In order to refinance rental property, homeowners need to familiarize themselves with the entire process. Intimidating as it may be, however, refinancing a rental property isn’t as hard as many people make it out to be. Instead, refinancing an investment property can pay significant and immediate dividends if approached correctly. Most notably, a timely home refinance can lead to better terms and, perhaps, a little more cash in your pocket every month. That said, there is a time and a place for such a strategy, so be sure to educate yourself and make sure it’s something you actually want to do.
If you want to refinance a rental property, you must first fill out an application with a lender. Before you do, however, pay special considerations to the lender you intend to apply with, as each will have different qualification standards and requirements. In the event you find a lender you are comfortable proceeding with, you must then get all of your documents in order. Start putting together a packet of your most important documents, not the least of which include social security numbers and address of previous homes for at least a few years. In addition, you will also want to round up the following:
Only once everything is in place can I recommend moving forward. That said, your next step will be to find a loan that suits your needs. If you hope to reduce your monthly mortgage obligations, make absolutely certain your attempt to refinance will lower monthly payments. In addition, pay special considerations to the length of the resulting refinance. While your payments may go down, the duration of the loan will most likely increase. Most importantly, shop around to get the loan you want. Once you are satisfied with a specific loan, you may apply; this is where all that documentation comes into play.
Not unlike refinancing a primary residence, refinancing an investment property will require an appraisal. Once you have applied, and your loan has been reviewed, proceed to order an appraisal. The impending appraisal will determine how much the property is worth, and how much equity you have to refinance rental proeprty.
If the appraisal favors your argument for refinancing, it’s time to move forward and make things official. At this point, you’ll review underwriting, loan approval conditions, interest rates, documents and–once everything looks to be in place–sign the papers and close on the loan. That is, of course, if everything goes according to plan. As you will learn later, refinancing an investment property is slightly more difficult than a primary residence.
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In the event you want to make sure you qualify to refinance your rental property, there are at least three things you can do to tip the scales in your favor:
Refinancing a rental property is made easier through the Home Affordable Refinance Program, otherwise known as HARP. The Home Affordable Refinance Program, as its name suggests, is a federal government program set up to help property owners who are underwater. More specifically, however, HARP was instituted by the Federal Housing Finance Agency roughly a decade ago to help homeowners with a loan-to-value ratio exceeding 80%. Homeowners receiving HARP assistance may be allowed to refinance without also paying for mortgage insurance, which will save them even more money in the future. In other words, refinancing a rental property through HARP allows many homeowners to refinance that otherwise wouldn’t have been able to.
The more a homeowner owes on a mortgage, the less likely they are to be able to refinance rental property. Therefore, it stands to reason that the more a homeowner is able to pay down their current mortgage, the easier it will be to receive an approval. However, how much of the loan should be paid off before refinancing a rental property becomes a possibility? Each lender will have different criteria, but a good goal is to pay off 25% of the existing loan before you even think about refinancing it.
Lenders have developed a reputation for competing over business, which bodes incredibly well for anyone looking to refinance rental property. As a result, homeowners and investors tend to benefit when they shop around. Do yourself a favor and look at the products each individual lender offers. Doing so will not only give you options, but many of them may have less-strict criteria to meet. It is entirely possible to find a lender offering better terms than other competitors.
Not unlike the benchmark index, refinancing mortgage rates are anything but consistent. In fact, the only constant—in terms of refinancing mortgage rates—is change. Therefore, it pays to always keep up with current mortgage refinance rates, literally. If for nothing else, it’s worth keeping a finger on the pulse of the latest interest rates, as they will ultimately determine how much you end up paying over the duration of a loan. If you are considering refinancing an investment property sooner than later, here are the latest refinance rates via Wells Fargo:
Today’s interest rates set the perfect mortgage refinance example for those looking to ease their monthly obligations. Now is a great time for many to consider refinancing an investment property because rates are near historically low levels. Take a look at the following mortgage refinance example for a better idea of what I mean:
Let’s say you are the landlord of a property you bought approximately 10 years ago. According to Freddie Mac, interest rates in January 2008 averaged 5.76%. That means you were paying 5.76% of whatever you loan was at that time, and now. However, if you are able to refinance to today’s interest rates, you could reduce your monthly interest payments to 4.375% on a 30-year fixed mortgage. Of course, the duration of the loan will increase, but monthly mortgage obligations will decrease. That means you’ll be able to pocket more of your earnings every month by simply stretching out the length of the loan and reducing the interest rate.
