As per a survey, 50% of homeowners believe that refinance is a plausible choice due to high mortgage rates. Refinance is not only for primary residences; you can refinance an investment property as well.
Refinancing a rental or investment property is the same as financing a primary residence. Since interest rates on investment properties are higher, you can refinance them to get better terms on the mortgage.
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Refinance an investment property
- You can get lower interest rates and better terms by refinancing your rental or investment property.
- As of February 9, 2024, the 30-year fixed refinance APR is 7.23%, and the 15-year fixed APR is 6.58%.
- You can change the term of your loan during refinancing.
Why Should You Refinance an Investment Property?
There are multiple advantages to refinancing an investment property, which includes:
1. Low-Interest Rates on Your Mortgage
Interest rates on an investment property are 0.50% to 0.75% higher than on a primary residence. This is because a mortgage on your investment property can be risky. Lenders believe that you’ll prioritize the mortgage on your primary home during any financial hardship.
Refinancing allows you to get a lower interest rate on a rental or an investment property. However, you must disclose to your lender that you make enough money to cover the payments on both mortgages.
2. You Can Change Your Loan’s Terms
While refinancing a rental property or an investment property, you can change the terms of your loan as well. You can increase or decrease the length of your loan during refinancing.
Apart from this, you can also refinance your loan from an adjustable-rate mortgage to a fixed-rate mortgage. Most people opt for a fixed-rate mortgage because it keeps the interest payments uniform.
3. You Can Use That Money for Other Purposes
There’s no restriction on the use of the money that you get from the refinance. You can use it for other purposes, such as:
- Add to your retirement funds.
- Use that fund for your child’s education.
- Use it for further Investment.
- Save for emergencies and contingencies.
- Renovate or remodel your home.
>> Refinance Before Selling: Read to know more.
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How to Refinance a Rental or an Investment Property?
Here’s how you can refinance your property.
Step 1: Build Equity
You must have some equity in the property before you go for refinancing. Most lenders require your loan-to-value ratio to be less than 75%, meaning you must have 25% home equity.
By estimating your home’s current market value and subtracting any outstanding mortgage balance, you can easily see how much equity you’ve built. A free home value estimator tool can quickly help you determine it.
Step 2: Provide Documentation
Refinancing an investment property requires more documentation than the primary residence, which includes:
- Recent W-2 forms or pay stubs
- Personal and business tax returns for the last 2 years
- Proof of homeowner’s insurance
- A copy of your title insurance
Step 3: Check Your DTI
Your debt-to-income ratio plays a major role in refinancing. Lenders prefer a debt-to-income ratio of 45% or lower. If your DTI is more than that, you can reduce it by paying off some existing debt.
Step 4: Get an Appraisal
Lenders usually require a home appraisal to find out the rental potential of the property as well as its current market value. It helps the lender understand whether the home is worth refinancing or not.
Step 5: Close on the Loan
After all the formalities, it’s time to close on your loan. You must pay closing costs on your refinance once the lender gives you a closing disclosure. On average, closing costs on a refinance are $5,000; however, they can vary depending on the amount.
Bottom Line
You can opt for a refinance to get better loan term and interest rates on your investment or rental property.
Apart from this, you can withdraw money against your equity in the house using a cash-out refinance or home equity loan for your rental or investment property. You must explore all your options before getting a refinance.
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Frequently Asked Questions
Can you refinance a rental property?
Yes, you can refinance a rental property, as it is a form of investment.
Can you get home equity loans on a rental property?
Yes, you can get home equity loans on rental and investment properties.
How much does it cost to refinance an investment property?
Generally, interest rates on investment property refinance are 0.50% to 0.75% higher than primary residence refinance.
