How to refinance an investment property

Looking to refinance rental property to improve cash flow or free up cash for renovations? When you refinance¹ an investment property, you replace your current mortgage with a new loan that can reduce your rate, change your term, or let you borrow built-up equity to reinvest. If you’re considering a refinance, evaluate your property and today’s market first so your next move supports long-term returns.

6 steps to refinance a rental or investment property

Refinancing an investment property is like refinancing a primary residence.

However, lenders view investment properties slightly differently due to their unique risks. Preparing your financial documents and information in advance can ensure a seamless and secure approval process.

Before you dive in, you’ll want to ensure you are targeting loan options specifically structured for non-owner-occupied homes or second homes. Taking an active approach now ensures you won’t hit unexpected roadblocks later.

Let’s look at the step-by-step path to successfully refinancing a rental property.

Step 1: Estimate your home equity

You need some home equity to refinance your investment property.

Most lenders prefer a loan-to-value (LTV) ratio of less than 75%, meaning you generally need at least 25% equity to refinance.

You can estimate yours using the home equity calculator from Rocket Mortgage.

Step 2: Gather your documents

Your lender will ask you for several documents to begin the refinancing process. These include:

• Proof of income. This includes pay stubs from the last 30 days, a bank statement, or another form of income verification if you’re self-employed.
• Copies of your W-2 or 1099 forms. These forms are used to verify your employment history and income. If you’re self-employed, you may need to provide your complete income tax return.
• Proof of homeowners insurance. This shows the lender that you have enough homeowners insurance coverage to protect your investment.
• Copy of your title insurance. Your title insurance helps your lender verify that the property is yours to refinance and provides a legal description of the home and basic tax information.
• Copies of your asset information. Your lender will want to verify all your assets, including bank statements, investment accounts, and retirement savings.

Gather the proper documentation before you apply for refinancing to speed up the process. Keep multiple copies available in case you need to resend any documents.

Step 3: Compare refinance rates and apply

Shop around and compare rates from different lenders to ensure you’re getting the best deal.

Your relationship with your current lender may work to your advantage if you’re in good standing.

Once you’ve settled on a lender, contact them to apply. Complete the application, submit the requested documents, and respond promptly if they ask for additional information.

Check the latest refinance rates from Rocket Mortgage.

Step 4: Lock in an interest rate

Once your application’s approved, you may want a mortgage rate lock if you think rates may increase before you close.

Rate locks vary by lender but usually last 15 – 60 days. Your location and loan type may also affect how long your rate lock lasts.

Without a rate lock, your interest rate can change before closing.

Step 5: Go through underwriting

Your lender will start underwriting your application by verifying your finances and assessing the property’s condition. The lender also will require a refinance appraisal to determine the property’s fair market value.

Make sure your property is looking its best before your appraiser arrives. Also, list upgrades you’ve made to the property since you bought it.

If the property currently has a tenant, be sure to coordinate with them so the appraiser can access the property.

Step 6: Close on the loan

At least 3 business days before closing, your lender will provide a Closing Disclosure that details your new loan and the closing costs you must pay.

At closing, you’ll sign documents and ask any final questions about your loan. If you’re borrowing equity, your cash will arrive in your bank account within a few days.

How often can you refinance an investment property?

If you find yourself wondering if you can refinance an investment property multiple times, the answer is yes. You’ll need to pay closing costs and have sufficient equity in the property each time you refinance.

Many lenders also have a seasoning period – a mandatory waiting window between closing one mortgage and originating another.

You may have to pay a prepayment penalty on your current mortgage. Check with your current lender.

How soon can you refinance an investment property? For conventional mortgages, lenders usually require you to wait at least 6 months after purchasing a property before you can execute a cash-out refinance.

If you want to refinance an investment property for a rate-and-term change, the 6-month rule remains a safe industry benchmark, though some lenders might allow it sooner.

Keep an eye on broader market trends before pulling the trigger, so you don’t use up your refinancing options right before an even larger drop in market rates.

Understanding when and how often you can refinance your home can help you time this decision to maximize the benefits.

