Main Steps For Refinancing A Rental Property
Once youve determined what the value of your rental property should be, the next step is to apply for a loan to refinance:
1. Contact your current lender or mortgage broker
If youre happy with your current lender, provide them with the first opportunity to refinance your existing loan. Having a trusted mortgage lender or broker on your team can make growing your real estate business that much easier.
That being said, do research other sources for loans as well, because not all lenders have access to the same programs for real estate investors. Be sure to get an estimated closing statement from each lender you speak with to see how much the cost to refinance varies from one source to the next.
2. Provide required documents and prepare for additional requests
Theres a lot of required paperwork when you buy a property, and even more when you refinance an investment property. In the next section well take a closer look at the documents your lender will need.
But for now, be prepared to provide information when you apply and respond promptly to additional requests during the underwriting process so that your loan doesnt get delayed.
3. Property inspection and appraisal
Your lender will order an appraisal to be done on your property to verify the value of the property. If the property is rented, be sure to let the tenants know in advance that youll need access to the inside of the house.
4. Sign your loan documents
How To Qualify For An Investment Property Refinance
You and your property will need to meet certain requirements to qualify for a refinance. These requirements will vary by lender and loan program, but the below chart offers a good high-level look at what sort of standards you can expect to be held to:
Investment Property Rates Are Above Standard Rates
If you buy an investment property at the right price and finance it correctly, it can create cash flow for you almost immediately.
But getting an ultra-cheap mortgage rate on a rental or investment property is tougher than for a primary residence. Thats because lenders charge more for non-owner occupied transactions meaning a property you dont plan to live in.
Despite higher rates, investing in real estate is often a good idea long-term. Heres how much you can expect to pay now to finance that future cash flow.
In this article
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Increase Size Of Down Payment
The surest way to lower an investment property’s interest rate is to make a larger down payment. Many expenses get eliminated by paying at least 20 percent down. It might be worth looking into borrowing against the equity of a primary residence or finding a less expensive property to contribute more with the initial deposit and save more with lower rates.
Will Applying For A Mortgage Affect My Credit Score
During the underwriting process, your lender will do a hard pull of your credit. This can lower your score, especially if you have several hard inquiries within just a few months. Over time, however, a mortgage tends to build credit by diversifying your history and establishing a good payment record over many years.
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What Types Of Mortgage Refinancing Are Available
The three most common types of refinance options are: rate-and-term refinance, cash-out refinance and cash-in refinance.
The rate-and-term refinance allows homeowners to lower their interest rate and/or change the term, which is the length of time borrowers must pay on their loan. For example, you might want to refinance your 30-year mortgage with a 3.5% interest rate into a 15-year mortgage with a 3% rate. This will help you lower the amount you pay in interest and pay off the mortgage faster.
A cash-out refinance gives homeowners the opportunity to access the equity in their home, with the option to also lower their interest rate.
A cash-in refinance is when homeowners apply cash to the principal, which can help them lower their loan balance, eliminate private mortgage insurance, get a better interest rate or qualify for a refinance.
Can I Refinance With Bad Credit
There arent many home refinancing options for investors with bad credit. Some lenders will allow you to refinance an investment property loan with a score as low as 640. If its below this threshold, you may want to spend some time improving your score before applying. Not only will it help you qualify, but it could improve the interest rates youre given when you do.
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What Are Investment Home Loans
An investment home loan is the type of mortgage property investors use to buy investment properties. Investment loans look the same as owner-occupier home loans , but they typically have higher interest rates. This is because lenders view investors as riskier borrowers.
While every borrower benefits from finding a loan with a lower interest rate, an investor may have different priorities to an ordinary home buyer. An investor’s mortgage interest charges are tax deductible , and so are the loan fees.
Different types of investment loan
As with other loans, an investment home loan can have:
- A fixed or variable interest rate.Variable rate loans are more flexible and are currently lower than fixed rates loans. But a fixed rate loan lets you lock in an interest rate and forget about rates rising. There’s also the option of splitting your loan into fixed and variable portions.
- Principal-and-interest repayments or interest-only repayments. With a principal-and-interest repayments you pay off the money you’ve borrowed plus interest on top. That’s what most borrowers do. But interest-only loans are popular with many investors. These loans start with very low repayments because you’re not paying off the loan. You just pay the interest on top. These loans cost you more in the long run. But for investors they are a way to maximise your tax deductible debt in the short term.
