Preparing For an Investment Property Refinance

Refinancing loans is an important concept in the real estate business. There are many captivating advantages to refinancing rental homes. It has the potential to least open up a plethora of opportunities for accumulating wealth, such as the capacity to reduce interest rates and monthly payments, optimize loan conditions, and generate more cash flow. Many newbie real estate investors are not aware of this investment strategy, and they are losing in terms of better interest rates and cash flow.

Refinancing investment property assets is a serious undertaking; hence, you will need to consider why you need to refinance. Undoubtedly, a certain amount of risk is involved with refinancing a rental property. Investors must understand the reason behind their refinancing decision and balance the potential dangers and advantages. But refinancing a rental property can be a smart choice if done well and for the purpose intended. For any residential property owner, refinancing can be a wise choice, but it is more advantageous for investors in rental properties.

You presumably submitted a mortgage application when you bought your house to finance it. Now that you have lived in the house for a while, you may be thinking about refinancing your mortgage or getting a new, better mortgage to renew your existing one. Refinancing typically requires you to start the loan application procedure from scratch. As a result, you will need to consider closing fees, including a fresh appraisal, before choosing if a refinance is the best option for you. When your loan application gets approved, a new closing date is set, and the previous mortgage is paid off with the funds from the new loan.

Usually, a lot of investors use home mortgages to buy rental properties. If you have an investment property where you took a loan to finance the property, you may have a high-interest rate, which depends on how healthy your credit score is and the time you took the loan. You can refinance your mortgage to benefit from the reduced rates. However, the requirements for refinancing an investment property differ slightly from refinancing your residential home, which comes with some additional paperwork.

Types of Refinance Loans

There are different refinancing packages designed to help you if you own a property and have a financial need. Below are the different refinancing options that you can consider.

1.    Rate-And-Term Refinance

If you seek a better rate-and-term than the ones you initially acquired, you should consider a rate-and-term refinance. For individuals who wish to refinance their adjustable-rate mortgage (ARM) with a 15- or 30-year mortgage rate, avoid mortgage insurance rates on their Federal Housing Administration (FHA) loan, reduce their monthly mortgage payments, or revise their loan term, this type of refinancing is considered to be ideal for you.

If your salary has increased and you wish to repay your loan more quickly because your credit score is now significantly higher compared to when you originally applied, or perhaps you’ve paid off most debt and your debt-to-income ratio, or DTI, is now substantially lower, you may be able to secure a rate-and-term refinance with a significantly reduced rate.

If you are divorced, your spouse or partner is deceased or disabled, and you need to lower your monthly mortgage payment, you can consider rate-and-term refinance. For instance, if you purchased your house ten years ago, you may be able to cut your monthly payment even more by refinancing the remaining amount of your mortgage with a 30-year fixed-rate loan. This strategy will result in longer-term costs, yet you can easily refinance again if your financial condition changes in the future.

2.    Cash-Out Refinance

A cash-out refinance strategy allows you to exchange home equity with cash, and the difference between the new mortgage and your existing mortgage is given to you in cash. With a cash-out refinance, you can establish a new mortgage with a higher loan amount by using your house as security for the new loan and some money. Using your property’s equity as collateral is a simple approach to getting money for needs, wants, and expenses.

A cash-out refinance is similar to a rate-and-term refinance, with the exception that the homeowner receives payment on closing day for any equity they wish to withdraw from the property. The borrower is in the same situation in terms of loan-to-value, in which they were previously if they use the funds and reinvest them in the house, helping to boost its value. In other words, the borrower has more properties and owes more debt.

3.    Cash-In Refinance

When a homeowner uses a cash-in refinance, they pay down their mortgage in full at the time of refinancing. The outcome is that they switch to a mortgage with a lower principal balance in place of their existing one. When you use cash-in refinance, you can make a lump-sum payment to reduce your monthly payments, increase your equity to 20% such that you can stop paying PMIs, or reduce the duration it takes to pay off your loan. Consider it a means to make a down payment at any time while you are still the house owner.

Changing the conditions of a mortgage loan after which the homeowner makes a lump-sum payment is akin to a mortgage recast, similar to a cash-in refinance. The key distinction between the mortgage recast and cash-in refinance is that with a mortgage recast, your lender will collect your cash payment, add it to your main balance, and reamortize the loan while you maintain your existing mortgage interest rate and term.

4.    Streamline Refinance

Homeowners with an FHA loan may benefit from the FHA Streamline Refinance; a mortgage refinance program offered by the Federal Housing Administration (FHA). This refinance option helps to lower the borrower’s interest rate and monthly payment. An FHA Streamline is a swift, and straightforward refinance approach. Even though the appraisal is required before closing, some borrowers can bypass it. Closing costs are cheap since streamlining requires less documentation and no additional assessment.

For homeowners, the Federal Housing Administration offers an alternative called an FHA streamline refinance (FHA). Its goal is to make it simpler for consumers to get refinancing for their mortgages from a lender interested in participating. A homeowner must already have a mortgage with FHA insurance and have a good payment history. An expedited refinance procedure can be available to you if your mortgage is guaranteed by the government, such as a Federal Housing Administration (FHA), Department of Veterans Affairs (VA), or the United States Department of Agriculture (USDA) loan.

No further credit checks, income checks, or DTI calculations are necessary for the FHA Streamline Refinance, VA, and USDA Streamline initiatives. To be eligible for rate and term refinancing, borrowers must meet the following requirements:

• You must have made 3months of on-time mortgage payments
• At least 210 days must have passed since you purchased or refinanced your home
• You must have an existing FHA mortgage
• You must show a clear monetary benefit to refinancing by showing that your monthly payments will be reduced or your repayment period will be shorter.
• You must be able to lower your interest rate by at least 0.50% in most cases.

5.    Reverse Mortgage

Just like every traditional mortgage, a reverse mortgage loan enables homeowners to borrow money while using their house as collateral for the loan. Also, the title to your property remains in your name when you apply for a reverse mortgage loan. With a reverse mortgage loan, however, borrowers do not have to make monthly payments like they would with a regular mortgage.

