How to refinance rental and investment property in 2021

By admin On Dec 24, 2021

Enjoy low investment property refinance rates

Owning an investment or rental property can offer the security of extra income, but what if your existing loan is eating into your profits?

With investment property mortgage rates still near historic lows, refinancing into a new loan could lower your monthly payments and increase cash flow.

But refinancing doesn’t make sense for everyone.

Here’s how to know when a refinance is right for you, and tips to score the best refinance rate for your investment property.

Check your investment property refinance rates. Start here (Dec 24th, 2021)

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Good reasons to refinance your investment property

There are several common reasons to refinance a rental or investment property:

Lower your mortgage rate
Pay off your current mortgage faster
Use a cash–out refinance to purchase new investment properties or upgrade your current rental property mortgage

Lower interest rates

Seth Feinman, vice president of Silver Fin Capital Group LLC, says refinancing can make sense for a lot of rental or investment property owners.

“You likely want to keep your carrying costs as low as possible on an investment property. This is due to the risky nature of potentially not having a tenant at times,” he says.

“So if real estate investors have the chance to qualify for lower interest rates or lower your monthly payments, you may want to jump on that opportunity.”

Besides simply lowering your mortgage rate, there are other reasons to refinance a rental or investment property.

Change loan terms

Many borrowers use a mortgage refinance to shorten their existing loan term. While your monthly mortgage payments are likely to increase, with this loan option, you’ll pay less mortgage interest over the life of the loan – and you’ll own your home sooner.

As an example, let’s say you’re seven years into a 30–year fixed–rate investment property loan for $300,000 at 5.25%. Even if you keep the current rate, but refinanced into a new 15–year loan, your remaining mortgage interest balance drops from $210,850 to $135,881. That’s an overall savings of $74,969, less closing costs.

Keep in mind, mortgage lenders typically charge higher interest rates for 30–year loan terms than they do for the 15–year variety – so refinancing into a 15–year loan will likely fetch you a lower interest rate.

The above example is just an estimation, however. Use a mortgage refinance calculator to begin getting an idea if a new loan is right for your financial situation.

Refi into a fixed–rate loan

You may even be able to refi your existing loan from an adjustable–rate mortgage (ARM) into a fixed–rate mortgage (FRM).

Some real estate investors and homeowners enjoy the consistency of fixed interest rates, over an ARM loan’s fluctuating rates.

“[A fixed interest rate] helps with keeping track of how much you will need to rent it for, as there isn’t going to be this additional adjustment in monthly cost throughout the years,” adds Jon Meyer, The Mortgage Reports loan expert and licensed MLO.

Drop private mortgage insurance

With conventional loans, private mortgage insurance (PMI) automatically drops off when you’ve paid off 78% of your principal loan amount, and PMI can also be refinanced off of your current loan when you’ve built 20% equity in your home, too.

While FHA loan holders are required to pay mortgage insurance premiums (MIP) for the life of their mortgage loans, they can refinance into a conventional loan with no PMI once their mortgage balance reaches 80% loan–to–value ratio (LTV).

Cash out home equity

A cash–out refi involves tapping into your home equity and pulling money out of the property that you can pocket at closing.

“It can be a great time right now to take money out so that you can buy another investment property. That beats taking money out of the stock market or other financial investments. You can use your increased equity to purchase further real estate investments,” adds Feinman.

Or, you could use that cash–out money to upgrade your existing rental or investment property. This could raise the value of the property and increase your returns through equity or higher rental income.

“Keep in mind, once you reach a threshold, you have to have a specific amount [of cash] in reserves per property, based on the monthly debts associated with each financed property,” adds Meyer.

Get your cash-out refinance options. Start here (Dec 24th, 2021)

Investor repayment

If you have co–investors on your property, you could use cashed–out funds from your investment property refinance to repay them.

Andrew Rosenberg is a partner in the law firm of Cassin & Cassin LLP. He explains that refinancing can improve your cash flow, too.

“When interest rates are low, refinancing a property without increasing the amount of debt you owe is smart. It will generally have a positive effect on cash flow because debt service costs will decrease,” says Rosenberg.

When to refinance investment property

Realtor and attorney Bruce Ailion says it’s still a good time to refinance, despite interest rates no longer being historically low.

“There may never be a better time to refinance an investment property or rental property,” he says.

There may never be a better time to refinance an investment property or rental property.” – Bruce Ailion, Realtor and attorney

Rosenberg agrees that the best time to refinance is when property values are high and interest rates are low.

“In this scenario, refinancing can add to the general financial health of your property,” says Rosenberg. “And your loan–to–value ratio should be lower. That can lead to more favorable financing terms and the ability to borrow a larger amount.”

Keep in mind that although refinance rates are rising from the record lows seen in 2020 and 2021, they’re still lower than they’ve been at almost any time throughout the past five decades. So if you bought your investment property or last refinanced it prior to 2019, it’s likely still a good time for you to refinance and get a lower rate on your rental home.