Examining the investment loans in Finder’s database this month, we can see that:
How To Find A Bank To Refinance Your Investment Property
With mortgage rates at historic lows, more people than ever are refinancing their mortgages. These opportunities apply to your primary home as well as your investment property. When you refinance an investment property, there are things you should consider like your existing interest rate, closing costs associated with refinancing, and determining the type of loan available for refinancing. In this article, we discuss how to find the best place to refinance mortgages, and what banks look at during the refinancing process.
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How Much Equity Can I Cash Out Of My Investment Property
The amount of equity you can cash out depends on the current value of your home and your existing loan balance.
Investment property cash-out loans have a maximum loan-to-value ratio of 25% to 30%.
That means you must leave 25-30% of your home equity untouched so youll likely need more than 30% equity to cash out.
- Imagine you own a one-unit property worth $300,000 and you currently owe $200,000 on the mortgage
- Do you have $100,000 in usable equity? No, not quite
- Your new cash-out refinance loan has a maximum LTV of 75% or $225,000 on a $300,000 home
- $200,000 of that loan is used to pay off your existing loan balance
- The remainder, $25,000, is your tappable equity
Are You Ready To Be An Investor
Property investment can be both risky and rewarding. Rental income and capital gains are never guaranteed. Before taking the plunge, here are some of the potential risks and benefits you should think about.
- Rental income. You may earn a rental income that puts cash in your pocket right away some investors may enjoy returns of $50, $100 or more every week, over and above the costs of owning the property. You can invest this money into the mortgage to pay the loan off sooner, or use these funds to supplement your own income.
- Capital gain. Many investors buy property with an eye on the long-term gains, so they’re aiming for future price appreciation. When it comes time to sell your property, you may benefit from making a capital gain if the value of your property has risen. You could potentially grow wealth far more effectively with property than through savings alone.
- Tax and depreciation benefits. You can deduct investment loan interest charges and other investment costs from your income tax each month, making the cost of owning a property far more affordable.
- The potential to add value. Unlike shares or other investments, you may be able to manufacture equity or price appreciation in your property asset by adding value through renovations.
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Best Investment Property Loans Of 2022
- Best for Single-Family Homes: Citibank
- Best for Commercial Property: Lendio
- Best for Rehab Loans: LendingOne
Why We Chose It: We chose Quicken Loans as our best overall investment property lender because they lend nationwide, offer a wide variety of loan types, and make applying for a mortgage online very easy for the borrower. Quicken provides competitive rates as well, which helps solidify its position as the best overall mortgage lender.
Online application and live agents to talk to
Fast, easy, and paperless income verification
Custom fixed-rate loan terms that are between eight and 29 years
Down payment of as low as 3% on conventional mortgages
Quicken Loans doesn’t offer home equity loans or HELOCs
No branches to visit in person
Doesnt consider alternative credit data, only credit scores and debt-to-income ratio
Formed as a brick-and-mortar lender in 1985, then moving online between 1999 and 2001 as Rocket Loans, Quicken Loans rise paralleled the growth of the internet.
Quicken Loans is our best overall investment lender because they are easy to use for investors nationwide. They offer a large portfolio of loan products that can be tailored to your needs when you complete their online application.
Quicken Loans lends on residential and multi-unit investment properties with fixed- and adjustable-rate home loans, mortgage refinancing, FHA, USDA, and VA loans, and jumbo loans for higher-priced homes.
Every Lender Has Different Ways Of Pricing Mortgage Rates
Never respond to mass mailers.
- Many scammers and unorthodox brokers use mailers to get leads
- Always do your due diligence by checking and researching the loan officer and mortgage company
- Low rates may be important but make sure you read the fine print
- Compare mortgage rates with closing costs
- Get quotes from a few different lenders
- For homeowners with stellar credit and have no intentions of refinancing in the future may want to buy down rates with discount points
As mentioned in the earlier paragraph, make sure all quotes are in writing via the Loan Estimate.
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Prepare For Stricter Ltv Requirements Than With Primary Residences
Your loan-to-value ratio this is the mortgage amount divided by the appraised value of the property shows lenders how much equity you have in the home. So, if your investment property was appraised at $200,000 and you had a mortgage for $100,000, your LTV would be 50% . The higher your LTV ratio, the more of a risk you seem to the lender and thus the higher interest rate you can expect to pay. For investment properties, most lenders will only let borrowers who have a LTV of 75% or lower refinance. This is stricter than with refis of primary residences. Note, however, that LTV requirements for investment properties vary from lender to lender.
