When you refinance rental property, you can generally expect an interest rate starting at 5.04 percent for a 30-year term and a minimum 75 percent LTV. There are typically five steps involved when you refinance investment property. These include things like choosing a lender, applying to refinance the property, and the underwriting process.
If you’re ready to refinance investment property, we recommend you work with Visio Lending. They’re a nationwide lender that offers loans for investors with competitive rates. You can get pre-qualified online in just a few minutes and funded in about 21 business days.
Here are the five steps to refinance investment property:
1. Make Sure Refinancing Is Right for You
You refinance rental property when you take out a new loan on your property to pay off the old loan. You either keep the proceeds as cash, or there aren’t any proceeds and your new loan provides a better rate or term than your previous loan.
Generally, an investor refinances an investment property to receive a lower interest rate, change the terms of their mortgage, or take equity out of the property as cash. If you lower your interest rate, you can save money on your monthly mortgage payments and put that money towards purchasing and fixing up another investment property. If you refinanced the investment property to take equity out, then you can use that cash to purchase another property.
Rates, Terms & Qualifications of a Rental Property Refinance
Each lender has their own rates, terms, and qualifications for refinancing a rental property. Generally, the rates are slightly higher than refinancing a primary residence. The qualifications are usually more stringent as well.
Typical rates and terms include:
- Rates: 5.04 percent for a 30-year fixed mortgage and 4.03 percent for a 15-year fixed mortgage, which are both 0.5 percent higher than primary residence refinance rates
- Terms: 15- or 30-year terms are the most common
Typical refinance qualifications include:
- Credit score: 660+ (check yours for free here)
- Property ownership: at least six months with current mortgage payments
- Rental history: at least six months for the subject property
- Debt to income ratio: less than 43 percent
- Loan to value (LTV): 75 percent or less
Who a Rental Property Refinance Is Right For
An investment property refinance is generally right for investors who want better rates and terms than their existing mortgage offers. It can also be right for an investor who wants to take equity out of the property as cash.
A rental property refinance is right for:
- An investor who wants to lower their interest rate
- A long-term investor who wants to change mortgage terms
- An investor who wants to take equity out of the property as cash to invest in home repairs or to buy another investment property
2. Choose a Lender for Your Investment Property Refinance
When looking for a lender, you should start with your current lender. Since you already have a history of on-time payments, they may be more lenient with their qualifications. However, if they don’t offer refinances or their rates aren’t competitive, then you should shop around for other lenders. Choosing a lender is the most important step of the refinance process.
What to Look for in a Lender When You Refinance Investment Property
When you’re looking for a lender, you want to make sure they offer competitive rates (around 5.04 percent for a 30-year fixed mortgage) because the lower rate should justify paying the additional closing costs required with a refinance. Also, consider lenders based on their minimum qualifications. You don’t want to pay the loan application fee before you know if you even qualify for the refinance.
Some questions to ask when choosing a lender include:
- Do you refinance investment properties in my state?
- How long do I have to own an investment property before I can refinance?
- How long does the property have to be rented before refinancing?
- What’s your minimum credit score requirement?
- What’s your interest rate?
- What terms do you offer?
- How long does it take to close on the loan?
- What are your fees: including appraisal, loan application, and closing costs?
Where to Find a Lender When You Refinance Rental Property
You can start with your local bank or credit union to see if they refinance investment properties. You already have a banking relationship with them, so they’re a good place to start. Keep in mind that not all banks offer investment property loans or refinancing. And if they do, they may be at a premium.
If you decide not to refinance with your current lender, then there are generally two options: banks and credit unions or online lenders. If you want a traditional lender or someone you already have an account with, a bank or credit union is right for you. However, if you prefer a more streamlined process and applying online, you should consider an online lender.
The top five lenders that offer refinancing for rental properties are:
Visio Lending is a nationwide online lender that offers loan products specifically for investors, including rental property refinance loans. They can pre-qualify you online in a few minutes and generally fund their refinance loans in 21 business days. Unlike other lenders, they only require 30 days of seasoning for a cash-out refi. They also allow larger investors the opportunity to refinance multiple properties into one loan.
