If you own a rental property, refinancing your investment property can help free up extra money for future investments and reduce your monthly payments. However, refinancing an investment property isn’t as easy as refinancing a home mortgage. There are stricter requirements, and more costs to worry about.
Below, learn about the benefits of refinancing real estate and how to refinance your mortgage.
What are the benefits of investment property refinancing?
Refinancing investment real estate can be a smart choice even though you’ll have to pay closing costs and fees. If you own an investment property, there are three main benefits to an investment property refinance:
- You can lower your monthly mortgage payment: When you refinance, you can qualify for a lower interest rate. You can opt for a longer loan term to reduce your monthly payment. And, you can choose between a fixed rate mortgage and an adjustable-rate mortgage.
- You can increase your rental income: With a lower interest rate and a lower monthly mortgage payment, you can increase your profits on your real estate rentals.
- You can leverage the equity in your investment property to buy additional properties: If you complete a cash-out mortgage refinance, you can improve your cash flow to purchase another rental property.
How to refinance your investment property
To refinance an investment property rather than a primary residence, you need to meet the following criteria:
1. Own real estate with equity
To qualify for a refinance loan on an investment property or multi-family unit, your real estate must have some home equity. Most lenders won’t approve you for refinancing unless your loan-to-value ratio (LTV) is 80% or less, so you need at least 20% equity in your property.
2. Have good personal credit
Most lenders look for applicants with a credit score in the good to excellent range. According to Experian, that means you’d need a credit score between 660 and 850 to qualify for a loan to refinance. If your credit score is less than that, you’ll struggle to find a lender willing to approve you for a loan.
Lenders will also look at your debt-to-income ratio (DTI), or the amount of debt you have relative to your monthly income. In general, lenders will look for a DTI of 35% or less, but some lenders will be willing to work with you if your DTI is as high as 45%.
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3. Own the property for several months
If you plan on refinancing an investment property, you can’t do it right after buying the non-owner occupied unit. Lenders typically require you to own the property for three to six months before you’re eligible for a refinancing loan.
Can you refinance an investment property?
While refinancing real estate can be a smart strategy, not everyone can qualify for refinancing. Your LTV plays a big role in determining your eligibility for refinancing. The higher your LTV, the more of a credit risk you pose to the lender.
You can refinance investment property at 80% LTV
Most lenders require your LTV to be 75% or less. However, there are some lenders that are willing to work with borrowers who have 80% or even 85% LTV. If your property has an LTV within that range, you can get a conventional loan from most traditional lenders, including banks and online lenders.
You can’t refinance investment property at 90 LTV or higher unless you find a specialty lender
You will struggle to find a loan officer willing to approve you for refinancing if your property’s LTV is 90% or higher. However, you may be able to refinance with alternative lenders, such as a specialty lender, private real estate investor, or a hard money lender.
How to do a cash-out refinance on an investment property
With cash-out refi, you refinance your current mortgage on the real estate you own. The new loan is for a larger amount than the existing mortgage. The lender issues you the difference between the two mortgages in cash. This strategy allows you to use some of the equity you’ve built with the investment property as cash.
When you complete a cash-out refinance, you can get money to use for a down payment on future real estate purchases, potentially helping you build more income. Or, you can combine it with delayed financing.
The BRRRR approach
With cash-out refinancing loans, there’s another strategy you can use: buy, renovate, rent, refinance, repeat (BRRRR). With the BRRRR approach to real estate investing, you buy a fixer-upper that needs significant work with a purchase-rehab loan. It needs to require enough renovations that you can raise its value. You can use business credit cards to help finance the renovations, if needed.
Once the renovations and repairs are complete, you lease out the property to tenants. Then, you refinance the purchase-rehab loan to get a long-term mortgage. If you’ve built enough equity in the home, you can cash-out refinance and get money to buy another rental.
1. Are mortgage rates higher for investment properties?
Yes, mortgage loan rates on investment properties tend to be higher than they are for mortgages on primary residences. You can expect your mortgage rate to be 0.5% more with an investment property mortgage.
2. What documents are required to refinance?
Refinancing investment properties is more complicated than refinancing a mortgage on a primary residence. To go through the refinancing process, you’ll need to collect the following documents:
- Proof of income: You’ll need to show proof of income, such as recent paystubs or a W-2 from your employer. If you have rental income from tenants, you’ll need to provide checks, bank statements, or lease documents to show how much you made from the unit.
- Copy of homeowners, or mortgage insurance: Lenders will require you to show that you have adequate coverage in place for the property.
- Copies of asset documentation: Lenders want to ensure you can comfortably afford the closing costs and monthly loan payments. They’ll ask you for documentation of your assets, including bank statements, retirement accounts, and investment accounts.
- Copy of title insurance: Your lender will ask for a copy of the title insurance to verify taxes on the property.
- Past tax returns: The lender may ask for copies of your past tax returns, especially if you’re self-employed.
3. Is a cash out refinance investment property tax deductible?
The interest you pay on cash out refi can be deducted as a business expense on your taxes. You can also deduct closing costs and refinancing application fees.
4. Can you do cash out refinancing at 100% LTV?
For an investment property, your LTV needs to be 80% or less to qualify for a refinancing loan with most lenders. If your LTV is 90% or less, you may be able to secure a loan with a specialty lender that offers hard money loans or a short-term loan. Nav can match you to some of the best small business loans, but most lenders aren’t willing to work with borrowers with 100% LTV.
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This article was originally written on December 6, 2019 and updated on August 25, 2020.
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