How to refinance an investment property

Refinancing is an important way investors can improve their cash flow. When refinancing an investment property, you replace the current mortgage with a new loan that either saves you money or lets you borrow your equity. There are reasons for refinancing an investment property to consider before taking concrete steps toward that goal.

6 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 know that if you’re short on cash, you’ll pay the mortgage on your primary home before you’ll pay the loan on an investment. Interest rates on a mortgage for an investment property are usually 0.5% – 0.75% 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.

Current interest rates for refinancing

Here’s an overview of current refinance interest rates:

Remember, rates change quickly depending on market conditions, and your individual rate relies on a review of your finances.

2. Change the loan term

If you shorten your investment property’s loan term, you’ll pay more each month but own the property free and clear sooner. You’ll also pay less overall interest. If you have trouble making your current monthly payment, you could lengthen your loan term. You’ll pay less each month, but it’ll take longer to pay off the loan and you’ll pay more interest. Refinancing to extend your mortgage term may not change your interest rate.

You also can refinance from an adjustable-rate mortgage to a fixed-rate mortgage. Investment property owners often switch to a fixed interest rate to ensure the mortgage 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 and by increasing the value of your property. And when you have enough equity, you can refinance your mortgage to borrow it using a cash-out refinance or home equity loan.

Let’s say you took out a mortgage for $500,000 with a 20% down payment of $100,000. After about 15 years, you’ve paid down your mortgage balance to $300,000 and your property is now worth $700,000. You’d have $400,000 in equity and could borrow a large portion of it to do whatever you wish with. The borrowed equity is repaid as part of your new mortgage.

Borrowing equity can give you access to enough cash to pay for major repairs or renovations, 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 charging more 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 heating or central systems

Improving your property builds goodwill with current tenants and increases its market value. This means you can charge more rent in the short term and get more money back when you sell the property.

5. Finance more investments

You may want to 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 on 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:

• Grow your child’s college tuition fund
• Boost your retirement savings
• Invest in the stock market
• Consolidate credit card debts at a lower interest rate
• Pay off medical debt
• Pay college or university expenses
• Make repairs or upgrades to your primary residence
• Take a dream vacation
• Pay for a wedding

Use our refinance calculator to see if refinancing your investment property can help you achieve your goals.

How to refinance a rental property or an investment property

Now that we’ve gone over the benefits of refinancing, it’s time to look at how you can refinance your investment property. Fortunately, refinancing a rental property is less complicated than buying a home.

Step 1: Build equity

You'll need to build equity before you can refinance your investment property. Lenders have different requirements for how much equity you need to refinance. As a general rule, most lenders prefer a loan-to-value ratio of less than 75%, meaning you need at least 25% equity.

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 requested documents, and respond quickly to any requests for more information.

Step 4: Lock your new, refinanced rate

Once your application’s approved, you can lock in your interest rate. This gives you time to read your refinancing terms without worrying about the interest rate changing. Rate locks may last 15 – 60 days, depending on your lender. Your location and loan type may also affect how long your rate lock lasts.

If you’re happy with the proposed rate, lock it in immediately. If not, you can “float” your rate and proceed with the loan. If you float, keep in mind that your rate may either go up or down, depending on how market rates change.

Step 5: Go through underwriting

Your lender will proceed with the underwriting process after you lock in your rate. During underwriting, your lender will review your documents to verify your finances and assess the property's condition. The lender also will require an appraisal to determine the fair market value of a home and estimate property taxes. Make sure your home is looking its best before your appraiser arrives. You may also want to list upgrades you’ve made to the home since you bought the property. If the property currently has a tenant, you will want to coordinate with them so the appraiser can access the property.

Step 6: Close on the loan

Closings on a refinance is quicker for an investment property than a home purchase. At least 3 business days before closing, your lender will provide a Closing Dislosure that covers the details of your new loan and any closing costs or fees you must pay. At closing, you’ll sign documents and ask any final questions about your loan. If you’re borrowing equity, your loan will arrive in your bank account within a few days.

The Bottom line: Refinancing can help you with your goals

Refinancing an investment property is like refinancing your primary residence. Refinancing lets you get a lower interest rate, change your loan term, or borrow equity. The refinancing process is usually more straightforward than applying for a mortgage to buy a new home.

If you’re ready to refinance your investment property, start the mortgage refinance process with Rocket Mortgage^®!