If you’re thinking about refinancing a rental property, you’ll want to determine your goals for doing so. It’s also important to ensure you have enough equity in the property to cover the lender’s loan-to-value (LTV) ratio for a rental property refinance. In this article, we’ll give you five simple steps to refinance your investment property, find a great interest rate, and start saving money.
If you’re ready to refinance an investment property, we recommend you work with Lima One Capital. It offers a variety of loan programs across the country that are tailored to your needs as a real estate investor.
1. Determine Your Rental Property Refinance Goals
If market interest rates are lower than your current rate, you may want to refinance the rental property to pay off the existing mortgage and get a better rate, which could save you money on your monthly mortgage payments and through the life of the loan. If you want to borrow from your available equity, you might consider a cash-out refinance.
Other reasons to consider refinancing include:
- Removing private mortgage insurance (PMI): If you purchased the property with less than 20% equity and pay PMI, and you now have 20% equity in the property, you may want to refinance to save the fees.
- Convert an adjustable rate to a fixed rate: Fixed rates give you the peace of mind of your new lower rate never fluctuating, and your monthly mortgage payment staying the same.
- Changing the loan term: Shortening a loan from 30 to 15 years can increase monthly expenses, but the loan can be paid off sooner, and you’ll pay less interest overall. Refinancing a 15-year loan to a 30-year mortgage can reduce monthly expenses, but overall interest paid is higher.
- Purchase a new investment property: You can use your equity from a cash-out refinance toward purchasing an additional investment property and building a real estate portfolio.
- Rehab an existing rental property: If it makes financial sense to refinance, you can use proceeds from a cash-out refi to repair or rehab the investment property you refinanced.
You’ll need to make sure you have enough equity in your rental property to refinance based on the lender’s LTV requirements. If you’re pulling cash out, you’ll need to make sure the equity in your property exceeds the LTV plus the amount you want to borrow.
Example: If you have 20% equity in the property, and the lender’s LTV requirement is 80%, you won’t be able to pull any money out. If the property has 40% equity and the lender’s LTV requirement is 80%, you’ll have up to 20% equity from which you can cash out.
2. Choose a Refinance Lender to Meet Your Goals
If you can refinance with your current lender, and it offers you a competitive rate, do it. Because you already have a history of on-time payments and a banking relationship, they may be more lenient with their qualifications. However, if they don’t offer products to help you achieve your refinancing goals or their rates aren’t competitive, you should shop around.
Rates, Terms & Qualifications
When considering refinancing, you’ll need to research current interest rates, what you need to qualify for the loan, and if the new loan will ultimately save you money. If you plan to sell the property within a few years, it may not be a good idea to refinance. Closing costs can potentially offset any gains.
30-year fixed rate | 4.5% to 7% |
15-year fixed rate | 5% to 7.5% |
Loan term | 15 or 30 years |
Minimum credit score | 660 |
Minimum seasoning period | 6 months |
Minimum rental history | 6 months |
Minimum debt-to-income ratio (DTI) | 43% |
Maximum loan-to-value (LTV) | 80% |
If you prefer a more streamlined process and want the convenience of applying online, you may consider an online lender. Here are three lenders that offer refinancing for rental properties.
Lima One Capital
Lima One Capital offers cash-out refinances and rental property refinancing. Interest rates can be fixed or variable. Rates start at 5.5%, and they can close on your loan in as little as 15 days. There is no maximum loan amount, but you should have 30% to 40% existing equity in your rental property to qualify.
RCN Capital
RCN Capital is an online lender that offers investment property refinancing. It will allow you to apply online and generally close the loan within one to two weeks. RCN offers rental property loans up to $1 million with 75% as-is value and 30-year terms.
LendingHome
LendingHome offers investment property refinancing on two-to-four unit multifamily and single-family properties. Both individual and entity borrowers are eligible to apply. Borrowers can cash out up to $500,000, and there’s no prepayment penalty after three years. LendingHome has adjustable- and fixed-rate options as well and can close in as few as five days.
3. Apply to Refinance Your Rental Property
After you choose a lender, complete a loan application to get the refinance process started. The lender will run a credit check and ask for some financial documents to see if you’re approved for a refi. You should qualify with most lenders if your FICO score is at least 660, and you have two or more years of continuous employment.
Some information you’ll need to provide includes:
- Mortgage statements: At least six months
- Tax returns: Two years
- Pay stubs: Two months
- Bank statements: Two to three months
- Leases: At least six months of rental history
- Rent receipts: At least six months
Many lenders can give you preliminary approval in minutes, and closing can happen in a few days to a month, depending on the lender. Traditional and local banks may take up to 30 days to close while online lenders can close within a week or two.
4. Go Through Underwriting
After you’ve completed the application process, the lender will move your loan to the underwriting phase. The underwriter will recheck your credit score, verify your pay stubs, bank statements, and tax returns. They’ll schedule an appraisal to determine the investment property’s current market value. Appraisals usually cost $300 to $500 and need to be paid upfront.
The lender will verify at least six months of on-time mortgage payments for the investment property and will review your current leases. Generally, you will need to own the property for at least six months and have a minimum of six months of tenant rental payments before refinancing a rental property. This is called the seasoning period.
Lock in Interest Rates for Your Rental Property
You’ll be given the option to lock your interest rate. Your locked interest rate is typically good for 60 to 90 days. If interest rates go up during the rate lock period, you will still receive the same rate you were quoted. If the rate drops, you’ll be locked in at the higher rate. Some lenders will allow a one-time rate drop on a locked rate.
5. Prepare for Closing
The last step in rental property refinancing is to attend the closing and sign the refinance documents so that the previous loan gets paid off. The closing usually takes about one hour. You should bring two forms of identification and a certified bank check to cover closing costs if you’re not wrapping them into the new loan. You may be required to get a new insurance binder. You can call your existing insurance provider, and they’ll send one directly to the lender on your behalf.
Prior to closing, your loan officer will give you estimated closing costs, which may include:
- Loan application: $250 to $500
- Loan origination fee: 1% of the amount borrowed
- Title search and title insurance: $200 to $400
- Deed recording fee: $25 to $250
Tax Implications When You Refinance Rental Property
It’s important to consult with a tax expert to make sure you know what tax implication you may face. Assuming your interest rate is lower on the refinanced loan, your interest tax deduction—if you qualify—will be lower as well, so you may have to pay more in taxes.
Because the property is a rental property, the IRS treats it like a business that earns income, and you’re expected to report it on a Schedule E form on your federal tax return. If you refinance the property for more than the original loan balance and take cash out, the interest deduction generally can’t be for more than the original loan amount. The exception is if the funds were used for certain tax-deductible improvements on the rental property.
Refinance Rental Property Tax Deduction
If your current lender charges you a prepayment penalty for paying the loan off early, then that amount typically is tax-deductible. You may also take a tax deduction for making repairs to your investment property.
Some repairs can be deducted immediately while others can be deducted over time. For more information on the top rental property tax benefits, read our in-depth tax deduction guide, which includes a free worksheet.
Bottom Line
You refinance rental property when you get a new loan with better rates or terms to replace your existing loan. First, you should decide why you want to refinance your investment property. Next, choose a lender that has qualifications that you meet and who offers a low interest rate.
Submit Your Comment
You must be logged in to comment. Click a "Log in" button below to connect instantly and comment.
LOG IN