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How to Refinance a Rental Property

Published on: March 11, 2022

refinancing a rental property

Refinancing a rental property requires jumping through a few more hoops than you would with a regular refi, but it can be a wise choice for some investment property owners. Refinancing a rental home can lower your monthly payment, free up cash flow, and reduce the total cost of the loan.  

However, like with all refinances, borrowers will need to pay closing costs and qualify for the home loan. Learn more about refinancing rental property mortgages, including the process and requirements for investment property refinance loans.

Can you refinance a rental property?

Yes, refinancing a rental property is possible. Choosing to refinance a rental home can be a great way to take advantage of lower interest rates, increase your rental profit, or pay off your mortgage faster.  

But borrowers should keep in mind that investment property refinance loans have slightly different guidelines from refinance loans for principal residences. And lenders typically require more documentation during the process of refinancing a rental property.

Can you do a cash-out refinance on a rental property?

Yes, borrowers looking to leverage equity can do a cash-out refinance on a rental property. However, cash-out refinance investment property loans typically have lower loan-to-value (LTV) ratio requirements than traditional cash-out refinance loans. This means borrowers may not be able to access as much equity as they would if it were a primary residence.

How does refinancing a rental property differ from a regular refinance?

While refinancing a rental property replaces the existing mortgage with a loan with new terms, just like in a traditional refinance, there are some differences. Investment property refinance loans typically have different guidelines from refinance loans for personal homes. And borrowers should expect stricter requirements when refinancing a rental home.

Higher interest rates

Investment property loans present a greater risk to lenders than mortgages for personal homes, so rental property refinance rates are typically higher than traditional refinance rates. A Finance of America Mortgage Advisor can let you know the rental property refinance rates in your area.

Lower loan-to-value ratios

Most investment property refinance loans have lower LTV requirements than traditional refinances. For example, conventional mortgages typically require borrowers to have 15% or more in equity when refinancing a rental property and 25% or more in equity for a cash-out refinance on a rental property. However, some investment property refinance loans may permit a higher LTV.

Stricter borrower requirements

Lenders and banks that refinance investment properties have more stringent borrower requirements because of the higher risk of investment property refinance loansFor example, some borrowers may need more cash reserves in the bank or a higher credit score than traditional borrowers.

Longer application process

Because slightly more documentation is involved, refinancing a rental property can sometimes take longer than traditional refinances.

Steps to refinancing an investment property

The steps to refinancing a rental property are similar to refinancing a personal residence. However, borrowers should expect more documentation to be required during the refinance process and a possibly longer approval time.

Here’s how to refinance a rental property.

1. Determine your refinance goals.

Before shopping for investment property refinance loans, you should be clear on your goals for the refinance. Are you seeking a lower interest rate? Are you looking to lower the monthly payments by extending the loan term? Do you want a cash-out refinance on your rental property?

Your objectives for refinancing an investment property will guide the process and what type of loan to apply for.

2. Gather your documents and financial information.

The exact documentation you’ll need to provide when refinancing a rental property will depend on the lender and type of loan. But lenders will generally request the following:

  • Recent paystubs or proof of income sources 
  • Recent W2s 
  • Information on your other debts 
  • Information on rental income 
  • Information on your current mortgage 
  • Proof of savings  
  • Information on assets 

Additionally, expect lenders to check your credit score. Some investment property refinance loans may have a higher credit score requirement. Typically, you’ll qualify for lower interest rates with a higher credit score.

3. Compare investment property refinance loans.

To get the best mortgage rate and terms, compare loan products with multiple lenders and banks that refinance investment properties. Be sure to review the specific terms, APR, closing costs, and total cost of the mortgage. Once you see the loan with the terms you like, you’re ready to apply.

4. Submit your application.

After comparing lenders and loan options, apply for the loan with the best terms. Some lenders may have an application fee or may charge you for a credit check.

5. Go through the underwriting process.

During the underwriting process, your lender may require additional information or documentation. Submitting the requested documentation in a timely manner will help the refinance process move along smoothly.

Your lender will also order an appraisal of the property. Taking care of necessary repairs and cleaning up the property will increase your chances of a higher valuation.

6. Close on the loan.

Once the underwriting process is complete, you’re ready to close. Your lender will provide a closing disclosure detailing the final terms of the investment property refinance loan. You’ll sign the loan documents to finalize the refinance.

What are the benefits of refinancing a rental home?

Refinancing a rental property can provide many advantages, depending on your goal for the refinance. For example, refinancing a rental home can reduce your mortgage payment, lower the overall cost of the loan, or free up cash to improve the rental property.

To determine whether refinancing a rental property is the right move for you right now, consider your overall investing strategy and the proposed terms of the investment property refinance loan you are applying for.

Should I refinance my rental property?

Here are a few reasons you may want to move forward with refinancing a rental property.

  • To lower the interest rate. If rates have dropped since you first obtained the mortgage, refinancing a rental property can lower your mortgage interest rate and monthly payment. This move decreases your monthly expenses, increases your cash flow on the property, and reduces the overall cost of the loan.
  • To change the loan term. Opting for a shorter loan term when refinancing a rental property will likely result in a higher monthly payment, but you’ll speed up the time it will take to own the property free and clear. This move will also result in a less expensive mortgage, and you’ll get a lower interest rate than a loan with a longer term. On the other hand, extending the loan term on the mortgage when refinancing an investment property can help make the mortgage more affordable, especially if your cash flow on the property is low or negative.
  • To change the type of interest rate. Going from an adjustable-rate mortgage to a fixed-rate investment property refinance loan can be a great way to lock in a low interest rate for the rest of the mortgage. This move stabilizes the payment and makes your cash flow on the property more predictable. Conversely, refinancing to an adjustable rate from a fixed-rate loan can lower the rate and mortgage payment and put more money in your pocket. Just keep in mind that the rate will fluctuate and can increase over time.
  • To improve the property. Doing a cash-out refinance on a rental property allows you to tap into the equity and use the cash to renovate or improve the home. This can open the door to charging higher rent and increasing your profit on the property.
  • To purchase an additional rental home. Choosing a cash-out refinance on an investment property can also provide an opportunity to invest in other rentals. This is an excellent way to increase your portfolio without paying out-of-pocket costs.

If you’re ready to refinance your investment property, talk to Finance of America Mortgage Advisor today to learn more about your options.

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