Quicken Loans is another online lender with an investment property refinance loan program. Their unique feature is that you can track the progress of your refinance application online. Their seasoning requirements and time to funding vary depending on the borrower’s qualifications, type of property, and location.
Citizens Bank is a traditional bank with branches in over 940 locations, mostly on the East Coast and in the Midwest. They offer investment property refinancing (refi) as well as the financial products and services you would expect at a bank. If you have an account with them, they offer you a discount on the refinance closing costs. They generally close a refi within 30 days.
Lending Tree is a nationwide online lender that offers refinance loans for investment properties, including multifamily properties. They have a short online quiz that helps you pre-qualify for an investment property refinance in about 10 minutes. They can generally close the refinance loan in 20 – 45 days, and seasoning usually needs to be 90 days or more.
LendingOne is another online lender that offers investors rental property refis. They will also pre-qualify you online in a few minutes and generally close the loan within three to four weeks. They require six months of seasoning before refinancing an investment property.
Generally, each of these lenders offer similar rates and terms but their qualifications may vary, so it’s best to call two or three before choosing one lender to work with. Since refinancing an investment property is a specific loan product, not all lenders publicize their rates or qualifications online, so contact them with specific questions.
If you’re considering refinancing your rental property, contact Visio Lending. They’re a reputable lender that offers refinancing for investment properties. They have competitive rates for prime borrowers and will pre-qualify you online in a few minutes.
3. Apply to Refinance Your Rental Property
After you choose a lender to work with, you need to complete a loan application to get the refinance process started. The lender will run your credit score 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 660 and you have two or more years of continuous employment.
Generally, you will need to provide your lender with the following:
- Credit score: 660+ (check yours free here)
- Mortgage statements: six or more months
- Tax returns: two years
- Pay stubs: two months
- Bank statements: two to three months
- Leases: six or more months of rental history
- Rent receipts: six or more months
After you have applied to refinance your rental property, the lender will review all of your documents during the next step, the underwriting process.
4. Go Through Underwriting on Your Investment Property Refinance
After you have filled out the lender application and submitted all of your financial documents, the lender will review your documents during a process called underwriting. During this time, the lender will check your credit score, verify your pay stubs, bank statements, and/or tax returns.
Then they will request an appraisal to see how much the investment property is worth. This usually costs $300 – $500 (or more) and needs to be paid upfront. The lender will also want to see six or more months of on-time mortgage payments for the investment property and your current leases. Generally, you will need to own the property for six or more months and have six or more months of rental payments before refinancing a rental property.
Lock in Interest Rates for Your Rental Property
The next part of the underwriting process is locking in your interest rate. When you lock in the interest rate, you’re guaranteed to get this rate for a certain amount of time. This means that if interest rates go up, you will still receive the same rate you were quoted. The mortgage rate lock usually lasts 60 to 90 days, and some lenders charge fees to extend it for a longer time period.
Since a refinance can usually be done in 30 to 45 days, your rate lock is good until you complete the refinance process. Contrary to popular belief, there isn’t a certain day or time that is best to lock in your rate. Instead, it’s best to talk to your lender and lock it in once you’re comfortable with the terms of the loan and are ready to refinance your rental property.
The general timeline of underwriting is as follows:
- Lender verifies your income verification documents – one week
- Appraisal is ordered and reviewed – two weeks
- Lender verifies rent rolls, mortgage statements – one week
- Lock in interest rate – one day to lock in rate and it lasts up to 90 days
This timeline varies by lender, and most lenders are completing a combination of things concurrently during the underwriting process. Generally, the most time consuming part of underwriting is scheduling the appraisal and then reviewing the appraisal report.
5. Finish Refinancing Your Rental Property at Closing
The last step in how to refinance rental property with a great rate is to attend the closing. This is also referred to as a settlement: it is when the borrower signs the refinance documents and the previous loan is paid off. The closing usually takes about one hour and is more of a formality since you already own the property.
