How To Refinance A Rental Property | Quicken Loans (2024)

If you own a rental or investment property, you probably know that getting a mortgage for an investment property differs slightly from getting a mortgage for a primary residence. Investment property loans usually have stricter requirements due to their higher associated risk.

So, what does the process look like when you want to refinance an investment property? Let’s look at everything borrowers need to know to refinance and start making the most of their investments – beginning with why you would consider refinancing a rental property.

5 Reasons To Refinance Your Rental Property

Maybe the high costs of owning an investment property are holding you back, and you want to reduce your monthly spending on your property or free up money in your budget for repairs or renovations. Or maybe you want to free up cash to continue investing in real estate. You can achieve these goals and more with a refinance.

Here are five popular reasons property owners refinance their investment property:

1. Improved Cash Flow Through Lower Interest Rates

For owners paying high interest rates on their current mortgage, it can make sense to refinance to a lower rate. Refinancing can lower your monthly mortgage payment and maximize your net monthly cash flow.

2. Portfolio Expansion Opportunities

You can refinance to tap into your valuable equity. If you want to grow your investment portfolio but don’t have the cash, you might consider a cash-out refinance to get the money. When you refinance, you can use the funds to purchase another rental property or use it for a different investment opportunity, such as stocks, bonds or mutual funds.

Do your research to help ensure that your return on the new investment will likely exceed what you’d pay in interest rates with a cash-out refinance.

3. A Way To Boost Property Value

When you refinance an investment property, you can take the money and reinvest it in the property, boosting its market value with strategic renovations and property upgrades – possibly leading to higher rental income.

This approach may make the most sense for a property owner interested in growing the profitability of their existing investment.

4. New Mortgage Terms To Suit Your Strategy

Refinancing a property allows you to adjust your mortgage terms, potentially offering greater flexibility to align your financial goals with your investments.

You can adjust several mortgage terms, including shortening or lengthening your loan term or lowering your interest rate to reduce your monthly payments.

You can also refinance from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage. Compared to ARMs, fixed-rate mortgages provide more security and simplicity in managing cash flow.

5. Debt Consolidation Via Your Home’s Equity

If you refinance to a new loan with a fixed rate, you can consolidate other debts into a single loan. Debt consolidation can simplify your budgeting and may free up cash to pay off your investment property faster.

Refinance Options For Investment Properties

When you refinance a property, you take out another loan to pay off your existing loan. Property owners typically refinance to get a lower mortgage rate, shorten or lengthen their loan term or tap into home equity.

While there are many different types of refinancing, the two most commonly used for investment properties are a rate-and-term refinance and a cash-out refinance.

Rate-And-Term Refinance

With a rate-and-term refinance, you get a new loan with new terms. If you want to take advantage of lower rates or switch to a loan term that best suits your needs, a rate-and-term refinance may be a solution. For example, with a rate-and-term refinance, you can switch from a 5-year ARM to a 15-year fixed-rate loan.

Cash-Out Refinance

A cash-out refinance shares similarities with a rate-and-term refinance – with the added benefit of receiving cash at closing. A cash-out refinance involves taking out a new loan that’s larger than your current mortgage. You may qualify for a lower interest rate if rates have dropped since you purchased the property. A portion of the new loan pays off your original mortgage, and you can pocket the rest.

What Are The Requirements To Refinance A Rental Property?

Now that you know some core benefits of refinancing an investment property, let’s look at some requirements to refinance an investment or rental property.

1. Minimum Credit Score Of 620 And Maximum DTI Of 50%

Here are some standard requirements to qualify for a refinance on an investment property, which may vary by lender:

With a higher credit score, a lender will likely offer a more favorable interest rate.

2. A Maximum Loan-To-Value Ratio Of 75%

The loan-to-value ratio (LTV) requirements to refinance an investment property are stricter than for primary residences. To calculate LTV, divide your current mortgage balance by your property’s appraised value. You’ll need a specified amount of equity in your rental or investment property to qualify for a refinance.

A primary residence typically requires an LTV of 80% to refinance, while an investment property typically requires an LTV of 70% – 75%.

Here’s a breakdown of the LTV ratio you’ll need by type of refinance:

3. Cash Reserves Of At Least 6 Months’ Worth Of Payments

You’ll need to show your lender that you have cash reserves set aside to help tide you over if you lose your current source of income or face any other hardships. Lenders generally ask for at least 6 months’ worth of monthly payments.

7 Steps To Refinancing Your Investment Property

It’s essential to stay organized and tackle the necessary steps in the right order to help you successfully refinance.

1. Building Equity In Your Investment Property

Establish that you have enough equity before even considering refinancing your investment property. Borrowers should aim for an LTV ratio of 70% – 75%.

2. Gathering Essential Documentation For Refinancing

Collect the documents you’ll need to refinance for your lender, including:

Lenders may require other or more paperwork, but gathering this standard list of documents can help lead to refinancing success.

3. Comparing Refinance Rates And Applying

Once you’ve collected your documents, reach out to several lenders so you can compare refinance rates. While your current lender may offer competitive terms, you should confirm that by looking at other offers.

Since real estate investment properties are considered riskier than primary residences, you can expect a higher interest rate for your investment property to reflect its increased risk.

4. Locking In Your Refinanced Interest Rate

Your lender will provide an offer that outlines the loan’s terms, like the loan length and interest rate. If you like the rate, talk to your lender and request that they lock in the rate or send a request in writing.

The rate lock-in period for most lenders usually ranges from 15 – 60 days. It’s better to lock in your rate sooner rather than later.

5. Navigating The Underwriting Process

And now the underwriting process begins.

Your lender will verify your assets and income, evaluate the property’s condition and order a property appraisal to determine the current market value of your rental property. Lenders use appraisals to verify that the property’s value aligns with the loan amount.

It’s worth talking to your lender about your property and highlighting any recent upgrades that may potentially boost its valuation.

6. Closing On Your Refinanced Loan

The final step is to close on the refinance loan.

Your lender will send you a Closing Disclosure outlining loan details, like the loan’s term, the interest rate and total closing costs 3 business days before your scheduled closing.

At closing, you’ll sign off on:

7. Preparing For Potential Closing Costs

You’ll pay closing costs when you refinance. You can typically expect to pay around $5,000, but closing costs may vary.

You may be able to roll your closing costs into your loan. Speak with your lender about your closing costs and ask what your options are for financing them.

When You Shouldn’t Refinance An Investment Property

Whether refinancing your investment property makes sense will depend on your circ*mstances and current market mortgage rates. For example, refinancing could be worth the benefit of using your equity to pay off debts and free up cash flow. Ultimately, you’ll have to do your own risk/benefit analysis on whether or not you should refinance.

A Lower Mortgage Rate Isn’t Guaranteed

Depending on the rate on your original mortgage, refinancing won’t always guarantee a lower rate. It may make more sense to hang on to your current mortgage when mortgage interest rates are high.

You Might Pay More In Interest

If the new loan adds extra years to your mortgage, it will affect your amortization schedule. Calculate how much more you’ll pay in interest over the life of the loan if you lengthen the time you spend paying off the loan.

The Bottom Line

Refinancing your investment property can make a lot of sense and help you achieve financial goals or build your investment portfolio. However, as with any big decision, you should consider all your options.