Why Should You Refinance Your Investment Property
Grow Your Rental Income
When you refinance your investment property using cash-out refinancing, you can utilize that money to make improvements to your property. This may include remodeling, updating, or repairing the property. These efforts are likely to boost your rental income from your investment property.
You could put the equity in your rental property to good use by choosing cash-out refinance and invest that cash into additional properties. This could be a second house or an apartment building. This strategy could help to build your portfolio as a real estate investor.
You can use the equity on your investment property to fund other attractive investing opportunities to boost your overall ROI. If you have an equity on a rental property higher than 20 percent, cash-out refinancing may be an ideal choice for you.
How Does Refinancing Your Mortgage Work
Refinancing to invest meansreworking your current mortgage to give you access to the equity you havealready earnt. This could come from its rise in value or the portion you havealready paid towards the loan.
For example, if you have a$420,000 mortgage on a $800,000 property, you could have $220,000 worth ofequity and an LVR of 80%.
Although this is less than thetotal equity you have available, taking out more than this would raise your LVRto over 80%, making you liable for the added cost of Lenders Mortgage Insurance .
Pros: Why refinancing to invest could be a good idea
Refinancing to invest in property can be a good idea because it means you can put your investment property up for rent, allowing you to funnel the costs into paying off the new mortgage, all while building your portfolio.
Cons: Things to consider before you start
Before investingchecklist
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Refinancing Your Home?
How To Find The Right Investment Property
There are many things you should consider when finding the right investment property for you. Here are a few things to ask yourself:
- What does the market look like? It is important to remain up to date with estate trends.
- Try to make sure youre coming in at a time that is financially sound for you. Acting on emotion is not recommended but remaining proactive and reactive to market trends is.
- Where do you want to buy?
- Where is smart to buy?
- How much can you afford?
- Do you want to invest alone or as a group?
- How much could you charge as a rental?
- How much do other homes cost in the area?
- Does this area have a high rate of appreciation if youre looking to sell?
- What kind of attractions and job opportunities are around?
- Is this a vacation destination? If so, how can you remain competitive with other rental properties nearby?
If you know someone who has invested in real estate, it might be helpful to pick their brain. Knowledge is power!
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How Much Can I Earn From A Rental Property
The profit you can make from monthly rent payments depends on the area youre in, how good of a deal you get on the home, and how you manage your expenses month-to-month.
That being said, maintaining rental properties are great investments because they can often become passive income when everything lines up perfectlyan up-and-coming neighborhood can command higher rent each year, and if the home doesnt need a ton of maintenance, you might not have to do much work at all throughout the year. Simply sit back, collect the rent checks, and enjoy your new source of income!
Know What Lenders Are Looking For
Just as with a refinance of a primary residence, your credit score , debt-to-income ratio and income matter to getting a refinance on an investment property. But because lenders think investment property loans are riskier than primary residence loans, they will often evaluate you slightly differently.
First, in addition to the typical financial documents required by lenders like tax returns and statements detailing assets and debts, investment property owners may be required to have six months or more of monthly mortgage payments in the bank.
Though investment property owners get rental income from their tenants, they may not be able to include this as part of their income if they havent had tenants paying rent for two consecutive years or more if theyve had tenants for two or more years, they will need to prove with checks, bank statements and other documentation that the tenants have paid.
Investment property owners can also expect to pay $150+ more for an appraisal than would the owner of a primary residence, and they will likely face higher LTV requirements .
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Decide Why You Want To Refinance Your Investment Property
The most common reason to refinance an investment property is to lower your payment so you take home more rental income every month. It can also make sense to pursue a rental property refinance if:
You want to tap equity youve built to buy other properties. If home values are on the rise, you may be able to put the extra equity to work to buy more income-producing properties.
Youre shortening the term to pay your mortgage off faster. Youll build equity faster by refinancing your investment property loan to a 15-year term. The higher payment may even be offset by higher rents.
You need to pay off a hard money loan used to purchase the home. A rental refinance can clear out a high-interest-rate hard money loan used to purchase a fixer-upper property.
Youre replenishing cash used for an all-cash purchase. If you tapped a 401 or stock account to pay all cash for an investment property, conventional lending guidelines allow you to replenish your money within six months of the purchase.
How To Get A Home Equity Loan To Buy Another House
If youre interested in using home equity to purchase a new home, the value of your house will need to be high enough to support the loan, and youll have to meet your lenders requirements. Heres how to get a second mortgage to buy another house.
1. Determine the amount you want to borrow. Before taking equity out of your home to buy another house, decide how much you want and need. Home equity loans limit how much you can borrow. In most cases, you can only access up to 85% of the equity in your home. For example, if your home is worth $350,000 and you owe $250,000, you have $100,000 in equity. In this example, the maximum you would be able to borrow is $85,000.
2. Prepare for the application process. Your approval for a home equity loan will depend on multiple factors. The value in your home will determine the maximum amount of equity available, and your financial information will determine how much of that equity you can borrow. In addition, your lender will look at your credit score, income, other outstanding debts and additional information.
4. Apply to the loan with the best terms. Once you’ve determined the loan with the best terms, youre ready to apply. Youll submit the application and provide the requested information. Your lender will order an appraisal of the home or determine the value using another method.
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Refinancing A Rental Property You Bought With Cash
Delayed financing refers to the practice of buying a home with cash, then reimbursing the purchase with a refinance.
Because there are no loans on an all-cash home purchase, any subsequent refinance is technically a cash-out one.