Prior to closing, your loan officer will give you estimated closing costs so you know what charges to expect. You should bring two forms of identification and certified funds with you.
Generally closing costs on a refinance include:
- Loan application: $250 – $500
- Appraisal fee: $300 – $500 (or more) and usually needs to be prepaid
- Loan origination fee: 1 percent of the loan
- Title search and title insurance: The search costs $200 – $300; the lender’s portion of the policy varies but can be around $400 and up
- Recording fee: This varies by municipality but can be $25 – $250
Now you have completed the refinance process on your rental property: paid the closing costs, paid off the original loan, and received your new loan documents. Keep them in a safe place because you will need them for your tax returns.
If you’re thinking about refinancing your rental property, work with Visio Lending, a reputable nationwide lender that offers refinance loans for real estate investors. They can pre-qualify you online in a few minutes and they offer competitive rates for prime borrowers.
Tax Implications When You Refinance Rental Property
Refinancing an investment property can have certain tax implications. It’s important to consult with a tax expert to make sure you know what they are. In general, after you refinance an investment property, your interest rate is lower so you’re paying less interest. This means that your interest tax deduction will be lower, so you may have to pay more in taxes.
Because the property is a rental property, the IRS treats it like a business that is earning income, and you’re expected to report that income 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
Generally, if your current lender charges you a prepayment penalty for paying the loan off early, then that amount is tax deductible. Some other investment property tax deductions include repairs made to your investment property.
Some repairs can be deducted immediately on your current year’s tax return and others can be deducted over time. Once again, consult a tax professional for specific information.
For more information on the top rental property tax benefits for 2018, read our in-depth tax deduction guide, which includes a free worksheet.
Frequently Asked Questions (FAQ)
What Does It Mean to Refinance Rental Property?
You refinance rental property when you get a new loan to replace your existing loan. The new loan pays off the previous loan. Refinancing is usually done to take equity out of the property or to lower your interest rate.
How Much Money Can You Take When You Refinance Investment Property?
This depends on the lender’s requirements. It’s usually not a specific dollar amount, and instead depends on your loan to value (LTV) and your credit score to see what you’re approved for.
What Percentage of Equity Can You Refinance?
This also varies depending on the lender, but generally your (LTV) needs to be 75 percent or lower for most lenders to consider refinancing your investment property, leaving 25 percent equity in the property. This means that if your property is worth $100,000, you can’t owe more than $75,000 on your current mortgage to be considered for a refinance.
Can You Do a Cash-out Refinance on an Investment Property?
Yes, a cash-out refinance may be an option on a rental property. A cash-out refinance is when an investor takes out a new loan on an existing property to extract equity. The refinance is for more than the current amount owed and the borrower gets the difference in cash.
Is the Interest Rate on an Investment Property Refinance Higher Than a Primary Residence?
Yes, your interest rate on an investment property refinance is generally about 0.5 percent higher than on a primary residence refinance. This is because the lender knows that if a borrower goes into financial distress, they’re more likely to pay their primary residence loan before an investment property loan.
“Interest rates on an investment property are higher than a primary residence. This is all due to the risk inherent in an investment property, since the owner is not living there and would be more likely to walk away from the investment property if faced with financial hardship. For an investment property, a minimum of 25 percent equity would also be required, whereas on a primary residence, you could refinance up to 100 percent of the home’s value on some loan programs. ” – David Goldberg, Vice President Mortgage Division, CBC National Bank
Do You Have to Put Money Down on a Refinance?
Generally the lender lets the borrower roll the closing costs of the refinance into the loan so there aren’t any upfront expenses. However, this varies by lender and you can expect to pay about 2 percent of the loan as closing costs, which include a loan origination fee, an appraisal, title insurance and a mortgage application fee.
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, and then choose a lender that has qualifications that you meet and who offers a low interest rate.
If you want to refinance investment property, contact Visio Lending. They’re a reputable lender that offers competitive rates for prime borrowers. They can pre-qualify you online in just a few minutes and get you funded in as little as 21 days.