How Soon Can You Refinance An Investment Property

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Lower The Refinanced Interest Rate

How to Safely Refinance a Rental Property So That You Can Buy More

You might be surprised by the difference between an investment property and a primary propertys interest rate. Typically, the interest rate for an investment property runs at least 0.5% 0.75% higher than what the same borrower might pay for a mortgage on their primary residence, but may be higher. It all depends on your situation.

Investment properties represent a larger risk for lenders. Banks and online lenders know that if you run into financial hardship and can only afford a single mortgage payment, youll always choose your personal home.

To account for this risk, lenders charge more in interest on investment properties. Two mortgage payments can be unsustainable, so you might want to search for a lower rate by refinancing.

Refinancing can give you access to lower rates if you can show that you are successfully managing your rental property. Compare your current interest rate with offers from lenders before you refinance.

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Eliminating The Preferred Return With A Cash

Indeed, there is! Instead of selling the property after 5 years, you can a refinance or cash-out refinance the apartment building after 3 years, the period that is in this scenario you would reach the expected level of return. By refinancing, you can return the investors principal funding and simply continue holding onto the property.

Because you have returned the capital, you no longer need to pay out the preferred return rate, but you would continue to supply the investors with 25% of the cash flow and profits from the eventual sale, as they would own this part of the property.

This strategy eliminates the risk to investors after 3 years, and they still enjoy 25% of all cash flow distributions and profits, making this a popular option. For you, this option eliminated the preferred rate payout. You do have the refinance to service, but the rate on that compared to the 8% is minimal.

Interestingly, the return for the investor for Option 1 and 2 are very similar. But for you, the difference is startling. Option 1 would provide you with around $40,000 after 5 years without any investment. Meanwhile, option 2 results in a huge $120,000 after 6 years. Thats well worth waiting the extra year. Or hold on for another 4 years to see a profit of around $230,000

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Proof Of Individual Ownership

Many investors put their investment properties into a limited liability company or a corporation to give themselves added legal protection. But if you plan to refinance your investment property using a conventional mortgage, you must be listed as the primary owner of the property.

If you currently have the homes title in an LLC or a corporation, youll have to transfer the title of the property back to your name. You can use a copy of the title insurance to prove that you own the property, or provide supporting documentation that proves you and your co-borrower if applicable collectively have 100% ownership of the LLC holding the title.

Potential Downsides Of Refinancing

How Soon Can I Refinance My Home Mortgage? I Did the First ...

One downside of refinancing is the closing costs that are included in the loan principal. These are typically about 2% of the loan amount and can total thousands of dollars. The interest you will pay on them may offset any savings that you might have made by refinancing. Another potential downside of refinancing is that it resets the amortization schedule of your monthly payment. Typically, you pay off interest in the beginning when you take out a loan. However, refinancing resets the payment schedule, and you will have to pay off the interest of your loan once again before your payments are put towards your principal balance. Be sure to fully consider your financial situation before deciding that refinancing is the best option for you.

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How Do I Compare Investment And Rental Property Mortgage Rates

The only way to find the lender with the most competitive investment or rental property mortgage rate is to compare multiple lenders, and then compare their rates and fees. Within days of being preapproved, youll receive a Loan Estimate from each lender. These let you compare every aspect of the loan side by side, so you can see the total cost including the investment property mortgage rate, origination fee, closing costs and more.

» MORE: How much you could save by comparing mortgage rates

Provide The Documents Needed To Refinance A Rental Home

Youll need more financial paperwork to refinance an investment property than a primary residence. Besides paystubs, W-2s and bank statements, make sure you have the following documents handy:

  • All pages of the last two years of your personal federal tax returns. Lenders analyze your Schedule E to see how much rental income you earned after expenses.
  • Closing statements for recently purchased property. These statements are required if you bought an investment property within the past six months and want to participate in the delayed finance program outlined above.
  • Current lease. You can provide a lease in lieu of tax returns if the property was just purchased or not rented due to renovations or repairs.
  • Proof of first months rent and security deposit. Lenders may require canceled checks or bank statements to prove the income if you just renewed a lease or began renting a home you recently purchased.
  • Two months of bank statements showing funds for reserves. Besides checking and savings accounts, lenders will count retirement and investment accounts balances toward your reserve requirement.

