Take Cash Out Of The Home
A cash-out refinance lets you take money out of your home equity. You can then use the cash to improve your property, make repairs, or even finance a new investment. Its a good alternative to a home equity line of credit.
Before you decide on a cash-out refinance, its a good idea to compare mortgage refinance rates from multiple lenders. Credible makes it easy to compare rates in minutes.
How To Successfully Refinance A Rental Property In 2022
Many rental property investors are leaving money on the table without even realizing it.
They purchased their property several years ago when interest rates were higher. Today, theyre still making a higher than necessary mortgage payment which eats away at their cash flow.
Not only that, many investors have a surprising amount of untapped equity in their property that could be put to much better use.
Heres how real estate investors can benefit from doing a refinance on their rental property.
What Is A Good Investment Property Interest Rate
A good investment property rate varies from day to day, as rates change based on numerous economic and noneconomic factors. To find the best rate for an investment or rental property, youll want to compare investment property mortgage rate quotes from multiple lenders.
» MORE: Mortgage rate factors you can control
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How Do I Compare Investment Property Refinances
When comparing investment property refinances, it is important to thoroughly research your options across a variety of lenders. Looking for loan options with lower interest rates is a given, but also keep an eye out for special deals from lenders which may include discounted or waived fees. Lenders will go to great lengths to recruit you as a new customer so take advantage of it.
Dont rely on what you see on the internet to make your decision. Instead contact lenders directly as they may provide you with individual discounts or waive certain refinancing fees to gain your business.
Should I Keep Rentvesting Or Use Equity To Buy My First Home
If youre currently renting and own a rental property, you may be considering whether to access the equity to buy another investment or to buy your first home.
It depends on whats more important to you: your financial goals or your lifestyle goals.
The beauty of rentvesting is that you can claim negative gearing benefits on interest payments on the investment loan, as well as the cost of property maintenance and repairs.
Also, your landlord will cover the cost of maintenance and repairs for where you live.
Buying a home is better for avoiding capital gains tax but, more than this, buying your first home is a long-term lifestyle decision, particularly if youre planning to start a family soon.
For example, not having to worry about being evicted and having to uproot on a regular basis when your lease ends is a plus.
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Am I Eligible To Refinance My Investment Loan
- You must owe less than 80% of the property value on your investment loan.
- You can refinance at any time if youre on a variable interest rate.
- You can refinance on a fixed rate if you find that youre likely to recoup the cost of early exit fees within the first two years of refinancing .
Find out if youre in a position to refinance an investment loan by calling 1300 889 743 or by completing our online enquiry form today.
The Lender Underwrites Your Loan
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 Your Investment Properties
Note:Kiavi
About the author:Adam Luehrs is a writer during the day and a voracious reader at night. He focuses mostly on finance writing and has a passion for real estate, credit card deals, and investing.
The financing chapter of your investment story isnt necessarily over just because youve closed on a mortgage. There may come a time when its advantageous to consider refinancing your investment property. You may be especially interested in refinancing a property because youve seen interest rates fall since you closed.
Unfortunately, that means that youre currently stuck with a rate thats eating away at your rental income every month. There are actually three goals on the table when approaching a refinancing opportunity.
Lower your interest rate
Alter mortgage terms
Cash out your equity
There are some important things to know when you refinance real estate thats being used as a rental. Will it really save you money in the long run? Are you actually in a place to apply for refinancing? Lets break down the blueprint behind how, why, and when to do an investment property refinance plan.
Compare Lenders And Rates
The next step is to determine which lender youll use. Since mortgage lenders vary on interest rates, terms, and qualifying requirements, youll want to shop around and compare quotes from at least a few. Getting multiple quotes can save you money.
If youre looking for a quick and easy way to compare mortgage refinance rates, Credible can help. By filling out just one form, youll be able to compare prequalified rates from our partner lenders in the table below in just minutes.
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Documentation Of Debts And Other Obligations
Your lender will also review your credit history and require documentation of other debts and financial obligations, such as:
- Housing expenses
- Auto, personal or student loans
- Business loans
- Other mortgages
- Documentation of alimony or child support payments
- Other types of legal and/or financial obligations
Change Your Loan Term
If you initially bought your investment property with a 15-year mortgage, the propertys cash flow might not be as nice as anticipated. Most non-landlords dont realize how many expenses landlords incur, from repairs and maintenance to vacancy rate to property management costs.
