How to refinance a rental or investment property

If there's one silver lining about the coronavirus pandemic’s effect on American finances, it’s that mortgage rates have reached historic lows, incentivizing home buying and refinancing.

However, if you are thinking of refinancing an investment property, you may face some unique considerations. With that in mind, we've created a guide on how and why to refinance loans. Read on to learn more.

How to refinance your rental property or investment property

If you think that refinancing might be the right move for you, the next piece of the puzzle is to learn how the refinancing process works. With that in mind, we've laid out the five refinancing steps you need to know:

1. Mortgage refinancing requirements
2. Shop around for low mortgage rates
3. Apply to refinance your mortgage
4. Go through underwriting
5. Close on the home loan

1. Mortgage refinancing requirements

Refinancing a mortgage on a rental property comes with stricter qualifying requirements than if you were refinancing the loan on your primary residence. While every lender's qualifying standards may be a bit different, here are a few general guidelines to help you determine if you might be a good candidate.

• Loan-to-value ratio: 75%
• Credit score: 660
• Debt-to-income ratio: 45%
• Cash reserves 6-12 months

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Documents needed

In addition, you’ll need to provide the lender with similar financial documentation you submitted for your current loan. You should prepare the following:

• Two years of tax returns or W-2s
• Recent pay stubs with your year-to-date income listed
• Statements from any bank accounts or other assets
• Proof of homeowners insurance
• A copy of any leases on the property

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2. Shop around for low mortgage rates

In truth, the interest rate you receive can vary from lender to lender as can some of their qualifying requirements. Getting quotes from multiple mortgage lenders is the best way to ensure that you receive competitive rates. That said, the way refinance rates are trending, now is likely going to be a good time to refinance regardless of whom you choose.

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3. Apply to refinance your mortgage

Next, you will apply to refinance with a loan officer. They will help you fill out the application, lock in your mortgage rate for your new home loan, and compile your financial documentation for the underwriter.

4. Go through underwriting

Afterward, your loan will go through underwriting, which is where an underwriter will verify all of your financial information and decide whether to approve you for your new loan. As part of the process, you will likely have to have an appraisal done, which will estimate your home's value to ensure that it is worth at least as much as the loan amount.

5. Close on the home loan

As long as your home value is sufficient and your financial information can be verified, you should be approved to refinance. From there, all that's left to do is to sign the paperwork on your mortgage refinance and to pay your closing costs.

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3 reasons to refinance your rental property or investment property

Competitive rates aside, if you're thinking of refinancing your existing mortgage, it’s absolutely crucial to get clear on your reasoning behind making this move.

Usually, there are three main reasons to refinance a mortgage on an investment property:

1. Lower your payments (and increase your rental income)
2. Change your loan terms
3. Leverage the equity in the property

1. Lower your payments (and increase your rental income)

With mortgage rates as low as they are currently, the main reason why so many investors are choosing to refinance is to secure lower monthly payments. At the end of the day, if you can make smaller loan payments and collect the same amount of rent, any savings goes into your pocket each month.

2. Change your loan terms

However, in addition to securing lower monthly payments, refinancing also presents an opportunity to change your loan term. For example, you could move from a 30-year loan to a 15-year option or switch from a loan product with adjustable rates into a more traditional fixed-rate loan. Additionally, depending on your home's equity, you may be able to get rid of a private mortgage insurance requirement

3. Leverage the equity in the property

Lastly, if you have some equity built up in the property, you may be able to do a cash-out refinance. Many investors will pull cash out of one investment property in order to secure the down payment on another or to finance repairs.

Use an online mortgage refinance calculator to see how low your monthly payment could be.

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The bottom line

Similar to all forms of wealth management, refinancing is one area where it makes sense to speak to an expert.

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