Once the borrower vacates the property, the debt is due in full, and each month the loan sum is increased because of fees and interest being charged. In other words, your home equity declines as your loan balance increases. To qualify for a reverse mortgage loan, homeowners must maintain their homes in a livable condition, pay their property taxes, and get homeowners insurance. It is a loan where the monthly loan balance rises as a result of monthly borrowing plus interest and fees. The debt will eventually need to be repaid by the homeowners or their descendants, typically by selling the property.

Reverse mortgages are a type of refinancing available to certified borrowers above 62. You don’t need to make monthly repayments while you are still living if you have a reverse mortgage. You will be able to receive payments from your home equity, but the remaining balance of your loan will then be settled if you sell your house or die of old age through the proceeds of the sale or money paid by your estate.

6.    No-Closing-Costs Refinance

A no-closing-costs refinance or a refinance with no upfront closing costs is one in which you can obtain a loan without paying any fees. Rather, you can integrate them into the loan or pay a more interest rate on the same mortgage loan. However, this does not imply that your mortgage lender pays the charges upfront for nothing. Borrower fees are not eliminated by no-closing-cost refinances; rather, they are simply transferred to your loan or traded for an increased interest rate.

The no-closing-cost mortgage refinances transfer the sum you would have been charged at closing to your new mortgage. This means that the refinancing company lender increases your principal, or the outstanding balance of your loan, by the amount of your refinance closing expenses. Your interest rate is unaffected by this, but your monthly payments will increase. Your lender can also permit you to accept an increased interest rate in return for the exclusion of your closing costs.

Numerous variables affect interest rates for refinancing. Although the principal amount is unchanged by an increased interest rate, you will still have to make additional monthly payments. In a regular refinance option, the borrower makes a single payment at closing to cover expenses such as the appraisal charge, title search fee, title insurance fee, and application fee. In summary, a no-closing-cost refinance loan’s principal will be increased to pay the closing fees, or the interest rate will be raised.

7.    Short Refinance

A short refinance, also called short payoff or loan modification, is a rate and term refinance suitable for those who owe excessively than what their home is valued or are at risk of getting far behind on their mortgage payments and still want to maintain their home. This means you don’t want to fall into a short sale or a foreclosure. This refinancing option is best for borrowers who are in default or behind on their monthly mortgage payments.

A short refinance could be advantageous for homeowners who want to refinance to prevent foreclosure. The lender occasionally overlooks the excess when the new loan exceeds the previous one’s outstanding balance. A lender may decide on a short refinance even if the new loan’s payment will be lower because it is less expensive than going through foreclosure.

By substituting a mortgage with a lesser balance for the original one, the lender can reduce monthly mortgage payments to a more manageable level. The homeowner gains by keeping their home, while the lender gains by suffering less financial loss than in the case of a foreclosure. However, short financing requires the lender’s permission and might impact the mortgage client’s income taxes.

8.    Debt Consolidation Refinance

Debt consolidation refinances provide you with money you receive from the equity you have generated in your house to pay off other non-mortgage debt, such as credit card debt, with the money. Mortgage rates are often lower than those for other types of debt, so even if your mortgage debt will increase, in the long term, you will likely end up paying less, which means that you are paying less mortgage interest.

Reasons why you should refinance your Investment Property

There are many advantages you will enjoy when you refinance your investment properties. Aside from enjoying the benefits of lower interest rates and better loan terms, other benefits will be discussed below.

1.    Low Refinance Rates for your Investment Property

One of the reasons you should consider refinancing is the lower interest rate for your loan. You might have received a mortgage loan with a slightly high-interest rate, and this depends largely on when you obtained the mortgage for your rental property. In 2018, rates for 30-year fixed-rate mortgages were about 5%, meaning that you might be paying a higher rate if your mortgage is outdated.

The rates that were offered in 2020 contrast that glaringly. For instance, the average interest rate for a 30-year fixed-rate loan fell to a record-low 2.65% in January 2021, while the rate for a 15-year fixed-rate loan was 2.16%. The 30-year fixed rate is currently 3.76%, and the average interest rate for a fixed-rate 15-year loan is 3.01% as of March 2022. Refinancing allows you to avoid paying significant interest if you bought your investment property at a higher rate.

If you refinance your mortgage with good credit, you might be eligible for a rate lesser than the one you currently have and consequently save up money while also paying your loan. Lenders are more at risk when giving loans to investment properties. The interest rates that lenders demand on investment properties are higher to reflect this risk. You might choose to refinance to get a lower rate, as two mortgage payments may be unaffordable.

 If you can prove that you are effectively managing your rental property, refinancing could provide you an opportunity to reduce rates. However, before considering any refinancing offer, it is important that you compare your existing mortgage interest rate to refinancing offers. Investors’ monthly mortgage payments will be reduced as a result of an interest rate reduction. This might lead to a significant cash flow for a rental property that could be conserved or used to finance future projects.

2.    Adjust Mortgage Term

Modifying the loan’s repayment duration is also a motivation for investors seeking investment property refinancing. For instance, the ability to go from a 15-year interest rate to a 30-year rate can offer investors small but substantial advantages to their company. However, it should be noted that monthly payments will vary depending on the loan repayment duration in the agreement.

If you refinanced your investment properties and got a reduction in the payment period of your loan, it means that you will pay more each month but end up paying less interest. You have the option to select new loan terms when you refinance a mortgage. You can choose an extended repayment period that best suits you to achieve a cheaper monthly payment. Alternatively, a shorter time would allow you to pay off the property more quickly, or you might change your mortgage from a variable to a fixed rate. Just that might make refinancing feasible.

If paying your monthly premiums is a struggle, you might also want to think about extending your term. Longer mortgage terms result in lower monthly payments, but they are stretched out over a longer period and come with a higher interest rate. Your interest rate may or may not change if you refinance and shorten the term of your loan.

