When you own an investment property, the goal is to earn a solid rate of return. If after several years of ownership you find your return is not what you expected, an investment property refinance may be the answer.
Start the process by looking at investment property refinance rates to be sure they represent a savings over your current rates. When done properly, refinancing an investment property can increase your short-term cash flow and help you build longer-term wealth.
Refinancing an investment property can be a smart financial move for real estate investors. With mortgage rates near historic lows, now may be an ideal time to refinance the loan on your rental property or properties.
As an investor myself, I’ve refinanced investment loans on several rental properties I own. It has helped me pull cash out to rehab properties, lower my monthly payments, and shorten loan terms.
If you’re considering refinancing the mortgage on your investment property here’s what you need to know
Why Refinance an Investment Property?
There are several good reasons to refinance the mortgage on an investment property:
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Lower your monthly payments. This leaves you with more cash flow each month. Make sure the savings outweigh the costs.
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Tap into equity to access cash. Use it to renovate, buy another property or pay other bills.
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Shorten the loan term Go from a 30-year to 15-year loan to build equity faster
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Get a lower interest rate. Reduce your monthly payments by getting a lower rate.
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Consolidate debt. Pay off credit cards, personal loans or other high-interest debts.
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Change loan types. Go from an ARM to fixed-rate to lock in low rates.
Crunching the numbers is key – make sure refinancing makes financial sense by comparing costs vs. monthly and overall savings.
I’ve found refinancing my investment mortgages at lower rates has worked well when I plan to hold properties long-term. The interest savings have outweighed closing costs over time.
How Does Refinancing an Investment Property Differ?
Refinancing a rental property is different than refinancing your primary residence. Here are some key differences to know:
Higher interest rates – Expect to pay 0.25% to 1% higher interest vs. a primary home.
Stricter lending standards – You’ll need excellent credit, equity and cash reserves.
Lower LTV ratios – Many lenders limit LTVs to 75% to 80% on investment loans.
Higher costs – Closing costs may be 2% to 5% vs. 2% to 3% for primary homes.
No consumer protections – No option for an appraisal or right to rescind the loan.
More paperwork – Extra documents needed to verify income, expenses, ownership, etc.
Tougher appraisal – Appraisers scrutinize rents, expenses & comps more closely.
Lenders view investment property loans as riskier. That translates into tougher requirements and standards. But with proper planning and preparation, you can get approved.
6 Tips for Refinancing an Investment Property
Based on my experience, here are six tips to smoothly refinance your rental property:
1. Shop with multiple lenders
Compare loan estimates from several lenders. Rates and fees can vary significantly. Local banks and credit unions may offer good deals.
2. Mind your credit scores
Aim for scores of 740 or higher to get the best rates and terms. Pay down balances and correct errors before applying.
3. Document 6-12 months of reserves
Lenders want to see you have enough savings to cover 6 to 12 months of mortgage payments.
4. Get properties appraised early
Schedule appraisals as soon as possible. It takes extra time for investment property appraisals.
5. Gather paperwork early
You’ll need leases, rent rolls, tax returns, insurance, HOA fees and other documents.
6. Expect a longer process
More scrutiny means a slower underwriting process. Build extra time into your timeline.
Following these tips can lead to a smoother loan process and better loan offers when refinancing your investment property.
What Do Lenders Look For?
When refinancing a rental property, lenders dig deep into your finances. Be prepared to provide:
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Tax returns – At least two years of returns showing rental income and expenses. Schedule E is key.
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Leases – Current signed leases for all occupied units.
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Rent rolls – Documents detailing unit numbers, square footage and rental rates.
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Reserves – Bank and investment statements proving reserves.
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Property docs – Insurance, tax bills, HOA fees, legal descriptions, etc.
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Ownership docs – For LLC/corp owned properties, you may need to transfer back into your individual name.
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Purchase info – For a recent purchase, be ready to show purchase agreements, closing disclosures and statements used for down payment.
Having all this paperwork ready makes for an easier loan process. My lender provides a handy checklist of documents needed to refinance my rentals.
What Credit Scores Are Needed?
As I mentioned earlier, excellent credit is vital for an investment property refinance. Here are typical credit score requirements:
- 720+ – Ideal for the very best rates/terms
- 680 to 719 – Still considered good credit
- 640 to 679 – Lower rates, but still qualifiable
- 620 to 639 – You may struggle to qualify
- Below 620 – Almost impossible to qualify
The higher your scores, the better. Aim for scores above 720 if possible, as this opens up the most options. Pay down balances and correct any credit report errors first.
If your credit is damaged, wait to refinance until you improve it. Taking 6-12 months to boost scores can really pay off in lower rates.
How Much Equity Do You Need?