No two refinances are created equal, so it’s impossible to compare your unique situation with anyone else’s. Instead, to give yourself a better idea of what you can expect, I recommend using the refinance investment property calculator at Quicken Loans. While it won’t give you every detail you want to know, it’s a great starting point.
Understanding when to refinance an investment property has more to do with understanding your own financial goals than the timing itself—there isn’t exactly a time of year you should wait for. Instead of asking yourself when you should refinance your investment property, consider asking why. In identifying why you want to refinance, you’ll have an idea of when. Better yet, you’ll have an idea of what interest rates to look for. If for nothing else, it’s the interest rates and annual percentage rates that will determine whether or not you should refinance.
If you are deciding whether or not to refinance your investment property: ask yourself a relatively simple question: What are your financial goals? For instance, do you want to lower your monthly payments? Do you want a better interest rate? Perhaps you want to shorten your term. Whatever the case may be, you must first know what you want to accomplish before you can even start thinking about refinancing.
For example, now is a great time to lower your monthly mortgage payment. Interest rates are historically low, despite having crept up over the last year. So if you are still asking yourself when you should refinance, you may want to consider sooner rather than later.
If your goal is to lower monthly mortgage obligations, effectively increasing monthly profits, there are three ways in which refinancing an investment property can help:
The next time you ask yourself when you should refinance, think about what it is you want to accomplish, and make sure the indicators are where you need them to be to accomplish what you intend to.
Outside of lowering your interest rate and monthly payment, there is one more popular reason people refinance rental property assets: to buy another property. A cash-out refinance, in particular, allows investors to turn their equity into cash for subsequent investments. Prices have risen exponentially for the better part of a decade, which has allowed many homeowners to build an incredible amount of equity. Therefore, a cash-out refinance will allow investors to tap into the equity of their rental properties to buy yet another property.
To be clear, it’s entirely possible to refinance both an investment property and a primary residence. It is worth noting, however, that while refinancing each respective asset will share some similarities, there are inherent differences to take into consideration: namely, the refinancers penchant for risk aversion. If for nothing else, traditional lenders prefer to lend on primary residences because they are safer bets. Homeowners are much more likely to prioritize their own homes over any subsequent investment properties, effectively making tertiary investments a liability in the event money is tight. In other words, homeowners would rather default on their investments than their primary living arrangements. There is no doubt about it: investment properties are inherently riskier for lenders.
On top of that, it’s more difficult for owners to maintain more than one mortgage. If a single mortgage in expensive regions like San Diego or New York weren’t enough, investment property owners also have to deal with unexpected vacancies. Without question, the mere fact that vacancy is an option is enough to give any lenders that want to refinance an investment property cold feet. If that wasn’t enough, there’s always the possibility that the investment was ill-advised from the beginning, which would make more investors inclined to cut losses and quit making payments.
In addition, not all lenders offer investment property owners the privilege of refinancing their assets, commonly citing risk as the primary reason for neglecting the option. And those that do offer to refinance a rental property will most likely ask for higher interest rates, as well as setting the qualification bar higher than that of a primary residence refinance.
All things considered, it is unequivocally more difficult to refinance an investment property than a primary home. However, the refinance investment property vs. primary residence conversation is still one that should be had. At the very least, a timely refinance (provided you can get one) could be well worth the hassle. Perhaps most importantly, those that qualify could ease monthly mortgage obligations while simultaneously increasing the amount of money they bring in each month from renters. It’s a move that could pay huge dividends in the short-term.
When all is said and done, the ability to refinance rental property is a uniquely individualized situation. Perhaps even more specifically, there are times when you should, and there are times when you shouldn’t. The real key is to determine what you want to gain from a refinance. Ultimately, if a refinance can meet your goals, it could be worth looking into. If not, you may need to look elsewhere.
If you are looking to refinance for lower monthly payments, now is a great time to do so. Rates are near historically low levels, and almost anyone that has purchased a home more than 10 years ago stands to benefit—at least, if you are willing to extend the length of the term.