3.    Covert Fixed-rate to an Adjustable Rate

Converting from a variable interest rate or an adjustable-rate mortgage to a fixed interest rate is one of the primary reasons to refinance your rental property. Refinancing from an adjustable to a fixed-rate mortgage may be an option for you. Investors of investment properties usually decide to change to a fixed interest rate since the rates are more predictable because they don’t fluctuate monthly.

Although an adjustable rate can have short-term advantages with cheaper mortgage payments, it can be a miserable experience if interest rates increase over time. Investors can be protected from impending interest rate increases by locking in a low fixed rate. Regardless of fluctuating the market is, a fixed-rate mortgage guarantees that payments will remain constant during the loan.

4.    Cash-Out Equity

Another reason why you should consider refinancing is cash-out equity. Logically, you don’t own your home outright until your mortgage is paid off. Unless you have repaid your mortgage loan, your lender is still in charge of the home, and if not paid, it can be taken away from you. With a lien, your property may be seized by your lender if you are unable to repay the loan. Regardless of whether you have investment or personal property, this procedure follows the same steps.

Your ownership of the home increases when you make your regular or monthly repayments off your principal. The financial stake you have in a property is called home equity. All down payments and principal repayments are included in your home equity. Equity is not built by paying off interest.

For instance, if you secured a mortgage loan for $400,000 with a 20% down payment of $80,000, it means that you have reduced your principal by an additional $80,000 throughout the years, leaving $320,000 on your loan. In this instance, you have access to $160,000 in equity in your house. Through a cash-out refinance, you can borrow money against your house’s value and get cash immediately. You can use a cash-out refinance loan to access that equity if the investment property is valued for more than what you owe to pay for repairs and expansions, credit card debt repayment, buy a new investment property, or fulfill any other objectives.

By accepting a new loan for an amount greater than the remaining balance on your existing one, cash-out refinancing allows you to borrow money against the equity you’ve established in your properties. The excess between the new and previous mortgage is then paid to you in one payment.

5.    Increase Your Rental Income

You can maximize or make the most of your mortgage by refinancing your investment property. You might be able to increase the rental income from the property by refinancing to execute a few upgrades or repairs. To improve cash flow, you can implement improvements in your investment property.

Depending on which is more important to you, you can choose to replace missing tiles and rood, increase the living space, upgrade the appliances in the apartments, maintenance of outdoor design like fence, patio, or pool, upgrade the central air conditioning system, finish a basement and renting it for other purposes, or repainting the house to make it look more attractive.

Making your room more livable enhances your home’s market value and fosters a positive reputation with your existing tenants. This means you can demand higher rent upfront and recover your costs by selling the property for a higher price.

6.    Finance Other Real Estate Investments

If you notice a real estate deal that you need to snag soon, you might choose to leverage the equity in your home to deposit the property. Over time, as the value of your house rises, so does the value of your equity, which is greater than the principal amount you have borrowed.

When you use it to make a down payment on a new investment, you can use this built-up equity to generate a profit. You can also achieve your ambitious goals, which may include investing the funds from your refinance in a new kind of real estate project, such as commercial property or fix or flip properties.

7.    Fund Almost Anything

Another important reason you should refinance your investment properties is that you can use the fund to do other things- even outside investment. The money you receive from a refinance can be used for anything compared to other types of loans.

You can use the refinancing funds to improve your retirement savings, buy yourself a new car, go on vacation, further your education at college or other institutions, invest in crypto, stocks, etc., pay medical bills, plan your wedding or an event, pay your child’s tuition, pay for damages on your residential home, pay off credit card debt with lower interest rates, etc. Just name it! You can fund almost anything with refinancing money. With the help of refinancing, you can get quick access to money that you can utilize for nearly any purpose. You can use the funds from your home equity to make any wish you have come true.

8.    Eliminate PMI

Refinancing an investment property could also be done to get rid of private mortgage insurance (PMI). When borrowers put down less than 20% of the purchase price or when the loan-to-value (LTV) ratio exceeds 80%, lenders are compelled to impose the standard policy. The goal of PMI is to safeguard lenders from the possibility of purchasers failing on their mortgages. The long-term consequence of this for borrowers is increased expense on their mortgage. Once investors demonstrate a reasonable loan-to-value ratio, the lender may decide to deduct the private mortgage insurance fee from the monthly payment.

Potential Downsides of Refinancing Investment Properties

Refinancing a rental property comes with benefits and drawbacks, just like any other financial choice. Before making a final choice, take into account the following drawbacks.

1.    Loan Principal

The fact that closing fees are added to the original loan is a drawback of refinancing. These can amount to thousands of dollars which are normally calculated at around 2% of the principal amount. Any financial savings from refinancing may be negated by the interest you will have to pay on them.

2.    It Alters the Amortization Schedule

Refinancing may also have the disadvantage of restarting your monthly payment amortization plan. When applying for a loan, you usually pay the interest upfront. But when you refinance, the payment schedule is altered, and you must once more pay down the loan’s interest before making principal payments. Before considering refinancing, carefully evaluate your financial condition and other important factors.

3.    Strict Requirements

If you want to refinance a rental property rather than your residential home, you might need a higher credit score, a lower loan-to-value ratio, and higher income before you can be eligible for investment property refinancing.

4.    Higher Interest Rates

Mortgage interest rates on rental properties are often higher than those on personal residences. In other words,   your payments on an investment property will be more than they would be on a personal residence that you occupy.

5.    Closing Costs and Fees

You will presumably have to raise the funds necessary to cover the high closing charges associated with refinancing an investment property. Consequently, if you are reducing your monthly payment, it will take longer to reach the recess.

When is the best time to refinance my Investment Property?

When loan rates are low, and the valuation of your rental property is high, refinancing makes the most sense. If you have considered the value of your investment property and the loan rates, now is the best time to refinance your investment property.

The economy fluctuates, and any change in the financial today can affect refinancing rates; hence, there is no need for delay. For instance, people who acquired their investment properties before the economic crisis will probably discover that current rates are significantly lower than when they made their initial purchase.

