Refinancing an investment property
Quick insights
- Refinancing an investment property could help you adjust your loan terms to better align with your financial goals.
- It could give you access to equity that might be used for other investment opportunities, home renovations or expenses.
- Depending on the refinancing strategy and your situation, you can potentially reduce your costs or secure more predictable monthly mortgage payments.
Picture this: You purchased an investment property about four years ago, and it’s been steadily paying off with rental income. However, as time goes on, you start to wonder if the mortgage rate you locked in back then is still working as hard for you as it could. Perhaps current mortgage interest rates have shifted or maybe your financial goals look a bit different today than when you first signed the loan documents. That’s where refinancing an investment property might come into play. Whether you’re looking to reshape your loan terms, secure a lower rate or tap into built-up equity, refinancing an investment property may open the door to new possibilities.
Reasons to refinance an investment property
Refinancing an investment property can offer many potential benefits for property owners. Depending on your personal goals, here are some reasons you might want to consider it:
- Lower interest rates: Refinancing can help you potentially secure a lower interest rate, which may reduce your monthly mortgage payments and lower the overall cost of the loan.
- Example: If you originally took out a home loan at 7% and interest rates have since dipped, refinancing could lower your monthly payments, freeing up cash for home maintenance or upgrades.
- Cash-out refinance: With a cash-out refinance, you can access the equity in your property and possibly use it for other investments, home renovations or even to pay down high-interest credit card debt.
- Example: A property that has appreciated significantly over 6 years might allow you to refinance and take out the cash to reinvest in a second rental property.
- Change loan terms: Adjusting the length of your loan could help align with your financial goals (like shortening your term to pay off the loan faster or extending it to lower monthly mortgage payments).
- Example: Switching from a 15-year term to a 30-year term could reduce monthly mortgage payments, creating a little more breathing room in your budget.
- Switch loan types: Moving from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage may provide more predictable monthly payments, which could help with long-term planning.
- Example: If you started with an ARM and interest rates are expected to rise, you may consider refinancing into a fixed-rate loan once the adjustable period begins, to help stabilize your expenses.
Rental property refinancing requirements
When you refinance a rental property, mortgage providers typically look at a few important factors before approving your loan application. This usually includes your credit score, income, debt-to-income (DTI) ratio and the amount of equity you have in the property. Some lenders may also require proof of rental income to ensure that the property is generating positive cash flow.
Additionally, loan providers often review the mortgage on your primary home and any other properties you own. They want to see that you’re managing those payments responsibly, since your overall housing expenses can affect your ability to take on new debt. The specific requirements can vary by lender, so it’s a good idea to review your full financial picture and compare loan provider options before moving forward.
How to refinance a rental property or an investment property
Refinancing a rental or investment property may seem complicated, but we will break it down step-by-step to help you better understand the process. Here are the general steps you can expect when refinancing a rental property:
- Review your current mortgage and financial goals to determine if refinancing makes sense.
- Check your credit score and DTI ratio because both can affect your eligibility and loan terms.
- Gather all pertinent documentation such as tax returns, bank statements, proof of rental income and property details.
- Shop around with different mortgage providers to compare potential interest rates, loan terms and fees.
- Apply for the refinance, submit the required documentation and prepare for an appraisal of the investment property.
- Review your loan approval and closing documents carefully before you finalize the refinance.
Can I cash-out refinance a rental property?
Yes, it is possible to cash-out refinance a rental property, but it typically comes with stricter requirements compared to a home you live in (primary residence). Eligibility depends on factors such as your home equity, credit score and DTI ratio.
A cash-out refinance can free up additional funds for property improvements, new investment opportunities or debt consolidation. However, there are a few drawbacks to keep in mind:
- Higher rates and costs: Rental property refinances typically come with higher interest rates and larger down payment requirements than primary homes. Closing costs can also be significant.
- Equity risk: You’re borrowing against your property’s equity. If the rental market cools down or you face vacancies, you might struggle to keep up with a larger loan balance.
- Stricter terms: Some loan providers may require you to have owned the property for a certain amount of time (six months to a year) before allowing a cash-out.
- Tax implications: Proceeds aren’t generally considered taxable income, but how you use the money could have tax consequences. JPMorgan Chase does not offer tax advice. Please consult with a tax professional.
In summary
If you are considering refinancing a rental or investment property, there are a few benefits typically associated with this type of refinance such as lower monthly payments, access to equity and more predictable loan terms. However, it can come with higher costs, stricter lender requirements and tax considerations. Carefully review your financial situation, compare different lender options and consult with a mortgage professional to help you decide if refinancing is the right strategy for your investment goals.
