If You Qualify You Could Get A Lower Interest Rate And Better Terms
In the United States, investing in real estate is a popular way to build wealth. Many people purchase homes and rent them out, earning income from the rent. In fact, individual investors own nearly 17 million rental properties today.
Most investors purchase rental properties with home loans. If you own an investment property, you may have a high interest rate, depending on when you took out the loan and your credit score at the time. If you want to take advantage of todays lower rates, you can refinance your mortgage. However, the process to refinance an investment property is a bit different from refinancing your primary residence, and it requires some additional documentation. Here is what you need to know.
Types Of Rental Property Mortgages
When purchasing investmentproperty, you have access to many of the same property financing options aspeople buying their primary homes. They just cost more and are a bit harderto get.
You can use a standard conventional loan for an investment property. The minimum down payment is 15%, but 20% is recommended to avoid mortgage insurance.
You can buy an investment property with an FHA or VA loan loan IF you choose a multi-unit property and live in one of the units. These come with minimum down payments as low as 3.5% for FHA and 0% for the VA loan .
Portfolio lenders can make up their own investment property loan rules. You may be able to put less down or finance more properties with these programs, but you should expect higher interest rates.
Hard money loans
Hard money lenders charge high interest rates and steep fees, but these short-term loans could help when youve found a great investment opportunity and need the money fast.
Speed of financing is one of the only reasons to consider a hard money loan. Most real estate investors can find better financing options with another loan type.
Finally, for those who want to borrow solely against the income of the property, or buy projects with more than four units, there are commercial residential loans. They can be expensive and complex to set up.
Alternative investment property financing
Things To Watch Out For When Financing A Rental Property
People often assume they can rent their second home when theyre not using it. This is false, and can land you in trouble. Its critical to understand why you cant ever rent out a property you financed with a second-home mortgage.
The reason this isnt allowed is because of how the IRS treats taxes for second homes. If you own a second home, the mortgage interest and property taxes on that second home are fully deductible just like mortgage interest and property taxes for a primary residence.
Knowing this, it makes more sense that lenders dont allow you to rent out a property with a second-home mortgage on it, because youd be double dipping by getting rental income and also getting the same tax benefit as you do with a primary residence.
If you want to have a second home that you can also rent out, then you need to finance it with a rental property mortgage to comply with lender and IRS rules. This means youll need a larger down payment, and will pay a slightly higher rate, but you will benefit from the income and you can also use the income to qualify for the loan.
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What Are Lmi And Lvr
LVR stands for ‘Loan to Value Ratio‘ and it’s the amount youre looking to borrow, calculated as a percentage of the value of the property you want to buy . For instance if youre borrowing $400,000 to buy a $500,000 property, your LVR would be 80% .
LVR is important because it may affect your borrowing power. Generally, the lower the LVR the better, as it carries less risk for the lender. If your LVR is above 80% , you may need to pay Lenders Mortgage Insurance . This insurance protects the lender – ANZ, not you – if you default on your home loan and theres a shortfall following the sale of the property. Generally speaking the higher your LVR, the more LMI will cost.
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Compile Your Financial Documents
Youll need a good amount of documentation to refinance your investment property. Essentially, youll need anything that pertains to your income, assets, and personal wealth.
Heres a sample list, though the exact requirements will depend on your lender:
- Your last two personal tax returns
- Your last two business tax returns
- Two recent pay stubs
- Proof of your rental property income
- The last two months of bank statements
- The last two months of any asset accounts
- Proof of your homeowners insurance
How To Compare Investment And Rental Property Mortgage Rates
Rates and fees tend to be higher on investment property loans than traditional mortgages, so its especially important that you shop around and compare your options. Youll want to consider at least a handful of mortgage lenders, making sure to compare interest rates, APRs, closing costs, and other fees when you do.
When comparing your options, youll want to look at these line items:
- Interest rates: A lower interest rate will typically mean a lower monthly payment, but make sure youre comparing apples to apples. You cant compare one lenders 30-year fixed refinance rates to anothers 15-year fixed refinance rates. Make sure youre looking at the same numbers.
- APR is the annual cost to borrow the money, including the interest rate and any fees. Its a good barometer for comparing lenders especially ones who are really close on interest rates.