Qualifying tip for large one-time rental repair or renovation expensesIf youre refinancing a home that was extensively renovated, your tax returns may show a large loss the first year. If you can document and explain that the loss was related to fixing up the home, the lender may not count the loss against you, making it easier to qualify for the refinance.

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How To Refinance A Rental Property In 5 Steps

Editorial Note: The content of this article is based on the authors opinions and recommendations alone. It may not have been previewed, commissioned or otherwise endorsed by any of our network partners.

If youre a real estate investor, you may want to refinance your rental property to reduce monthly expenses and maximize profit. However, youll need to meet more stringent qualifying requirements to get approved for the best investment property refinance rates.

The Pros And Cons Of Refinancing

How Soon After You Buy A House Can You Refinance?
Pros of refinancingCons of refinancing
Access the equity youve built up in your home. Increasing the amount you are borrowing may lengthen the time it takes to pay off your mortgage.
Consolidate your debts and lower your overall interest rate. Your overall interest rate might be lower but the amount owing on your mortgage may be higher.
Possibly get a lower interest rate and pay less for your mortgage over time. There may be additional costs, including a prepayment charge.

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How Soon Can You Refinance A Rental Property

Rental Property Refinancingrefinance

Hereof, when can you refinance a rental property?

Rental Property Refinancing Requirements

  • Must have a LTV of 75 percent or lower .
  • Borrowers must have good payment history in the past 12 months on current mortgage at the time of the refinance.
  • Furthermore, can you do a cash out refinance on a rental property? A cashout refinance will increase the amount of the loan you have on your rental property. Yes, it is possible that values could go down and a cashout refinance would reduce the equity in your home. If you don’t need to sell your home, then it will not matter how much equity you have in your home.

    Additionally, is it hard to refinance a rental property?

    As a result, lenders typically require a minimum loan-to-value ratio of 75%, which means that you need to have at least 25% equity in your home. For example, if you are hoping to refinance a $150,000 mortgage on your rental property, most lenders will expect you have at least $50,000 in equity.

    Should you refinance rental property?

    Good reasons to refinance your investment propertyThere are two excellent reasons to refinance a rental or investment property: Lower your mortgage rate or pay off your loan faster. Use a cash-out refinance to purchase new investment properties or upgrade your current one.

    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.

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    How To Use Harp To Refinance Your Rental Property

    The Home Affordable Refinance Program is a government-backed program established to help those without a large amount of equity in their homes refinance into a mortgage with more stability. HARP allows you to refinance investment properties and refinance when you owe more than the worth of your home. This can occur in an underwater mortgage situation where a property purchase loan has a higher principal than the free-market value of the property. You also may be able to refinance a rental property through HARP if you dont meet the loan-to-value minimums most lenders require.

    To qualify for HARP, there are a few requirements you must meet:

    • You must not have been late by 30 days or more on any payments in the past 6 months.

    • You must only have a maximum of 1 late payment within the past 12 months.

    • The property you are trying to refinance must be your primary residence, a 1-4 unit investment property, or a 1-unit second home.

    • Your current loan-to-value ratio must be greater than 80%.

    • Your current mortgage must be owned by Fannie Mae or Freddie Mac.

    Get Your Accounts In Order

    Can you retire early with real estate investing? Learn the ...

    In some ways, getting a bank to offer you a financing or refinancing program for your property is no different from securing a regular loan or credit card. For one, youre not going to get very far unless you have a good credit score and income this proves youre a reliable borrower that the bank can count on to meet payments.

    If your finances arent looking so peachy, consider looking for a partner with better credit or more income who can sign the agreement with you. This will provide extra reassurance to your lender.

    The next thing to think about is your accounts. Many people who own multiple properties end up with confusing, disordered financial information, and this is a surefire route to having your application denied. Tidy everything up before you submit the application for your investment property refinance.

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    Investment Property Refinance Rates

    Rates for a cash out investment property loan tend to be on the high end for mortgage rates.

    Why? Because investment property rates are higher to begin with about 0.5% to 0.75% above primary residence rates on average.

    And if you take cash out when refinancing, rates are usually a little higher still. Thats because lenders take on more risk when a homeowner pulls equity out of their property.