Normally, the rental property buyer would need to wait six months to get reimbursed per standard cash-out rules. That ties up a lot of cash for a long time not the ideal situation for a savvy investor who wants to put their money to work elsewhere.
So, in mid-2011, Fannie Mae rolled out the delayed financing exception. Home investors may now receive a cash-out refinance just days not months after closing.
Guidelines for delayed financing are as follows.
- The buyer paid cash for the home
- The buyer must document the source of funds for purchase
- Loans or liens opened to buy the home must be paid off with the new loan
- A title search must confirm no financing on the purchased home
Keep all documentation for the home purchase if you plan to use the delayed financing exception. Most importantly, keep a final Closing Disclosure showing your closing date and loan terms.
How Much Can I Earn From A Flip
Another common strategy is to use the money from your cash-out refinance to cover the down payment and improvement costs on a house you intend to flip known as a fix and flip. Similar to the rental property option, youll need to run the numbers to make sure the costs and risks will be worth it. This can be a risky strategy if youre not familiar with costs and timelines for improving a property, and youre also at the whim of the market when you are looking to sell.
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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.
For example:
- 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
Turn To A Local Bank Or Broker
If your down payment isnt quite as big as it should be or if you have other extenuating circumstances, consider going to a neighborhood bank for financing rather than a large national financial institution.
Theyre going to have a little more flexibility, Huettner says. They also may know the local market better and have more interest in investing locally.
Mortgage brokers are another good option because they have access to a wide range of loan products but do some research before settling on one.
What is their background? Huettner asks. Do they have a college degree? Do they belong to any professional organizations? You have to do a little bit of due diligence.
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Special Mortgage Rules For Investment Properties
One of the advantages of buying an investment property is that you can typically add your anticipated rental income to your existing income when you apply. That will help you prove you can comfortably afford your new mortgage payments.
However, dont assume your lender will count all that extra income, nor that it will take your word for how much it will be.
Lenders typically allow 75% of the future rental income to count toward your qualifying income. And they require either a current lease agreement or a rental schedule, which will use the appraisers view of your likely rental income based on local comparisons with similar rental properties.
Youll likely need that extra income to qualify. Because your lender will want to be sure you can afford payments on your existing mortgage as well as your new loan.
When youre budgeting, also keep in mind that investment properties typically offer much more generous tax breaks than owner-occupied ones. So speak to your professional tax adviser to discover what those might mean to you.
When Should You Refinance An Investment Or Rental Property
There are a few reasons to refinance an investment or rental property. Many people refinance their loans in order to lower their interest rate, which in turn, can lower the monthly payment. Refinancing can also result in a shorter loan term. When you refinance, you replace your existing mortgage with a new mortgage that has a better interest rate or better terms.
Existing FHA loans can be refinanced into new FHA mortgages, just as existing VA loans can be refinanced into new VA mortgages. You can also refinance existing FHA, VA, and conventional loans with conventional refinances.
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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 youâre prepared.
Edited byChris JenningsUpdated October 12, 2021
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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:
Common Mortgages For An Investment Property
Its more common and usually more cost-efficient for people to finance a primary residence only. But if you are in the position to invest, there are a few things you can do. Keep in mind, down payments are usually higher for investment properties than primary residences. You will typically see lenders ask for a 15 to 25 percent down payment. Lenders will accept a wider range of down payments for primary residences because there is less risk.
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Minimum 0 To 6 Months Payments In Reserve
Lenders might also require you to have cash reserves in the bank in case of financial difficulty, such as a unit vacancy. The amount of reserves youll need depends on the other aspects of your financial profile:
- Investors with one rental unit: You wont need any cash reserves if your LTV and DTI ratios are low.
- Investors with two to four units: Borrowers with a high DTI and lower credit score may be required to show they have up to 12 months worth of reserves in the bank.
Total Equity And Useable Equity
Banks will typically lend you 80% of the value of your home â less the debt you still owe against it. This is considered your useable equity.
Since the bank is lending you money against the value of your home, they wonât lend you the full amount. Put simply, if house prices dip, they donât want an outstanding loan thatâs worth more than your property.
Keep in mind that itâs possible to borrow more than 80% if you take out Lenders’ Mortgage Insurance .
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Interest Rates And Fees If You Refinance Your Home
The interest rate on the refinanced part of your mortgage may be different from the interest rate on your original mortgage. You may also have to pay a new mortgage loan insurance premium.
You may have to pay administrative fees which include:
- appraisal fees
Your lender may have to change the terms of your original mortgage agreement.
Guide To Investment Property Loans
Investment property loans are a lot like standard mortgages, provided you want to buy a home with 1-4 units.
The application and approval processes work the same way, and mortgage rates are usually less than 1% higher than for a standard mortgage.
However, the rules are a little stricter for an investment property loan than for a mortgage on your primary home. For instance, you likely need 15-20% down instead of 3-5%. And your credit score will need to be in the high 600s or 700s.
If youre planning to buy an investment property in the near future, heres what you need to know.
In this article
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How Much Could You Borrow For An Investment Property
Using the example above, letâs say your home is valued at $400,000 and your mortgage is $220,000. Hereâs the breakdown of sums:
- value of your property – $400,000
- value of your property at 80% – $320,000
- minus your mortgage – $220,000.
This means your useable equity would be $100,000.
Learn how to estimate your propertyâs equity using the NAB app or use our equity loan calculator on our website.
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.
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