Despite the fact that interest rates are rising, they are still incredibly low for borrowers to take opportunities, as you can’t tell what will happen in the next two years. Rates today appear to be much better than they were a few years ago. As the economy improves, rates will keep increasing. Undoubtedly, the earlier you decide to refinance, the better it is for you and your investment.

Rental Property Refinancing Requirements

Identifying why you want to refinance your rental property is the first step when refinancing your investment property. You also need to consider your eligibility to know if you qualify and can apply for the refinance loan. These factors collectively help determine whether you are a credible borrower. Despite the fact that each lender will have its own requirements, the list below gives an overview of the requirements you must meet:

• When refinancing, borrowers must have a satisfactory 12-month payment history on their present mortgage.
• Financial Documents: You must be able to provide all your financial documents, which include tax returns, credit reports, statements detailing assets and debts, rental agreement, and proof of rental income.
• Good Credit Ccore: Lenders analyze a borrower’s credit score to determine whether or not they will receive their money when due. A credit rating of at least 700 potentially allows you to secure better loan conditions and a cheaper interest rate. However, some lenders will authorize a borrower’s refinance loan for an investment property with at least a credit score of 640, usually for single investment property refinancing. According to Fannie Mae’s guidelines, you will need a credit score considerably higher, at least 720, if you are refinancing an entire portfolio of investment properties.
• Lower Loan-to-Value Ratio: Often, a refinance of an investment property requires a loan-to-value ratio of no more than 75%, while some lenders request between 60%-70% of a loan-to-value ratio. For your investment property to qualify for refinancing, you will probably need to have accrued a substantial amount of equity. LTV is estimated by dividing the loan amount by the appraised valuation of the property. Your LTV would be 67.5% if the requested loan is for $400,000 and the rental property is worth $270,000.
• Debt-to-Income Ratio: A borrower is less likely to become overextended by carrying excessive debt if their loan payments are proportionate to their income. Prior to obtaining a refinance, you must demonstrate that you have the means to pay the mortgage on your rental property. To be eligible for a refinance of a rental property, a borrower typically has to have a DTI of less than 43%.
• Higher Income: Prior to obtaining a refinance, you must demonstrate that you have the means to pay the mortgage on your rental property. Lenders assess your income through the DTI ratio. However, most investment homes have a maximum DTI ratio of 45%. When determining a borrower’s debt-to-income ratio, some lenders may not take rental revenue into account except if the property has a proven history of being inhabited by tenants who pay their rent on time. When refinancing rental property, lenders often want investors to retain six months’ worth of loan repayments in a saving or deferral account. Cash reserves guarantee the lender that the loan will be maintained if the property remains unoccupied longer than necessary.
• Higher Interest Rate: Because investment property is used for commercial reasons, lenders consider loans for rental property and refinancing of rental property to be riskier than loans for primary residences, even for borrowers with excellent credit scores. Hence, the interest rate on a refinance of an investment property is often 0.5% to 0.75% more than the loan on a residential home.

Required Documentation needed to refinance an Investment Property

To refinance a rental property, you might be required to provide an audit of the rent you have received from occupants. You can use that money in this way to enhance your mortgage application. This will often be disclosed on Schedule 3 of IRS Form 1040 in your tax return. You might have to present IRS Form 8825 if you rent the property through a firm. There are some cases where you may be able to utilize your recent tenancy agreement to demonstrate to your lender the revenue you are receiving from your rental property.

This might take place if you’re refinancing a rental property that isn’t very old or if there haven’t been any occupants in a while, perhaps because of a refurbishment. Asides from that, the documents you will need to provide to refinance your investment property are almost the same as what you would need for any other regular mortgage. However, some of the documents you will need to provide include:

• Driver’s license
• Proof of homeowners and title insurance on the rental property
• Social security number
• Recent bank, retirement, and investment account statements to verify that borrower funds are available to credit toward any reserve requirement.
• Proof of borrower income, such as a recent pay stub or bank statement if self-employed.
• W-2 tax forms for the last two years to help verify employment history and income.
• Personal federal tax returns for the last two years with all pages, including Schedule E (Form 1040) reporting rental property income and expenses.
• Recent lease and rent roll for the current tenant showing rent payment history, security deposit, and amount of time left on the existing lease.
• Recent financial statements from the rental property being refinanced, such as income statement, net cash flow, and capital expense report.

Investment Property Refinance Rates In 2022

The investment property refinancing rate differs depending on your eligibility, term, and loan condition. However, lenders consider investment properties to be a more highly risky investment than primary residences. This means that the chances of property investors defaulting on their buy-and-hold assets before their residential home are higher. Because of this, refinancing rates for investment properties will, perhaps marginally, be different from those for a residential home. The majority of refinancing conditions for investment property will give shorter terms and fair, high rates, though specifics can vary depending on the lender. Despite significant rises over the past year, there are still various options with reasonable interest rates. For example, the 30-year rental property refinances rate in 2022 ranges between 3%- 5%.

Preparing For an Investment Property Refinance

Before deciding to refinance your investment property, investors should make plans and get ready to maximize their chances of getting accepted for a refinance. Creating a positive impression on the lender will help you receive a cheaper rate and favorable deals on a refinanced loan for an investment property. When preparing for an investment property refinance, there are tips you can follow to help a successful refinance loan application. They include:

• You can preserve your credit score at or above 620 by refraining from taking on additional debt and making timely payments on existing credit lines.
• If the current tenant’s contract is about to expire, you can try renewing it to demonstrate to the lender that rental income is dependable.
• Before requesting a refinance of an investment property, multifamily property owners need to rent out any unoccupied apartments.
• Repair any problems in the property so that the rental property will appreciate more favorably and pass any lender-required inspections without finding any issues.
• Get copies of your most recent two tax returns; ensure to include Schedule E (Form 1040), which details your income and expenses from rentals.
• Gather all the necessary paperwork for the rental property, such as documents of tenant lease, the rent roll, the previous year’s and current year’s revenue statements, and a capital expense statement outlining any recent changes done to the property to raise its value.
• Finally, be willing to compare different investment property refinance loans to know the best suit your financial needs. You can also contact a mortgage refinance loan company that can access a range of loan programs provided by several lenders.