    The best thing you can do when shopping for this type of loan is get rates from multiple lenders.

    New regulations on investment property mortgages mean rates and fees could vary a lot by lender. So compare at least 3-5 loan offers to find the best deal. You could stand to save thousands on your new loan.

    Learn The Requirements To Refinance A Rental Home

    History has shown that when hard financial times hit, rental home defaults and foreclosure rates begin to rise. Lenders offset this risk by setting stricter lending standards for investment property refinances. Fannie Mae and Freddie Mac, government-sponsored enterprises that buy mortgages to keep mortgage money flowing, set most of the guidelines for rental property refinances.

    Minimum rental refinance requirements usually include:

    Qualifying tip for refinancing a rental property with a government-backed loanLoans backed by the Federal Housing Administration , U.S. Department of Veterans Affairs and U.S. Department of Agriculture are designed for homebuyers to buy primary residences only. However, if you bought a two- to four-unit home with an FHA or VA loan and still live in one unit, you can refinance the home as a primary residence.

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    Compare Rates And Lenders

    Shop around for your rental property refinance to compare rates and other loan terms with three to five different lenders. This helps ensure you get the lowest possible interest rate and closing costs.

    In fact, according to research from Freddie Mac, borrowers could save an average of $1,500 over their mortgage term by getting at least two rate quotes, or around $3,000 by getting five quotes.

    Dont let the hassle of applying with multiple lenders dissuade you from shopping around. With Credible, you can easily compare rates from multiple lenders in just a few minutes.

    What Is An Investment Property

    WHEN and HOW should you Refinance Real Estate?

    An investment property is a residence purchased to earn rental income or flip and sell for a profit. Unlike second homes, an investment property can be more than one unit: two- to four-unit investment properties allow you to earn income from multiple tenants. An investment property may also be a commercial property.

    Building an investment property portfolio allows you to build equity in real estate using the rent collected from tenants. This can be a great long-term wealth strategy

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    Option : Straight Equity Split

    The easiest way to structure the deal would be to give your investors the majority of the equity, given that they are funding it. Something like 70% for the investors and 30% to you for putting the deal together and managing the project.

    If you all agree to sell the building 5 years later, you receive 30% of the cash flow distributions and 30% of the increase in the propertys value. Based on the values we calculated above, you should be looking at around $50,000 from the rental income, plus 30% of the appreciation, which might run into $20-40,000 more.

    Not only is this a great return without putting any of your own money in, but you also dont risk depreciation of property value, should there be a crash at the time you are selling, as your funds are not involved.

    But there is a better option.

    To Take Care Of Other Big Expenses

    The third major reason to refinance has less to do with your investment strategy than your personal life. However, it’s still important to mention. Sometimes life comes along with big expenses like education costs or medical debt. If you have to cover a big expense in the near future, doing a cash-out refi may be a smart way to get the funds you need at a lower interest rate than a personal loan or a private money lender.

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    Turning Your Second Home Into An Investment Property After Closing

    Its not uncommon for someone to decide to convert a second home to an investment property at some point. Its best to read your mortgage paperwork to verify there arent any restrictions on how long the home has to be used as a second home to avoid an investigation for occupancy fraud.

    Dont forget to report rental income to the IRS when you file taxes. If you decide to refinance, youll be subject to investment property guidelines and interest rates on the new mortgage. That means youll need more equity to refinance and will likely pay a higher rate than you did when the home was classified as a second home.

    The Lender Underwrites Your Loan

    When Can I Refinance My Mortgage?

    During the underwriting phase, your lender is looking to verify your financial information, ensure you meet the loans requirements, and confirm that you can comfortably afford the new mortgage payment youll be taking on. Its in this step that you will need to provide the documents you gathered in Step 2 to your loan officer.

    Tip:

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    How To Refinance An Investment Property In 5 Steps

    Those who know how to refinance a rental property are probably already aware of how beneficial it can be in the right circumstances. However, there are still plenty of people that didnt 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 Profitability

  • Acquaint Yourself With Mortgage Rules

  • Refinance

  • Intent To Occupy

  • Before learning how to refinance a rental property, you must first consider 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 non-owner-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 dont 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.

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