So, some landlords refinance their 15-year loan to a 30-year fixed mortgage to push their annual cash flow above water and stop losing money each year.
If you bought your property with a 30-year mortgage and are thinking about refinancing to a 15-year mortgage to pay it off faster, dont. Just pay more each month toward your existing loans principal. You can also try these other tactics to pay off your mortgage early.
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Refinancing A Rental Property Pros
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Save money on your monthly payment: Lower interest rates usually translate to lower monthly mortgage payments. If you qualify for a lower interest rate through refinancing, you may be able to save a considerable amount of money each month, and potentially thousands of dollars in interest costs over the life of the loan.
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Tap equity: With a cash-out refinance, you may be able to replace your current mortgage with a larger mortgage, taking the difference as cash. You can then use that money for other purposes like buying another investment property, perhaps.
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Finance property improvements: A cash-out refinance can also be a good way to finance needed improvements to your rental property, potentially paving the way to charging higher rents after the renovation.
Finance Other Real Estate Investments
You may want to use your home equity to finance a down payment if you see a real estate investment that you need to snatch up quickly. As your home grows in value over time, your equity increases in value beyond what you pay on your principal.
You can even parlay this built equity into more profit by using it to put money down on another investment. You might even have bigger goals, such as using the money you get from your refinance to invest in a different type of real estate venture, like a commercial property.
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Lower Your Mortgage Rate
If you took out a mortgage when you had bad credit or when interest rates were far higher than today, you may now be able to refinance at a much lower rate. That could in turn boost your monthly cash flow or at least allow you to break even after pulling cash out of the property.
Calculate how long it would take you to recover the money you spent on closing costs with your interest savings. For example, if refinancing would cost you $4,000 in closing costs, and your new lower monthly payment saves you $100, it would take you 40 months to break even on the refinance.
Better yet, add together the entire life-of-loan interest for the mortgage refinance and all closing costs. Compare that number to the remaining interest due on your current mortgage. Thats the real apples-to-apples comparison, and you may just find that your current mortgage will cost you less in remaining interest than the combined interest and fees on a refinance.
Nerdwallets Mortgage Rate Insight
On Wednesday, December 22nd, 2021, the average APR on a 30-year fixed-rate mortgageremained at 3.069%. The average APR on a 15-year fixed-rate mortgagefell 3 basis points to 2.254% and the average APR for a 5/1 adjustable-rate mortgage rose 5 basis points to 2.837%, according to rates provided to NerdWallet by Zillow. The 30-year fixed-rate mortgage is3 basis points higher than one week ago and26 basis points higher than one year ago.
A basis point is one one-hundredth of one percent. Rates are expressed as annual percentage rate, or APR.
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Proof Of Personal And Rental Income
Lenders use personal income, stock market investments and pension income to underwrite mortgages on investment properties. Be prepared to submit the following documents:
- Pay stubs from the previous 30 days
- W-2 forms from the previous two years
- Personal tax returns from the previous two years
- Business tax returns from the previous two years
- Proof of disability or pension income
Youll also need to provide detailed information about your rental income. This includes a detailed Schedule E from your personal tax return so that lenders can calculate the investment propertys net income.
If the property was leased for only part of the past year, landlords can submit a copy of the current signed lease agreement instead of a Schedule E. The lender will discount the income stated on the lease by 25% to account for ongoing maintenance and vacancy expenses, but the income is still valid.
Should You Release As Much Equity As You Can
A common strategy that professional property investors use is to release as much equity as you can when interest rates are low and put those funds in an offset account.
The reason is that in this type of lending environment, banks tend to tighten their equity release policies because theyre expecting the real estate market to take a downswing in the medium term.
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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.
How To Refinance Rental And Investment Properties
Refinancing a rental property mortgage typically comes with stricter requirements. Before you apply to refinance an investment property, make sure you’re prepared.
Edited byChris JenningsUpdated October 12, 2021
Our goal is to give you the tools and confidence you need to improve your finances. Although we receive compensation from our partner lenders, whom we will always identify, all opinions are our own. Credible Operations, Inc. NMLS # 1681276, is referred to here as “Credible.”
Refinancing can be a smart move for any property owner, but for rental property investors, it can be particularly helpful.
With a mortgage refinance, you can reduce your interest rate, shorten your loan term, take cash out of the home, or even finance new investments. And when done right, it can ultimately mean lower costs and higher profits.