Capture a low interest rate. Start here (Dec 24th, 2021)

Potential challenges when refinancing a rental home

Unfortunately, refinancing rental or investment property assets isn’t always easy.

Complex financial situations

“Often, investors have complex financial backgrounds. They can be self–employed. They can have multiple sources of income. Perhaps they own multiple properties. That makes documenting the assets and income from those properties difficult and time–consuming,” says Ailion.

Feinman agrees.

“Another challenge is that you might not show any income on your tax returns for your property to qualify for a full income loan.

“Also, due to various write–offs, your net income on your tax returns may not accurately reflect the income on your property. That’s because expenses are allowed to be used to reduce taxable income,” Feinman says.

Regulatory documents and liens

Regulatory documents or liens recorded against your property may also be a problem.

“The terms of these documents and whether the lender will be bound by them in the event of a foreclosure can complicate things,” says Rosenberg.

Undesirable credit score or credit issues

An undesirable credit report can also make underwriting a new loan challenging for lenders.

“Be aware that the mortgage lender will probably want to review copies of your existing leases. They’ll also likely ask for several years of financials – including tax returns. And they may request other material documents relevant to the operation of your property,” notes Rosenberg.

How to avoid refinance issues and delays

So, how can you avoid these potential roadblocks when refinancing your rental or investment property? The most important thing is to prepare all your documents ahead of time and stay organized.

Gather documents beforehand

Getting proof of income and other financial information ready for your loan officer beforehand will avoid unnecessary delays.

W–2 forms or 1099 forms for the past two years
Tax returns for the past two years
Income documentation: Pay stub for the past month
Proof of homeowners insurance policy, title insurance and recorded deed
Bank statements and asset information
Debt documentation from student loans, credit cards, child support, alimony, and so on
Other possible financial records could include award letters, letters of explanation, and divorce decree

Use our refinance checklist to guide you through the refi process.

Check your credit score and debt–to–income ratio

In addition, make sure you check your credit history and debt–to–income ratio before attempting to refinance. Issues in these two areas – too much debt, too little credit – are the two main reasons refinance applications get denied.

If necessary, work to pay down large or high interest debts from credit cards or other loans, or raise your credit score prior to refinancing your investment property. You’ll be more likely to qualify, and get a lower interest rate to boot.

Where to shop around your investment property loan refinance

Refinance loans are offered by banks, credit unions, private lenders, mortgage brokers, hard money lenders, and other sources.

“The lowest rates usually come from lenders offering conventional loans sold to Fannie Mae or Freddie Mac,” Ailion says. “In recent years, we’ve also seen refis from regional and national lenders funded through Wall Street or private equity firms.”

Rigid guidelines

The experts caution that many of these financing sources may have stricter rules than you may expect.

“Interest rates will always be a bit higher for investment or rental properties compared to primary or second homes. Credit score requirements might be stricter due to the extra risk factor involved,” explains Feinman.

“And loan–to–value will be lower for rental or investment properties compared to a primary residence or second home. Expect your maximum loan–to–value to be 85% to 90%.”

Higher interest rates

Know what to expect: Interest rates will always be a bit higher on investment property loans, and credit and loan–to–value requirements will likely be stricter.

Higher closing costs

Prepare to pay substantial transaction and closing costs, too.

“Any time you take out a mortgage or refinance you incur these costs,” cautions Ailion. “These can potentially offset your interest rate savings for years.”

For this reason, look closely at how long it will take for your savings to repay the costs of a refi.

“Say your repayment time is longer than you plan to hold the property. In that case, you might not want to refinance,” Ailion says.

Preparing to refinance your investment property

For best results, follow these tips:

Keep copies of the last two years of your tax returns as well as any leases on your investment or rental property
Wait to refinance until all or most of your rental property is occupied. “Having vacant units could cause an issue with the lender,” says Feinman
Keep your credit clean. “Don’t take on any new debt or go late on any payments while attempting to refinance,” Feinman advises
Gather all your documents needed. “And don’t rush into anything – go over all the options,” suggests Feinman
Try to speak to a licensed mortgage broker who works with many mortgage lenders
Shop around and compare refinance rates and terms carefully
Make a good impression on the lender. “Resolve any tenant issues, physical issues with the property, and any other material factors that could be a red flag to the lender,” Rosenberg recommends
Clearly understand the terms of your current loan and refi loan

These steps will not only help you qualify for an investment property refi, but also net a lower rate and see bigger savings on your refinanced loan.

Today’s investment property refinance rates

Investment property mortgage rates are still near historic lows, just like rates for primary mortgages.

Compare personalized rates from a few different lenders to find the best refinance deal for you.

Show me today’s rates (Dec 24th, 2021)

The information contained on The Mortgage Reports website is for informational purposes only and is not an advertisement for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent, or affiliates.

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