- Rate locks: Refinances have been taking a little longer to process these days due to the high demand, so if one lender gives you a longer rate lock , they might be the better option.
- Closing costs: The fees youll be charged at closing will be wildly different from one lender to the next. Take a look at the total cash youll need to bring to closing on each, and see which is lowest. You should also check if any of the lenders have rolled the closing costs into the loan on their estimates. While this lowers your upfront costs, it also means a higher loan balance, a bigger monthly payment, and more interest paid in the long run.
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How To Refinance An Investment Property
You probably already know that its possible to refinance the mortgage on your primary residence. But did you know that you can also refinance your investment property? An investment property refinance can make your loan more manageable and give you the cash you need to improve your tenants space. Heres a quick how-to guide.
How Much Higher Are Mortgage Rates For Investment Properties
Mortgage interest rates will always be higher on investment properties than on your primary residence.
How much higher? Technically, the answer to that question depends on the type of investment property, your credit-worthiness, and your down payment.
But as a rule of thumb, you can expect the interest rate on your investment property to be at least 0.50% to 0.75% higher than the rate on your primary mortgage.
As a rule of thumb, you can expect the interest rate on your investment property to be at least 0.50% to 0.75% higher than the rate on your primary mortgage.
For example, todays live 30-year fixed rate as of December 21, 2021 is 3.125% , so the investment property rate would be around 3.625% to 3.875% .
Lenders add this upcharge because they consider a rental or investment property mortgage to be a riskier loan product.
Mortgage borrowers tend to bail on rental properties before theyd bail on their primary residence if the going gets tough. Thus, these loans are more likely to default during hard economic times.
Research has shown that even good homeowners tend to stop paying their rental property mortgages if that residence becomes a bad investment. Lenders know that when you think of property as a business, youre less attached to it.
To protect themselves against theextra risk that comes with investment property financing,lenders charge a higher interest rate and have stricter qualification rules forborrowers.
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Refinance Your Investment Property To A Low Rate Today
- Maximize your return on investment lower your monthly mortgage payment and increase your rental income.
- Use the equity in your rental property to buy additional property or fund other investment opportunities.
- Quicken Loans allows you to invest in properties with up to four units, and you can refinance at any time with no prepayment penalties.
Every day we help hundreds of Americans lower their monthly payment by refinancing. Contact us today to see how we can help you.
Guide To Refinancing An Investment Property
Why Refinance Your Investment Property Loan?
When is the Right Time to Refinance?
Choosing an Investor-Friendly Lender
- Low rates and minimal closing/origination costs
- Hands-on, responsive customer service
- A variety of loan products, terms and limits
What Youll Need to Refinance
- Recent pay stubs, W-2s and tax returns to verify your income
- A copy of your homeowners insurance and title insurance
- Statements for your bank accounts, 401Ks, investments, stocks, bonds and other assets
- Statements for any loans or outstanding debts you have
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What Are The Most Common Investment Property Loans
Investors try to use a conventional mortgage to buy a property with one to four units if they can meet the banks criteria because this is where theyll find the lowest rates and fees.
To buy a home to renovate and resell or lease, investors often turn to private lenders that specialize in this process. Many banks either wont provide these loans or take too long to close for an investors preference, so private money lenders are successful here.
Private and hard money lenders are also helpful when investors want to buy commercial properties like apartment complexes, medical office buildings, or office towers for example. Their terms are more flexible than conventional mortgages and they will work with borrowers who have lower credit scores where banks and credit unions may not.
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Cash Out Refinance On Investment Property Faq
How do I pull equity out of my investment property?
You may be able to pull equity out of your investment property using a cash out refinance. For many landlords, this is a good strategy right now as refinance rates are near all-time lows. You may also be able to take equity out of an investment property using a home equity loan or home equity line of credit . But this is more difficult to do than getting a second mortgage on your primary residence.
How much equity do I need for a cash-out refinance?
When you cash-out refinance an investment property, you must leave 25 to 30 percent of your homes value untouched . That means you need significantly more than 25 to 30 percent equity to make cashing out worthwhile.
How much are closing costs on a cash-out refinance?
Closing costs for a cash-out refinance are similar to closing costs on a traditional refinance: around 2 to 5 percent of the new loan amount on average.
