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How To Refinance An Investment Property

February 25, 2024 7-minute read

Author: Miranda Crace


You probably already know that it’s possible to refinance the mortgage on your primary residence. But did you know that you can also refinance your investment property? An investment property refinance can make your loan more manageable, give you the cash you need to improve your tenant’s space or reinvest or for any other purpose you might need. Here’s a quick how-to guide.

Refinance An Investment Property: 6 Advantages

Refinancing your investment property gives you a number of advantages. Here are some of the reasons why you might want to refinance your investment property.

1. Lower The Refinance Rates For Your Investment Property

You might be surprised by the difference between an investment property and a primary property’s interest rate. Typically, the interest rate for an investment property runs at least 0.5% – 0.75% higher than what the same borrower might pay for a mortgage on their primary residence.

Investment properties represent a larger risk for lenders. Mortgage lenders know that if you run into financial hardship and can only afford a single mortgage payment, you’ll always choose your personal home.

To account for this risk, lenders charge more in interest on investment properties. Two mortgage payments can be unsustainable, so you might want to search for a lower rate by refinancing.

Refinancing can give you access to lower rates if you can show that you are successfully managing the cash flow on your rental property or you have enough alternative income to offset both payments. Compare your current refinance interest rate with offers from different lenders before you refinance.

2. Change The Mortgage Term

Do you want to change your investment property’s loan terms so you own your investment property free and clear sooner? You’ll pay more each month, but accrue less interest over time by shortening your loan’s term.

You may also want to consider lengthening your loan term if you have trouble keeping up with your monthly premiums. Lengthening your mortgage term means you pay less each month, but you spread your mortgage payments out over time and accrue more interest. Refinancing by changing the length of your mortgage may or may not change your interest rate.

You may also be able to refinance from an adjustable-rate mortgage to a fixed-rate mortgage. Investment property owners often choose to switch to a fixed interest rate because their rates don’t change on a month-to-month basis, which gives you a more consistent set of monthly expenses.

3. Tap Into Your Home Equity

As you make your monthly payments and pay off your principal, more and more of the home becomes yours. Home equity is the dollar amount of ownership you have in a property. Your home equity includes any money you put down on the home, plus any principal you’ve paid off. However, paying off interest doesn’t build equity.

For example, let’s say you took out a mortgage for $200,000 with a 20% down payment of $40,000. Over the years, you paid another $40,000 down on your principal and you have $120,000 left on your loan. In this example, you have $80,000 worth of equity in your home that you can tap into.

You can borrow against the equity in your home and access the cash through a home equity loan or cash-out refinance. You can use the money to fund repairs, pay off credit card debt or pay for almost anything else.

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4. Increase Your Rental Income

Are you getting the most rent possible out of your investment property? Refinancing to make a few improvements or repairs might allow you to rent the property out for more money. Some of the most common upgrades you can make to increase your cash flow include:

  • Adding an additional segment to the home to increase living space.
  • Finishing a basement and renting it out as a separate apartment.
  • Repairing the roof and replacing missing tiles.
  • Upgrading the major appliances, cabinets and floors.
  • Repainting the interior rooms to make the property look nicer.
  • Finishing or maintaining an outdoor structure like a pool or fence.
  • Upgrading the furnace or central cooling system.

Improving the livability of your space builds goodwill with your current tenants and increases the market value of your home. This means that you can charge more in rent in the short term and make your money back by selling the property for more money later on.

5. Finance Other Real Estate Investments

You may want to use your home equity to finance a down payment if you see a real estate investment that you want to buy quickly. As your home grows in value over time, your equity increases in value beyond what you pay on your principal.

Many investors will then parlay this built equity into more profit by using it to put money down on another investment. You might have even bigger goals, such as using the money you get from your refinance to invest in a different type of real estate venture, like a commercial property.

6. Fund Almost Anything Else

Unlike some other types of loans, there are no limitations on what you can do with the money you take away from a refinance. You can:

  • Grow a child’s college tuition fund.
  • Boost your retirement savings.
  • Invest in a stock or company.
  • Consolidate credit card debt with a lower interest rate.
  • Use the funds for medical debt.
  • Continue your education by enrolling in college or university courses.
  • Fund repairs or upgrades on your personal residence.
  • Take a dream vacation.
  • Pay for a wedding.
  • Buy a new car or boat.