Step-by-step Guide to Applying for refinancing your Investment Properties

When applying for refinancing, there are steps to take for a successful application. It is important that you know that each lender adheres to its rules, so do your study and find out what you are permitted and cannot do. Some lenders, for instance, restrict owners of several properties from refinancing. Therefore, adhere to the relevant occupancy regulations if you want to refinance your investment property. To refinance your investment properties, follow these steps below:

Step 1: Build Equity

Before applying for refinancing, you must first take into account the equity you have been able to accumulate in a particular property. Lenders often want a buffer of at least 25% to refinance an investment property. This means that lenders need confirmation that you have low default risk.

People who have greater equity have more leverage or experience and are consequently less inclined to skip mortgage payments. It is important to note that lenders may not always accurately assess your present rental income rate. Nevertheless, you must demonstrate to the bank that your investment properties will generate profits. To your best advantage as a homeowner, demonstrate to the lender that the rental income is reliable.

Once you demonstrate that rent income is reliable with enough equity, you can get acquainted with the refinancing process. The amount of equity you must have in your home before you can qualify for refinancing varies depending on the lender, but many require that you have a loan-to-value ratio that is lower than 75%, which means you must have at least 25% equity in your home to refinance the loan.

Before you may be approved for refinancing, you must have accrued some equity in the property. Consider the scenario where you still owe $200,000 on a home worth $280,000, leaving you with $100,000 in equity. You meet the criteria for refinancing because your LTV is 71%, and you have 29% equity.

Step 2: Know your Financial Situation

Due to the heightened threat of foreclosure, lenders usually have stricter qualification requirements for homeowners of investment properties. This is because borrowers who default on their mortgage are more likely to forfeit an investment property than their residential home. To refinance an investment property, lenders often demand that you have a debt-to-income (DTI) ratio of 45% or below. 4 If your DTI is higher than that limit, you can lower it before applying by completing some previous debt payments. The general minimum requirements are listed below, but they differ depending on the lender, loan program, and other aspects of your rental property, such as the number of units in your investment property.

• Minimum credit score: 660
• Cash reserves: 6-12 months
• Max Loan-to-value ratio: 70%-75%
• Max DTI: 45%

 Step 3: Gather all the Necessary Documentation

Similar to when you first applied for the loan, you will need a lot of financial documents if you want to refinance your investment property. Before signing a new loan, any refinance lender you deal with will ask for further information. Before starting, spend some time gathering and preparing the following documents:

• W-2 And 1099 Forms: Lenders can validate your employment history and investment revenue with ax documentation. Your entire tax return might even be requested in exceptional instances if they need further evidence. A full-time investor might not have a W-2. In such an instance, our tax returns ought to be sufficient and satisfactory.
• Proof of Rental Income: To establish how much money you make from your rental property, you will need to produce pay stubs, bank statements, and any other sources of income. Two recent pay stubs or copies of recent rent receipts if you don’t work a full-time job. These demonstrate your income level and can be used by lenders to calculate your debt-to-income ratio.
• Title Insurance Papers: Lenders frequently ask for credit information and copies of any leases for rentals on the property. This is because the lender can easily evaluate the investment property’s profitability.
• Credit Report: In many cases, lenders request credit information during the application process. A copy of any rental leases on the property.This can help the lender gauge the profitability of your investment property.
• Bank statements for any savings, checking, or business accounts: Lenders want to know how much they have set aside for closing costs and unanticipated charges. Compiling any documentation on other assets you own can be useful, in addition to tax records and proof of income. These can include retirement details, bank statements from different accounts, and more.

Step 4: Compare Lenders and Rates

Choosing the lender you will work with is the next step. Because mortgage lenders have different interest rates, terms, and qualification standards, you should do your research and analyze quotations from different lenders. Comparing multiple refinance offers can help you save money in the long run.

Step 5: Apply For Refinancing

After deciding on the best refinancing lender that best suits you, you must complete the lender’s complete application form. Having your supporting documentation on hand can be helpful since the application will ask for specific information regarding your income, debts, and financial situation. The lender will also run a credit check on you. Ensure you block off time to concentrate because it usually takes up to an hour to complete the application.

You could also allow your spouse or partners in business to be close by to respond to any inquiries regarding their sources of income or places of employment. When you have all your financial and investment documents and details, get in touch with your preferred lender to start the application process. The lender will specify what documentation or information you need to submit and outline your subsequent stages.

Step 6: Lock In the Refinanced Rate

The lender will provide a new interest rate and loan terms after receiving your refinancing application. Make sure you get a rate lock period from your lender by thoroughly going over this information with them. Depending on the lender and area, they might last anywhere from two weeks to two months. Your lender will typically give you the opportunity to lock in your interest rate after your application has been approved. This can be an excellent approach to guard against rate hikes throughout the duration it takes to complete your application process because mortgage rates fluctuate daily. As a result, you can study the terms of your refinancing without being concerned that they will change.

If you’re satisfied, lock in your rate with your lender as soon as possible. You can “float” your rate and complete the deal if it does not. If you float, be aware that your rate could alter based on changes in market rate, either going up or down. You might be allowed to extend your lock if there is a delay in the loan application procedure. Usually, a small amount of your loan balance will be charged for this.

Step 7: Underwriting

The underwriting procedure starts as soon as you consent to the new interest rate and loan conditions. Lenders handle the underwriting procedure; however, applicants must be present to respond to inquiries if the lender needs further information. Lenders will go through your financial records and property, while your appraisal will be needed at this stage of the application process.

Prior to writing the final loan, the appraisal will validate the home’s market value. Your lender will evaluate your financial details, ensure you qualify for the loan, and check if you can afford the new monthly mortgage payment during the underwriting stage. A professional property appraisal will be needed to assess the home’s current value and potential for rental income as part of the refinancing procedure.

