How to Refinance Rental Properties

Key Highlights

• Refinancing rental property may increase rental income profits and open up more financial opportunity
• Important distinctions between refinancing rental property and refinancing a home

When to Refinance Rental Property

At the top of the list…having a too high (comparatively) interest rate.  This current low interest rate environment will not last forever.

Other reasons to refinance include shortening or lengthening the repayment term or cashing out the equity in the property in order to buy more property.

What Lenders Want from Borrowers When Refinancing Rental Property

Before even beginning the application process to refinance your rental property, have these documents ready:

• Proof of Income – recent pay stub or bank statement
• W2 Forms – helps to verify income and employment – if self employed, may need additional documentation
• Proof of Homeowners Insurance – verifies adequate home coverage
• Proof of Title Insurance – verifies ownership and provides lender with additional legal and tax information about the property
• Financial Statements – shows all owned assets including bank investments and retirement savings accounts

Rental Property Refinancing Requirements

Here are things borrowers need to know prior to starting the application process:

• Loan-to-Value Ratio – equity requirements more than with traditional mortgage
  • Typically, lenders require maximum LTV of 75% to refinance investment property loans because there higher risk of loan default
• Good Credit
  • Typically a credit score of at least 670
  • 800 score will get borrower the lowest available rates
• Higher Interest Rate
  • Depends on housing market, credit score, income and whatever else the lender determines
  • Again, rental property refinancing tends to be more expensive in both interest rates and fees because of the higher risk of default
• Eligible Income
  • Lenders like to see 6 months worth of rental payments set aside in the back so lenders are confident you can keep up with the loan even when the property is vacant
• Debt-to-Income Ratio
  • Lenders prefer a DTI under 50% to verify that borrowers are not overextending themselves with too much debt

Steps Involved When Refinancing Rental Property

• Gather paperwork – no missing or outdated documents
• Submit Application – can be done online
• Lock in Rate – rate locks usually last 30 – 60 days
  • Special attention paid to interest rate and fee schedule
  • Review and compare terms of offer with other quotes
• Wait for Underwriting – can take few weeks
• Close Loan
  • Meet with lender to go over final contract
  • Pay closing costs – usually a minimum of 2% of loan amount

Remember, while factoring in closing costs (usually a minimum of 2% of the loan amount) and the extra interest paid on the loan, any savings that may come your way via refinancing with a lower interest rate may be wiped out. Just because “everyone” is refinancing these days doesn’t mean that refinancing makes financial sense for you.

Also remember that refinancing resets the amortization schedule so, just as when you the borrower initially purchased the rental property, most of the interest is paid in the beginning of the now new payment schedule.  It’s only when you the borrower get further along in the loan term that the loan payment begins to go toward the principal.

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