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How to Refinance a Rental or Investment Property

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February 2, 2021

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Renting out a property is a great way to generate steady income. But just as you have to manage a property day-to-day, you need to keep up with financial management, too.

By refinancing a rental or investment property, you can open yourself to significant savings—which can give you more investment money. The benefits can include lower interest rates and monthly payments or a simple cash-out sum. 

But just because rates are low doesn’t mean it’s necessarily the right time to refinance. Let’s go over when and how to refinance a rental or investment property.

When Should You Refinance a Rental Property?

The when will dictate how lucrative your refinancing options could be. Refinancing your property at the wrong time could backfire big time, so don’t just storm ahead without adequate preparation. 

The critical factor is mortgage interest rates. If interest rates are experiencing a significant drop, it might be time to refinance your property. 

The timing is especially advantageous if your property’s value is the highest it has ever been. Increased property value paired with low-interest rates makes for the perfect refinancing opportunity. It also leads us into why you might want to refinance a rental property.

Why Should You Refinance a Rental Property?

Lower interest rates are a prime motivator for refinancing your property. The lower associated monthly costs can mean more money in your pocket, which only increases your investment value. A lower interest rate of just 1% can make a significant difference in how much you save throughout your lifetime.

Additionally, through refinancing, you may be able to readjust your repayment periods to pay off your loan faster. To contrast this, you may choose to extend your loan to lower your immediate monthly payments. Of course, that’s only advisable if you can achieve a reasonable interest rate. Otherwise, you will only increase the amount you pay in the long-term.

Other potential benefits include:

  •     The opportunity to switch from a variable interest rate to a fixed interest rate on your investment properties
  •     A re-evaluation of the loan-to-value ratio on your property, which could remove mortgage insurance charges from your continued monthly payments
  •     A cash-out refinance, which could allow you to re-invest in additional properties

Depending on your circumstances, there may be many more benefits, which you could uncover with the right legal assistance. Having the right advice on hand is imperative to successfully refinance a rental property because there are specific parameters that you must meet. 

Requirements for Refinancing a Rental or Investment Property

Before applying to refinance your property, you’ll need to gather a few different documents. These include:

  •     W-2 forms. These will help verify both your income and your employment history. You do not need to provide the original documents; copies will do just fine. Note that if you are self-employed, you may need to provide additional tax documents.
  •     Proof of income. Besides your W-2 forms, you may need to provide evidence of your current income. It reassures the lender that you can keep up with payments on the new loan. Proof of income can take the form of a payslip or bank statement.
  •     Proof of title insurance. You will need to verify that you are the owner of the property.
  •     Financial statements. You need to make clear how many assets you presently own. You’ll need bank statements, investment information, and savings account records.

The Refinancing Process

1. Shop Around for the Best Rate

Anyone with a sense of good business practice knows that you need to compare your options. No matter how the market is performing, different mortgage lenders will offer different rates. Make sure you do your research. It may seem tedious, but it will be worth it!

2. Apply for Refinancing

Once you have your paperwork in order, file your application with the institution of your choosing. Talk to your loan officer if you need help tracking down documents

 You may need to get a home appraisal performed as part of your application, so be sure you’re clear on your lender’s specific requirements.

3. Complete the Underwriting Process

Following your initial application, an underwriter will review your documents and decide whether to approve your refinancing application. This process will often include an appraisal to confirm your property’s value. If the assessed value is at least the new loan amount and your documents check out, you should get approved.

4. Close the Home Loan

The easy part! Following application approval, all you need to do is sign the dotted line for verification. This stage is also where you will need to pay off any closing fees. 

Don’t Forget to Consider Cash-Out Refinances

If you want cash now rather than long-term savings, cash-out refinancing might be the option for you. 

Essentially, a cash-out refinance involves taking out a larger loan that encompasses the original loan amount plus a little extra depending on the property’s equity. This is a great way to secure funding for future investments, but it may involve taking on a higher interest rate or a longer loan term.

If you’re not sure if a cash-out refinance is right for you, ask an expert.

Contact Us Today

Whether you’re a seasoned real estate investor or just breaking into the market, let our team at Associates Home Loan help you.

Just contact us and we can help you get started on the refinancing process, answer any questions, and help you however we can. No matter if you want a lower rate, want to cash out, or just explore your options, we can help.

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