An appraisal evaluates a fair home market value and demonstrates to your lender that the amount you have agreed to pay for the property is reasonable. Estimating property taxes usually involves using appraisals. Before the arrival of the appraiser, ensure your home is in top condition. You can make a list of the improvements you have made to the house since you have been there as well. You must give the loan officer the paperwork you collected so they can decide from the appraisal if the house has sufficient equity to qualify for a refinance.

Step 8: Closing

Closing on your new loan is required following the completion of underwriting. Even though the process of closing can seem familiar from the time the house was first purchased, refinancing involves a much shorter period. Refinance closings take place faster than home purchases do. Your lender will provide you with a document known as a Closing Disclosure.

You need to check the Closing Disclosure at this point to make sure the information on your loan is accurate. However, you must sign this disclosure during your last closing meeting, which will also come with any closing fees or underwriting charges. To close your loan, you must show up for the scheduled closing session, sign the necessary documents, and pay the closing charges.

Closing expenses for a refinance usually run at approximately $5,000. However, you have a legal three-day window to rethink your decision after the closure. If not, your refinancing will be completed and processed. However, if your lender owes you money, as in a cash-out refinance, you’ll receive it in your bank account in the coming weeks.

Can I Refinance My Rental Property Under HARP?

Many property investors are curious to know if they can refinance their business with HARP. The answer is YES. The Home Affordable Refinance Program (HARP) was designed as a government-backed program to support homeowners who don’t have sufficient property equity in refinancing into a mortgage with greater security. When your debt exceeds the value of your property, HARP lets you refinance investment properties together with your primary residence.

HARP can help when the principal on loan to buy a property is larger than the property’s free market value. If you fall short of the minimal loan-to-value requirements that most lenders set, you could still be able to refinance your investment property with HARP. Nevertheless, there are still several requirements that must be satisfied. The loan must explicitly meet regular loan program eligibility criteria. The requirements you must meet include:

•  You must not have defaulted on any payments by 30 days or more in the past six months.
• You must not have more than one late payment within the past year.
• The property you intend to refinance needs to be either your residential home, an investment property with 1-4 units or a single-unit second home.
• Your current loan-to-value ratio must not be less than 80%.
• Your current mortgage must be owned by Fannie Mae or Freddie Mac.

What are the Benefits of refinancing your Investment Property under HARP?

The HARP program offers various advantages to qualified borrowers. With HARP, you can refinance your investment property’s value, and your mortgage balance is more than the property’s value. Because there is no underwriting procedure, mandatory appraisal, or minimum credit score requirement, the HARP refinancing process goes more quickly and easily than a regular refinance. However, when you refinance with HARP, you enjoy the following benefits:

• Lower interest rate
• Reduce monthly payments
• Paying off your mortgage faster will help increase your overall profit.

It is important to note that not all lenders participate in the HARP refinancing option. However, you can visit Fannie Mae and Freddie Mac‘s websites to check for lenders participating in HERP or reach out to your current lender to get information about their participation in HARP.

What are the Downsides of HARP Refinancing Loan for Investment Property?

There are always drawbacks to every refinancing program, which is why you need to carefully analyze your refinancing options. Although HARP has several drawbacks, it is a good solution for some investors. Just like other refinancing and loan modification programs, the following drawback still exists with HARP:

• Increased principal balance
•  If you owe mortgage insurance, you must keep paying it.
• A second loan with a fixed interest rate or a home equity loan cannot be repaid or refinanced.
• Depending on your state’s legislation, your loan’s terms could switch from “purchase money” to “hard money.”

Alternatives to HARP- Private Lender and FHA Streamline Refinance Program

Asides from HARP, there are other refinancing options you can consider. However, if you do not meet the requirements of HARP, you can consider other refinance programs for your investment property. The two alternatives to HARP loans are using a private lender or FHA Streamline Refinance Program. A private lender can help you reduce your interest rate and monthly loan payments, but there are specific loan-to-value and credit requirements you must meet.

If you meet the requirements for an FHA streamline refinance program, you can adopt it to refinance your investment property and enjoy advantages equivalent to those of the HARP program in terms of little to no documentation, appraisal, and underwriting. The highest loan amount can be your original loan balance, or the least of your existing outstanding mortgage balance can be used as the maximum loan amount you can be given. You have the choice to have your lender pay closing costs if you are incapable of doing so. However, you will be charged a higher interest rate if your lender decides to cover your closing costs.

Although the HARP program and streamline refinancing are both excellent choices for refinancing investment properties, you might need to keep making payments on your existing loan until you’ve accumulated sufficient equity to refinance a traditional investment property using a private lender.

Best Refinancing Investment Property Loans of 2022

Refinancing investment property is a means for investors to increase revenues and profits by leveraging on the advantages of a down payment, the duration of the repayment terms, and the interest rate. Also, investors can maximize their cash-out by using the funds to finance other real estate investments or renovating a property to raise its valuation and profitability.

You can choose a lender and loan program option based on the properties they can be used for, the minimum and maximum loan sizes, required down payments, the current interest rates and annual percentage rates, and the duration and intricacy of the underwriting process. However, the following are the investment property refinancing lenders and their loan programs.

1.    Quicken Loans

Quicken Loans is one of the best refinance investment property lenders. This is because they are relatively simple to use for investors. Quicken Loans was established in 1985 as a traditional and physical lender before going online around 1999 and 2001 as Rocket Loans, and its growth coincided with the expansion of the internet.

Quicken loan refinances conventional, jumbo, and all government-guaranteed loans. Along with a wide range of loan choices, Quicken also offers conventional, HARP, Jumbo, FHA, VA, 15- and 30-year fixed-rate, and adjustable-rate mortgages. In all 50 states, loans are available for practically any type of property, and Quicken will accept applications with a minimum credit score of 620 for traditional loans and 580 for FHA loans.

They have a good reputation for providing phone, online chat, and in-person customer service. Quicken Loans is a streamlined refinance lender that offers “anything” loans and has a global reach. To speed up the application process, it provides borrowers with two options: electronic loan closings and an online application through Rocket Mortgage.

