Everything You Need To Know About Refinancing A Rental Property

Key Takeaways

  • In order to refinance rental property in a way that benefits your future prospects, you need to know everything you can about the current marketplace.
  • Those that can refinance investment property efficiently and effectively stand to realize more success over the course of their investing careers.
  • Knowing how to refinance a rental property can save real estate investors thousands of dollars over the course of a single loan.

Do you know how to refinance a rental property? Did you even know it was an option? It’s quite possible that rental property owners can refinance their own rental properties and reduce their monthly mortgage obligations.

In today’s low-interest-rate environment, there are several compelling reasons to refinance your rental property. As an investor, refinancing an investment property can unlock a multitude of wealth-building opportunities, including the ability to lower interest rates and monthly payments, improve loan terms and earn additional cash flow.

However, refinancing is not without risk. Refinancing your rental property may seem like a terrific financial move, but it can also be an investor’s undoing if not correctly executed. That said, it’s critical for investors to not only comprehend their purpose for refinancing, but rather complement it with a plan of action.

How To Refinance A Rental Property

Those that know how to refinance a rental property are probably already aware of how beneficial it can be int he right circumstances. However, there are still plenty of people (even investors) that didn’t realize refinancing a rental property was an option; they had no idea they could reduce their monthly payments by minding a few simple steps.

If you qualify to refinance a rental property, here are some of the most important steps to keep in mind:

  • Determine How Much Equity You Have
  • Exercise Profitibility
  • Acquaint Yourself With Mortgage Rules
  • Refinance
  • Intent To Occupy

Prior to learning how to refinance a rental property, you must first take a look at the equity you have already managed to build up in a respective property. “Lenders typically require a cushion of 25 percent or more to refinance a loan secured by a nonowner-occupied house,” says Stephen LaDue, a senior loan officer at PrimeLending in Brookfield, Wisconsin. In other words, lenders will want to see that you are less likely to default. Those with more equity have more skin in the game, and are therefore less likely to default on mortgage payments.

It is worth pointing out that lenders don’t necessarily view the current rental rate as dependable. That said, you need to prove to the bank that your rental property will, in fact, be profitable. As a rental property owner, it is in your best interest to prove to the lender that the rent you collect will be dependable.

If you can prove that rent is dependable and you do have plenty of equity, it’s then important to familiarize yourself with the rules of refinancing. Mind due diligence and research what you can and can’t do, as lenders will all have their own guidelines to follow. Some lenders, for example, won’t allow owners with multiple properties to refinance.

“The purpose of having the ability to make minimum down payments and get (Federal Housing Administration) or private mortgage insurance was not to make (investors) rich in housing, but to provide access to the housing industry,” says LaDue. “You can have 10 houses and if only three of them have mortgages, you can get one more mortgage on a nonowner-occupied property, but you can only have four mortgaged premises.”

“Technically, a borrower must intend to occupy the property and sign an affidavit to that effect at closing to obtain a new owner-occupied loan,” says Marcie Geffner at BankRate. “One year of residency is often cited as a guideline to determine intent to occupy. But that’s not an absolute rule,” she says. As someone looking to refinance their own rental property, make sure you are following the appropriate rules of occupancy.

Once you are certain refinancing a rental property is the right move, go ahead and do so. While interest rates have gone up in recent history, they are still relatively low, so now is still a good time to consider your own refinance.

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How to refinance a rental property

Reasons Why You Should Refinance Your Rental Property

Convert A Variable Rate To Fixed: One of the major reasons to refinance your rental property is to convert from a variable interest rate (also referred to as an adjustable rate) to a fixed one. Why is this important? While an adjustable rate can result in lower home payments in the short-term, it can be a nightmare if interest rates were to rise in the long-term. Locking into a low, fixed rate, however, can protect investors from looming interest rates down the line. A fixed rate means mortgage payments will remain the same over the term of the loan, no matter how high or low the market goes.

Lower Interest Rate: Another consideration for refinancing your rental property is the ability to lower your interest rate.  The average interest rate on a 30-year fixed-rate mortgage in September was 3.46 percent, according to Freddie Mac, down from 3.89 percent the year before. For those that purchased their investment property at a higher rate, refinancing could potentially save you thousands of dollars over the life of the loan.

Lower Monthly Payment: By lowering your interest rate, investors will also be lowering their monthly mortgage payments. For a rental property, this could equate to additional cash flow which could be saved or leveraged into other investments.

Adjust Loan Term: Another reason many investors choose to refinance their rental property is to adjust the term of their loan. For investors with a 15-year interest rate, the opportunity to switch to a 30-year rate can provide subtle, but significant benefits to their business.

Remove PMI: An additional reason for refinancing an investment property can be to eliminate Private Mortgage Insurance (PMI). This common policy is required by lenders when borrowers pay less than 20 percent of a down payment or when the loan-to-value (LTV) ratio is more than 80 percent. The purpose of PMI is to protect lenders from the risk of buyers defaulting on their mortgage. However, this additional expense can add up to significant costs long-term for borrowers.

Take Cash Out: Another motive for refinancing your rental property is to take cash (equity) out of your home. With a cash-out refinance, investors have the opportunity to withdraw above and beyond what they own on their current mortgage, helping to put cash in their pocket, which could be used for upgrades on their current rental property or leveraged for other investment properties.

Do You Qualify? 3 Ways To Refinance Your Rental Property

The first step in refinancing your rental property is understanding your purpose for doing so. The second is reviewing if you even qualify for a refinance. Although every lender will have their own qualifying standards, the following provides a general outline of what they’re looking for:

  • Must have a LTV of 75 percent or lower (this ratio will differ from lender to lender).
  • Borrowers must have good payment history in the past 12 months on current mortgage at the time of the refinance.
  • Credit score must be 660 or higher.
  • Financial documents: Tax returns, credit report, statements detailing assets and debts, rental agreement and proof of rental income.

Before attempting to refinance, it’s important to understand that every lender will have their own qualifications for refinancing a investment property. In addition, the guidelines for refinancing a rental property will be much more stringent than refinancing a primary residence. However, they will vary from lender to lender. To take the next step and get started, investors should consider the following options:

Refinance investment property

1. Home Affordable Refinance Program (HARP)

One of the best programs to utilize in refinancing your rental property is HARP. Since 2009, the program has helped roughly 2.9 million homeowners to refinance their properties. In fact, one in six HARP refinances are for a second home or investment property.

To qualify for the Home Affordable Refinance Program, an investor’s rental property must consist of one to four units; the mortgage needs to be backed by Fannie Mae or Freddie Mac, and acquired before June 1, 2009; must be current on mortgage payments; and the LTV must be greater than 80 percent.

2. Pay Off 25% Of The Loan

Another refinance option is to simply pay off 25 percent of the loan. Because many lenders require a cushion of 25 percent before refinancing a non-primary residence, this strategy will help investors to not only lower the LTV of their rental property, but make it eligible for refinancing.

3. Check With Lenders

Whether traditional, private or hard money, every lender will have their own set of qualifying standard; in fact, not every lender will  offer rental mortgages to investors. The best bet as an investor is to explore a variety of lenders. Because lenders are the gatekeepers to your refinancing hopes, it’s best to have an assortment of options to find the deal most fitting.

In the end, the question “Should you refinance your rental property” will depend on a myriad of factors that only you can answer. However, the first step should be identifying if any of the above mentioned reasons apply to you and your situation. If so, refinancing your rental property would prove to be a great financial move, including the potential to grow your business.

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