Keys To Refinancing Your Investment Property
As with any mortgage or refinance, its crucial to shop around since some lenders might offer you a lower rate or no fees to gain or keep your business. Make sure you understand your financial situation and credit profile ahead of time since this will help the lender give you a more accurate quote from the start.
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Convert A Variable Rate To Fixed
One of the major reasons to refinance your rental property is to convert from a variable interest 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 rise in the long term. However, locking into a low, fixed rate 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.
Is Refinancing Your Investment Property The Right Choice
Refinancing your investment property can make a lot of sense and help you achieve financial goals. However, as with any big financial decision, its important to consider every aspect.
Curious whether a refinance would make sense for you? Apply now to get in touch with one of our Home Loan Experts and see if refinancing can help you achieve your goals.
Is It A Good Idea To Refinance A Rental Property
Refinancing real estate is a good idea because it tends to give the homeowner an adjustable-rate mortgage with a good closing disclosure on the rental home.
The real estate property investment is purposed to give you some benefit as an investor, so engaging in cash-out loans can help to achieve these targets.
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When Is The Right Time To Refinance Your Mortgage
Since the decision on whether to refinance your mortgage will often come down to the three benefits mentioned above, its important to truly understand what you hope to achieve with a refinanced home loan. If youre able to accomplish one or more of those three things, then it might be a great time to refinance your mortgage.
No matter what youre hoping to gain from refinancing your mortgage, the best time to do it is when mortgage rates are lower than what they were when you got the original mortgage. Currently, mortgage rates are at historically low prices, which makes it a great time to refinance your home and save money.
In addition to paying attention to mortgage rates, you also might want to consider refinancing your home when your credit is in a much better place than it was when you got the original mortgage. If youre able to get your credit score up to 740 or higher, then you should be able to lock in a much better rate with a mortgage refinance.
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Lock Your New Refinanced Rate
Once your lender approves your application, youll usually have the option to lock down your interest rate. This gives you time to read your refinancing terms without worrying about your interest rate changing. Rate locks may last between 15 and 60 days, depending on your lender. Your location and loan type may also play a role in how long your rate lock lasts.
If youre happy with the rate you get, lock it in through your lender as soon as possible. If not, you can float your rate and proceed with the loan. If you float, keep in mind that your rate may either go up or down, depending on how market rates change.
Waiting Period Of 6 Months After Home Purchase
You can use the proceeds from a cash-out refinance for just about anything. But you wont be able to complete the transaction until youve owned the property for at least six months.
Exceptions apply if you inherited the property or it was legally awarded to you in a divorce or separation. If you do qualify for an exception, then your maximum LTV will be capped at 70% no matter how many units you own.
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Why Refinance Your Investment Property
- Lower your monthly mortgage payment
- Maximize your return on investment
- Increase your rental income
- Use the equity in your investment property to buy additional properties
- Use the equity to fund other investment opportunities
Now, lets take a look at what you need to know before you refinance your investment property:
Tax Treatment For Investment Property Mortgages
If you have a rental property, this will show up in a section called Schedule E of your tax returns, which shows all the income and expenses of your rental property.
Expenses include mortgage interest, as well as many other things like property taxes, insurance, HOA dues , maintenance fees, rental management fees, and depreciation.
If the net number on Schedule E is positive, that number counts as income, and youre taxed on it.
If the net number is negative, that number counts as a loss, and reduces your taxable income. But theres a catch here because higher earners dont always get the benefit of reduced taxable income each year. If you make too much, a rental property loss on Schedule E would instead accrue yearly and count as an offset to capital gains when you sell the rental property.
Talk to your tax advisor for advice on which scenario would fit your profile.
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Benefits Of Doing A Cash
Building equity through appreciation in property value along with recurring income and tax advantages are three of the main reasons for investing in real estate.
Doing a cash-out refinance on a rental property turns equity into cash that can be used for things such as:
- Raising investment capital and having cash sitting on the sidelines while you search for another rental property.
- Updating an existing property to help raise the asking rents and increase property value.
- Paying off other real estate loans or high-interest personal debt, then redirect the cash flow saved into a special savings account to buy another rental property.
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