With an in-person electronic notarization (IPEN) or a remote online notarization (RON), Quicken’s eClosing allows you to close a transaction while significantly reducing the number of documents needed for the refinancing application. It is legal to use eClosing in all 50 states, but clients must get their titles through Amrock, a Quicken subsidiary company.

Pros

• Quicken accepts a minimum credit score of 620, 580 for FHA loans
• They offer cash-out and rate-and-term loans
• They refinance conventional, jumbo, and government-backed loans

Cons

• It does not consider alternative credit information such as employment and income data
• It does not provide lengthy rate locks in locations where shelter-in-place orders are in effect
• It requires using their sister firm, Amrock, to use the eClosing option.

2.    Nationwide Home Loans

Nationwide Home Loans is unmatched for comprehensive service as an in-house lender with loan types that cover the whole range of real estate, unique term options, and a best-rate guarantee. Nationwide home loan guarantees the lowest rate and provides a one-stop solution for services.

According to Nationwide Home Loans, providing outstanding customer service means putting the client first and determining how best to meet their individual needs. Your experience with Nationwide home loans will be customer-oriented and professional as they take the time to understand your objectives and create affordable terms compared to other options.

Since Nationwide Home Loans are an in-house lender, they offer terms that are unique to each client, ranging from 5 to 30 years. They can create a special loan with an 18-year term, for instance, if your loan has an 18-year term outstanding. It combines your interest rates, credit scores, loan-to-value (LTV), and debt-to-income ratios (DTI) to determine loan costs.

Therefore, the higher your credit scores, the lower your interest rate. If you fall outside of this limit, Nationwide will negotiate with you to raise your credit score so you may qualify. Its turn times are also substantially quicker than the industry standard. They only currently conduct business in the following states: California, Colorado, Texas, Idaho, Washington, Oklahoma, Montana, and North Dakota.

Pros

• In-house lender
• Best rate guarantee
• Custom loan terms

Cons

• They have a minimum credit score of 580
• It only operates in limited locations- 8 states California, Colorado, Texas, Idaho, Washington, Oklahoma, Montana, and North Dakota.

3.    AmeriSave Mortgage

AmeriSave is our choice for customer service since it provides a thorough rate quote for a range of loan programs, with cheap rates in a quick and easy online process. AmeriSave has outstanding customer service because of the simplicity and openness that it has included in its online services. With the exception of New York, AmeriSave has been operating since its founding in Atlanta. The company has financed more than 325,000 homes and more than $84 billion in loans.

In these simple steps, the client can research interest rates, choose the best loan, and then apply online or over the phone with a loan provider. There are no hidden costs or commitments that come with doing your research for a loan. Once the loan has been underwritten, agents will arrange a closure at a time and place that works for you. There are many types of loans available, including fixed-rate, FHA, VA, USDA, cash-out, and adjustable-rate mortgages (ARMs).

First-time buyers can make down payments as little as 3%, and those who make more than 20% down payments on a conventional loan are exempt from the requirement to purchase mortgage insurance. FHA loans require applicants to maintain their present job and have a minimum credit score of 580. Additionally, persons applying for loans are not allowed to make any other significant purchases, like a car, throughout the procedure.

Pros

• Customers can look at interest rates and loan options without making commitments.
• No hidden fees
• Quotes are accurate and aren’t assumptions

Cons

•  Current exterior and an interior appraisal are required.
• Mobile or manufactured homes are not permitted.
• Borrowers cannot change employment or make a large purchase during the loan application procedure.

4.    LenderFi

LenderFi is one of the top online lenders because its hassle-free online features allow users to seek rates without disclosing their personal information, receive immediate online approval, and lock rates without paying lender fees. With the exception of Hawaii, Missouri, Nevada, New York, and Utah, LenderFi has been in business since 2006 and provides affordable rates for various loan options nationwide.

They are a non-bank lender that reduces costs by simplifying expenses and getting rid of pointless fees via an interactive online system. LenderFi can handle all aspects of loan processing, from inception to closing, utilizing its resources and allowing customers to interact with only one firm throughout the process. LenderFi features no lender fees, rapid online approval, and the opportunity of speaking with a loan expert over the phone. It provides a variety of loan alternatives, including standard FHA loans, for both purchases and refinances.

There are no jumbo, VA, or USDA loans available, but they might exist in the later years. LenderFi provides products for manufactured homes, multifamily homes, townhomes, condominiums, co-ops, single-family residences, and planned unit projects. LenderFi offers as low as a two-week closing loan. For the duration of the loan, LenderFi offers rate insurance and will rewrite your loan with no extra cost if its rates fall by as little as 0.25% from your existing rate. A minimum of six current payments, without prepaid interest, must be made to meet the requirements.

Pros

• Loans can be closed by customers two weeks after applying.
•  No lender charges
• It maintains current mortgage rates for online applications

Cons

• Not available in Hawaii, Missouri, Nevada, New York, and Utah
• No loans for a house equity
• It does not provide details on the minimal borrowing amounts necessary without applying.

5.    Bank of America

Bank of America emerges as the best bank for refinancing because of its extensive selection of refinance loan options. Bank of America refinances a variety of loan types and also provides online, phone, and branch services. Refinancing costs for a 30-year fixed-rate loan is 3.250%; for a 15-year fixed-rate loan, they are 2.500%. The interest rate for a 5/1 ARM is 2.625%. When refinancing, current Bank of America clients may be eligible for a closing charge discount of up to $600. However, through its website or mobile app, the bank provides online loan applications to obtain pre-qualified, pre-approved, and lock in your rate.

If you are refinancing a BOA loan, you must have a 620 credit score for a conventional loan, 640 for an FHA loan, and 660 for a VA loan. Traditional banks are available in all 50 states, with Bank of America being one of them. It has a 2.500% initial interest rate and a 3.250% maximum.