Reasons to refinance an investment property

Homeowners usually refinance to reduce their interest rate or change their loan term, but refinancing is different for investors. Here are some of the reasons investors might refinance.

1. Reduce your interest rate

Lenders charge higher interest rates on investment properties because these loans are riskier. Lenders expect that if you’re short on cash, you’ll pay the mortgage on the home you live in before you’ll pay the loan on an investment.

Interest rates on a mortgage for an investment property are usually 0.25% – 1% higher than they are on a loan for a primary residence.

However, refinancing can get you a lower rate if:

• You can successfully manage the cash flow on your rental property.
• You have enough income to afford the payments on both your primary residence and investment property.

Check today’s refinance rates with Rocket Mortgage.

2. Change the loan term

If you shorten your investment property’s loan term, you’ll pay more each month but own the property sooner while paying less overall interest.

If you have trouble affording your current monthly payment, you could extend your loan term. You’ll pay less each month, and you’ll pay more interest. Keep in mind that refinancing to extend your mortgage loan term may not change your interest rate.

You also can refinance from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. Investment property owners often switch to a fixed-rate mortgage to ensure the payment is a consistent monthly expense.

3. Borrow your equity

Equity is the difference between how much your property is worth and how much you owe on it. You build equity by paying down your mortgage. You also gain equity if the value of your property increases. You can refinance your mortgage to borrow your equity using a cash-out refinance, a home equity loan², or a home equity line of credit (HELOC). Rocket Mortgage currently doesn’t offer HELOCs.

Let’s say you bought a property for $500,000 with a 20% down payment and a $400,000 mortgage. After about 15 years, your mortgage balance is $300,000, and your property is now worth $700,000. That would give you $400,000 in equity. You could borrow most of that amount with a cash-out refinance, home equity loan, or HELOC, leaving some equity in the home. The borrowed equity is repaid as part of your new loan.

Borrowing equity can provide the cash you need to pay for major repairs or renovations to your property, which could increase its value and your equity. You also could use the money to consolidate debts or invest in another property.

4. Increase your rental income

If you refinance to make improvements or repairs to your investment property, you may be justified in increasing the rent.

Common upgrades that increase property value include:

• Building an addition to increase the living space
• Finishing a basement and renting it out as a separate apartment
• Repairing the roof
• Upgrading appliances, cabinets, and floors
• Repainting the interior
• Finishing or maintaining an outdoor structure like a pool or fence
• Upgrading the HVAC or central systems

Improving your property builds goodwill with your tenants while increasing its fair market value. This means you can charge more rent in the short term and sell the home for more money when you’re ready.

5. Finance more investments

You can borrow your equity to finance a down payment on another real estate investment. Using your equity to put down money on another property allows you to grow your investments and potentially generate even more profit.

6. Fund almost anything

There are no limits to what you can do with the money you borrow when refinancing. Here are just a few examples of what you can do with your money from refinancing:

• Increase your child’s college fund
• Add to your retirement savings
• Invest in the stock market
• Consolidate credit card debts at a lower interest rate
• Pay off medical debt
• Pay education expenses
• Make repairs or upgrades to your primary residence

Use the refinance calculator from Rocket Mortgage to see if refinancing your investment property can help you achieve your goals.

The bottom line: Refinancing may reduce your overhead costs

Refinancing a real estate investment property can reduce your operational expenses and help you maximize profits. By taking the time to carefully analyze your equity, compile the necessary documentation, and track shifting market rates, you can position your properties for optimal cash flow. Whether your goal is to pay for an ambitious renovation or buy another rental property, restructuring your financing can help you get the most out of your investment.

Ready to explore your next real estate investment opportunity? Take the first step by applying for a mortgage.

¹ Refinancing may increase finance charges over the life of the loan.

² Home Equity Loan Product is a second standalone lien and may not be used for piggyback transactions. Valid for loan amounts between $45,000.00 and $500,000.00 (minimum loan amount for properties located in Michigan is $10,000.00). Not available on Ameriprise products. Additional restrictions, terms, and conditions apply. Must meet qualification requirements. This is not a commitment to lend.