For an investment property refinance, plan on having at least 25% to 30% equity. Lenders are hesitant to refinance loans with less than 25% equity.
The more equity you have, the better your chances of approval and lower interest rates. If you don’t have enough equity yet, you may need to wait a few more years of home price appreciation or principal paydown.
You can also use a cash-out refinance to tap equity above 30%, but equity withdrawal is usually limited to 65% combined loan-to-value.
Should You Choose a Fixed or Adjustable Rate?
This decision depends on your goals, time horizon and risk tolerance. Here’s an overview:
Fixed-Rate
- Interest rate stays the same over life of loan.
- Predictable payments that don’t fluctuate.
- Usually makes sense if holding long-term.
- Most common for investment refinances.
Adjustable-Rate (ARM)
- Start with lower teaser rate that adjusts over time.
- Makes sense if selling before rate resets higher.
- Payments fluctuate based on interest rate changes.
- Higher risk if holding property long-term.
I prefer fixed rates on my rental properties, as I don’t want the risk of payments spiking if interest rates rise over time. But for some investors, an ARM can make sense if they only plan to hold short-term.
Watch Out for These Mistakes
While refinancing investment property can pay off, it’s critical to avoid these common mistakes:
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Refinancing too often – this resets the clock and wastes money on new closing costs.
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Withdrawing too much equity – don’t overtap equity and put the property at risk.
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Using a ballooon loan to get lower payments – this simply kicks higher payments down the road.
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Not running the numbers – make sure monthly savings exceed closing costs.
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Not comparing loan offers – don’t just take the first loan you’re offered.
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Paying points to buy down the rate – points rarely pay off over time.
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Rushing the process – take your time so you don’t miss anything.
By being patient, avoiding mistakes and shopping aggressively, you can find a great investment property refinance.
Alternatives to Refinancing
If refinancing isn’t the right fit now, consider these other options to free up cash from your rental:
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Home equity line of credit (HELOC) – Access funds as needed instead of one lump sum.
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Home equity loan – These close faster than refis but have higher rates.
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Cash-out refinance – If you have enough equity, tap extra cash above paying off your current loan.
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Home improvement loan – Finance property renovations and repairs.
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Hard money loan – Quick financing for flipping properties if you can’t qualify for traditional loans.
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Sell the property – This frees up the most cash, but gives up future cash flow.
Look at all your options and run the numbers before deciding how to tap equity in your rental property.
The Bottom Line
Refinancing an investment property loan provides opportunities for real estate investors. But make sure you go in informed and prepared.
Do your homework, assess your financials
Refinancing an investment property to boost your cash on hand
Cash-out refinancing might be the right answer for some property owners. Once youve accumulated equity in the property by paying the mortgage on time for several years, you can refinance for more than you owe on the property. The difference will be given to you in cash. This can come in handy if you need to pay off other debts or large expenses, whether those are credit lines, medical bills, or maintenance bills for the property.
Complete a break-even calculation when considering refinancing
Before you refinance any property, you should do some quick analysis on how long it would take to break even on that transaction. First, look into refinancing rates. Youll want to be sure your investment property refinance rates are lower now than when you initially made the purchase.
Then, the refinance break-even point can be calculated by taking into account all the upfront costs of refinancing the loan — typically the closing costs plus any points — and how much youll save each month. When you compare the two numbers, you can determine approximately how long it will be before you break even and begin to save money. If you dont plan to own the property for at least that amount of time, refinancing the investment property is probably not an ideal financial decision as it will cost you more money than it will save you.
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FAQ
Can an investment property be refinanced?
How much does it cost to refinance an investment property?
What credit score is needed to refinance an investment property?
How many times can you refinance an investment property?
What can I do with the money from a refinancing?
The money from the refinancing could be used to pay for home improvement projects in your investment property. This would increase its value and boost its appeal to potential tenants. You can also use the cash from the refinancing as a downpayment to buy another investment property.
Should you refinance an investment property?
Choosing to refinance an investment property can help you improve your cash flow, free up money for new investments or replenish cash you spent fixing up a rental home. Investment property mortgage rates are more costly than primary residence mortgage rates, and qualifying standards are more strict.
How do I get a refinance on an investment property?
Just as with a refinance of a primary residence, your credit score (most of the time, you will need 660 or higher to obtain a conventional refi, and above 760 to get the best rates), debt-to-income ratio (the amount of debt you have relative to your income) and income matter to getting a refinance on an investment property.
Is refinancing an investment property free?
Refinancing an investment property isn’t free and it can also involve jumping through several hoops. For instance, most lenders require you to have a minimum amount of equity, typically at least 20%. If you don’t have enough equity, you may need to pay lenders mortgage insurance (LMI) when refinancing.