Customers should prepare to provide more personal documents than they would for an alternative lender. This can consist of tax returns, employment records, and other documents pertaining to your existing property. Bank of America is known to be one of the biggest banks in the world, with a solid reputation for stability.

Pros

• A 30-year fixed-rate loan’s interest rate ranges from 3.250% to 2.625% for a 5/1 ARM.
• Preferred Reward clients may be eligible for a discount on mortgage origination fees of up to $600.
• Rate disclosure

Cons

•  Although not specified, a minimum credit score is required.
•  You cannot refinance your USDA loan
• The closing costs are on the higher side.

6.    Alliant Credit Union

Alliant Credit Union is our top pick for credit unions since it can refinance your mortgage and forgo the mortgage insurance that other lenders impose. Alliant Credit Union was established in Chicago, Illinois, in 1935 and has expanded to become one of the biggest credit unions in the nation, with $12 billion in assets and 500,000 members. Alliant Credit Union provides all of its customer services online, has live phone agents available around the clock, and has 80,000 fee-free ATMs located around the country.

Alliant Credit Union provides mortgage financing on a national scale. Alliant Credit Unions can assist you in optimizing your savings when you want to refinance a loan burdened with mortgage insurance into a cheaper rate and payment by waiving the insurance. With individualized service from a loan expert and various mortgage loan options, Alliant Credit Union provides free personalized quotes and rate locks for three months on refinancing.

Pros

•  Will refinance condominiums without a warranty
• Shop rates online
• Online applications

Cons

• Government-backed mortgage refinances are not available.
• They have higher fees compared to other lenders.
• They do not have branches for an in-person consultation.

7.    Better.com

Better.com is one of the best mortgage refinancing companies with low fees. When Better.com launched in 2014, it teamed up with California-based Avex Funding, an originator specializing in prime and jumbo mortgages. To start providing online loans, Better.com purchased Avex Funding in 2015. With partnerships with 17 top mortgage investors, including Goldman Sachs, American Express, and Citibank, it is able to offer a variety of products to its clients, including FHA loans, because it is authorized as a Fannie Mae seller and servicer.

However, Better.com stopped servicing jumbo mortgages after acquiring Avex and has shifted its attention to loans for customers with low to middle incomes. Better.com’s mortgage refinancing process is quick and simple, offering you the cheapest closing costs, with pre-approvals taking three minutes and closings taking three weeks.

Better.com also provides homeowners’ insurance and title insurance. There is no application, underwriting, or origination fees, which will help you save on cost. Online approval can be completed in three minutes, providing transparent, fast loan estimates. If you have a minimum credit score of 620, Better.com will refinance you in any state.

Although its refinance rate range is lower when compared to others, buying points are necessary to get the best deals. They don’t offer FHA, other government-backed mortgage programs, adjustable-rate products, or other refinance products.

Pros

• It is the lowest cost loans
• You can add title or homeowners insurance
•  It allows you to close within three weeks

Cons

•  It does not offer jumbo refinance
• A minimum of 620 credit score is required
• They do not have branches for an in-person consultation

8.    Navy Federal Credit Union

Navy Federal Credit Union provided benefits like a rate match guarantee, a Military Choice program for veterans who have used up their VA loan benefit, and a free rate lock. Since its founding in 1933, Navy Federal Credit Union has amassed 10 million member-owners. Navy Federal Credit Union (NFCU) offers a VA loan program and allows veterans to refinance their mortgages.

For those who have already used their VA loan benefit, their Military Choice program offers rates and terms comparable to the VA loan program. If rates increase while applying, the rate lock maintains your rate. If rates drop to lower, you will be given two months to relock. Their VA loans have durations of 10 to 30 years and interest rates as minimal as 2.250%, with APRs as low as 2.718%.

The 1% loan origination charge associated with these rates can be waived in exchange for an additional 0.25% interest rate. With durations ranging from 16 to 30 years, their Military Choice program offers interest rates as low as 4% and APRs as low as 4.276%. This is an extremely demanding refinance program for veterans who have used all their VA loan options. Before you can qualify for this refinance program, you must be a Navy Federal Credit Union member. You are eligible for the program if:

• You are active duty, retired, or a veteran of any branch of the U.S. armed forces.
• You are a family and members of veteran’s households
• You are in the department of Defense employees, contractors, retirees, and annuitants

Since NFCU conducts rigorous underwriting, they take into account everything, including debt and earnings, as well as past loan repayments. Although there is no established credit requirement, applicants with a credit score of not less than 740 and a debt-to-income ratio (DTI) of at least 36% are eligible for the lowest mortgage interest rates.

Mobile and manufactured homes are eligible if they are firmly secured to the ground, without wheels, axles, and hitches, and have permanent water and sewer connections. Customers have access to service delivery via the phone, social media and online chat, secure email, and on-site at a branch. NFCU operates branches in all military posts and lends money in all 50 states.

Pros

• The Military Choice program is available to veterans who have already exhausted their loan benefits.
• Rate locks shield consumers from rate increases.
• Rate match guarantee

Cons

• You must belong to NFCU.
• Rates for refinancing loans are subject to a 0.750% rate increase if the current lender is not an NFCU.

Conclusion

Refinancing your investment property has significant benefits and drawbacks; therefore, you should consider your personal and financial status as well as your long-term objectives of the investment before making a decision. Refinancing can result in a reduced monthly payment and a payment at closing that you can spend as you wish. However, it is important that you consider the situation around you to better enjoy and harness the benefit of refinancing. Refinancing investment property is a huge choice, so give it some thought to determine which approach is best for you. For instance, you should not consider refinancing into a thirty-year fixed loan if you plan to sell the property sooner; rather, you can consider other loan programs such as HARP or the FHA streamline financing program. However, if you are looking for a good refinancing lender that offers low-interest rates and better terms, you should consider Aurum and Sharpe. Aurum & Sharpe provides the best customer experience, low interest, and excellent loan terms that help you save money. Call us at 516-241-8276 to book an appointment today and get started with your refinancing process, or use the online form to get in touch.