Refinancing can give you access to an easy source of cash – and you can use it for almost anything you need. If you can dream it, you can use the money from your home equity to make it a reality.

Think a refinance might be for you? Use our refinance calculator to see if refinancing your rental property can help you achieve your goals.

How To Refinance A Rental Property Or An Investment Property

Now that we’ve gone over everything that you can use a refinance for, it’s time to take a look at how you can refinance your own property.

Step 1: Build Equity

Before you can refinance your investment property, you’ll need to build some equity. Lenders have different requirements for how much equity you have to have in your property before you can refinance. Many lenders want to see a loan-to-value ratio (LTV) that’s lower than 75%, meaning you’d need to have at least 25% equity in your property.

Step 2: Gather The Proper Documents

Your lender will ask you for a few documents to begin the refinancing process, including:

  • Proof of income: You’ll usually have to show the lender your original pay stubs from the last 30 days. Your lender may ask for a bank statement or another form of income validation if you’re self-employed.

  • Copies of your W-2 or 1099 forms: Lenders require your W-2s or 1099 forms because they use them to verify your employment history and your income. Your lender may also ask to see your full tax return if you’re self-employed and will require this information from everyone you include on the loan.

  • Proof of homeowners insurance: This shows the lender that you have enough homeowners insurance coverage on the property to protect your investment.

  • Copy of your title insurance: Your title insurance helps your lender verify that the property is yours to refinance. It also provides the lender with a legal description of the property and information on taxes.

  • Copies of your asset information: Your lender will want to see your assets, including bank statements, investment account information and retirement savings.

Gather the proper documentation before you apply for refinancing to help speed up the process. Keep more than one copy available in case you need to resend any documents.

Step 3: Compare Refinance Rates and Apply

Refinancing a rental property is usually less complicated than buying a home. Don’t be afraid to shop around and compare rates from different lenders to ensure you’re getting the best deal on your investment property refinance. It’s not uncommon to find a better deal with a new lender, but your relationship with your current lender could also work to your advantage if you are in good standing.

Once you’ve settled on a lender, contact them to begin the application process. Complete the lender’s application, submit the requested documents and respond to any inquiries quickly.

Step 4: Lock Your New, Refinanced Rate

Once your lender approves your application, you’ll usually have the option to lock down your interest rate. This gives you time to read your refinancing terms without worrying about your interest rate changing. Rate locks may last 15 – 60 days, depending on your lender. Your location and loan type may also play a role in how long your rate lock lasts.

If you’re happy with the rate you get, lock it in through your lender as soon as possible. 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 verifies your income and assets as well as the condition of the property. Similar to when you bought the home, the lender also orders an appraisal.

An appraisal determines the fair market value for a home and shows your lender that the price you’ve agreed to pay for a home is fair. Appraisals are also often used to estimate property taxes. Make sure your home is looking its best before your appraiser arrives. You may also want to put together a list of 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 for the appraiser to access the property.

Step 6: Close On The Loan

After underwriting concludes, it’s time to close on your new loan. Closings for refinances happen more quickly than home purchases. At least 3 business days before your closing meeting, your lender gives you a document called a Closing Disclosure.

Your Closing Disclosure covers the details of your new loan, as well as any closing costs or fees you need to pay. At your closing, you’ll sign all of your documents and ask any last questions you have about your loan. If your lender owes you money, such as during a cash-out refinance, you’ll see it in your bank account within the next few days.

The Bottom Line

It’s possible to refinance an investment property in a similar manner to refinancing your primary residence. When you refinance, you may be able to secure a lower interest rate or change the terms of your loan. You can also take money out of your accumulated equity using a cash-out refinance or home equity loan. The refinancing process is usually simpler than applying for a standard mortgage.

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

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Miranda Crace

Miranda Crace is a Senior Section Editor for the Rocket Companies, bringing a wealth of knowledge about mortgages, personal finance, real estate, and personal loans for over 10 years. Miranda is dedicated to advancing financial literacy and empowering individuals to achieve their financial and homeownership goals. She graduated from Wayne State University where she studied PR Writing, Film Production, and Film Editing. Her creative talents shine through her contributions to the popular video series "Home Lore" and "The Red Desk," which were nominated for the prestigious Shorty Awards. In her spare time, Miranda enjoys traveling, actively engages in the entrepreneurial community, and savors a perfectly brewed cup of coffee.