If youre considering refinancing a rental property, heres what you need to know:
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Investment Property Loan Faq
Do you need 20 percent down on an investment property loan?
That depends on your lenders rules and the type of mortgage you want. Often 15 percent down is enough for a conventional loan. And for multifamily dwellings where you occupy one unit, you could put down 3.5 percent , 3 percent , or even 0 percent , although these are not considered true investment properties.
Can you put 3 percent down on an investment property?
You cannot put 3 percent down on a true investment property. But, as discussed above, a mortgage from Fannie Mae or Freddie Mac has a minimum 3 percent down payment for a multifamily dwelling where you live in one unit. So you can buy with one of these loans and still generate rental income from the additional units in your home.
Can you get a 30-year loan on an investment property?
Absolutely! Most borrowers do.
What bank will loan me money for an investment property?
Many banks, mortgage lenders, and other lenders are happy to lend on investment properties as long as you meet lending criteria, which are stricter than for your main home. In addition, investment property loans are easier to find when the economys doing well. You might have a harder time finding investment property loans during economic downturns, like when the Covid pandemic was at its peak.
Can I use my 401 to buy an investment property?Can I live in an investment property? How much can I borrow for an investment property?
Refinancing A Rental Property Qualifications
Mortgages on rental properties typically have more stringent requirements than those for your primary residence. To qualify to refinance your rental property, you may need:
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Good or excellent credit: If youre refinancing a single investment property, you may need a credit score of 680 or higher with some lenders. If youre refinancing a whole portfolio of rental properties, this requirement will be even higher at least 720, according to Fannie Maes guidelines.
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Lower loan-to-value ratio: The loan-to-value ratio needed to refinance a rental property cant be higher than 75% in many cases. Some lenders may require a loan-to-value ratio of 70% or even 60%. Youll likely need to have built significant equity in your property to qualify for refinancing.
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Higher income: Youll need to show that you can afford to make your payments on your rental property before you refinance. A key way lenders evaluate this is by examining your debt-to-income ratio. This metric compares your monthly payment obligations on all of your loans to your overall monthly income. The maximum DTI ratio on most investment properties is 45%.
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Things To Know Before Refinancing A Rental Property
There are three things about refinancing rental property that real estate investors should be aware of:
1. Interest rates and fees
Interest rates and loan fees are usually slightly higher than refinancing a primary residence.
Thats because banks generally view an investment property loan as having more risk than an owner-occupied home, and lenders use higher rates and fees to compensate themselves for taking additional risk.
2. Maximum LTV
Lenders typically allow a maximum loan-to-value ratio of 75%, which means that you need to have more than 25% equity in your rental property to do a cash-out refinance.
For example, lets consider a rental property with a current mortgage balance of $75,000 that appraises for $145,000. Your equity is $70,000 , but youll need to keep some of that money in the rental property when you refinance it.
Based on an appraised value of $145,000 the maximum refinance loan you could qualify for would be $108,750 . The difference between the appraised value and the new loan amount is $36,250 , which is the amount of equity you would need to keep in the property.
So, instead of having usable equity of $70,000, the actual cash you have available to reinvest would be $33,750 .
3. Refinancing rules
The rules to qualify for a rental property refinance are more stringent than refinancing your primary residence:
Can You Call An Investment Property A Second Home
Tempted to call your investment property a second home and take advantage of some of the second-home perks, like a lower down payment and interest rate?
Dont be. In the mortgage world, you need to call it what it is whatever it may be.
It is absolutely imperative that borrowers are completely transparent when disclosing to their lender the intended use of the property to ensure that they receive the appropriate product and rate, Joseph says.
Joseph adds that borrowers may be asked to sign a document verifying their intended use of the property, so theyll have to indicate in writing what they plan to do with the home. Deceiving a lender otherwise could have serious consequences.
Intentionally misleading a lender constitutes mortgage fraud, Joseph says. Not only is it unethical, its illegal and could result in criminal prosecution.
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Can I Get An Sba Loan For Rental Property
The SBA 504 loan is the best choice for buying commercial property. Money can be used to buy a building, finance ground-up construction, or rehab an existing building. With the SBA 504 loan, you are likely to have the lowest interest rates and a 25-year repayment term.
Borrowing limits are normally $2 million for commercial property. Key requirements of this loan include the owner must occupy 51% of an existing building or 60% of a new construction building.