Are rates higher for cash out refinance?
Yes, mortgage refinance rates are usually higher when you take cash out. Thats because the homeowner is taking out a bigger loan, and thus creating more risk for the lender. Theres no formula to tell you how much higher rates will be for a cash out refinance to find out, youll have to check rates from a few lenders and see what you qualify for.
What is the max LTV on an investment property?Should I get a cash out refinance to pay off debt?Is it hard to refinance a rental property?
Don’t Forget About Debt Coverage Ratio Requirements
The requirement for Debt Coverage Ratio varies from one lending institution to another. Some institutions will use rental offset for qualifying purposes, while other lending institutions will use a 1.10% debt coverage ratio â arrived at by dividing the net operating income by the debt service.
What does rental offset mean? A lending institution will calculate 50%-70% of the rental income and off-set it against the principle, interest and tax mortgage payments you would make on the property. Any rental ‘shortfall’ of this calculation will be included in the Debt Ratio, and a rental ‘surplus’ would be added to your net worth.
For example, assume a rental property with a PIT of $1432 and rental income of $2000. Then take 70% of the $2000 income and deduct that from the PIT . The shortfall of $32 is then added to your Debt Ratio.
We can help answer any questions, and take care of the details for you.
Take a walk through the mortgage park â with us. You’ll be glad you did.
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How To Refinance An Investment Property Mortgage
Now that you know more about what type of mortgage rate you can expect when refinancing an investment property as opposed to a primary residence, as well as some of the benefits and disadvantages of refinancing, the next step is to learn more about how the refinancing process works. Read over each of the steps below so that you have a sense of what to expect from the process as a borrower.
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:
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Best For Veterans: Veterans United Home Loans
Veterans United Home Loans
Why We Chose It: We chose Veterans United Home Loans as our best investment property lender for veterans because the firm specializes in VA-backed mortgages with experts who understand this loan program better than anyone else.
Offers 24/7 customer service over the phone
Has online application and pre-qualification
Employs advisors from each branch of the armed forces
Doesn’t offer home equity loans or HELOCs
Information on FHA, USDA, and conventional loans is harder to find on its website
Founded in 2002, Veterans United is a full-service lender that specializes in VA loans for qualifying veterans, active service members, and their spouses. They are one of the largest VA mortgage lenders in terms of volume in the United States.
Investors benefit from flexible qualification guidelines, lower rates, and monthly payments, no down payments, and no private mortgage insurance. Veterans United has VA loans for as little as 0% down, and they understand how to make the VA loan work for an investor and still remain within the programs guidelines.
Among the products offered are fixed and adjustable-rate mortgages, jumbo loans, refinance loans, and cash-out loans. Loan rates change dailyNovember 2021 rates ranged from 2.750% to 3.250%withAPRs between 3.049% and 3.558% depending on the loan product.
Understanding Investment Property Mortgage Rates
Investment property mortgage rates can range from 50 to 87.5 basis points higher than rates on a primary home. As an example, if mortgage rates for a 30-year, fixed-rate mortgage on an owner-occupied home are averaging about 3.25%, you might expect a 30-year investment property loan to have a 3.75% to 4.125% interest rate.
Why? Because lenders are exposed to more risk when lending money to real estate investors. Higher risk means higher interest rates and stricter borrowing requirements.
Investors typically rent out their investment properties to collect rental income. Periods of vacancy can increase the likelihood of mortgage default if an investor isnt financially prepared after all, theyd want to cover the mortgage payments on their main home first. When times get tough, investment property owners can cut their losses and run.
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Is It Hard To Get A Loan For An Investment Property
Qualifying for an investment property loan is more challenging because lenders view investment properties as a greater risk. Lenders will want to make sure that you earn enough to afford monthly mortgage payments in the worst-case scenario, such as your tenant stops making their payments.
Compared to loans for your personal residence where you may qualify for a 0% or 3% down program, lenders want to see a larger down payment on investment properties, often between 20% to 35%.
To get the best rates and terms, youll want to get a traditional mortgage, which is why most of our winners here have come from that sector. However, you can max out at four conventional loans for investment properties. If you want to keep going, youll need to convert to private and hard money lenders