If you own an investment property, refinancing your loan can give you greater financial freedom. The process of refinancing is similar for an investment property and a primary residence, but you’ll have to meet stricter guidelines to refinance the loan on a rental property.
Reasons to Refinance Your Mortgage
Loans for rental properties are riskier for lenders than mortgages for primary residences. When borrowers get into financial trouble, they focus on paying the loan for the house where they live and are more likely to default on the mortgage for an investment property.
That’s why lenders typically charge higher interest rates on loans for rental properties. If your credit has improved or interest rates have gone down since you took out your mortgage, you might be able to lock in a lower rate and reduce your monthly payments.
You might want to change your loan term. Shortening the term will increase your monthly payments and allow you to pay off the mortgage sooner and pay less in interest over the life of the loan. If you’re having trouble keeping up with your payments, you can extend the term and pay less each month. That will cost you more in total interest charges.
You can access some of the equity that you’ve built up and use the money to repair or upgrade the investment property so you can attract new tenants or charge more for rent. You might prefer to use equity from the property you currently own to finance the purchase of another rental property.
Refinancing Requirements for an Investment Property
You’ll have to provide documents showing your income, savings, investments and other assets. The lender will check your credit and will require an appraisal.
Borrowers who want to refinance loans for rental properties must meet stricter guidelines when it comes to equity, credit score and debt-to-income ratio than customers who want to refinance loans for primary residences. You might have to build more equity, pay down debt, or improve your credit before you can qualify.
You’ll need enough cash reserves to cover several months of mortgage payments in case one or more rental units are unoccupied. A lender will also make sure that the rent you’re charging is reasonable based on the rates for comparable properties in the area.
How to Find the Best Loan
Before you refinance the mortgage on any type of property, shop around and compare terms. Even a small difference in the interest rate can have a significant impact on the amount you’ll pay each month and the total you’ll pay in interest over the life of the loan.
Pay attention to the closing costs associated with each offer. When you look at the big picture, you might realize that a lender that offers you the lowest interest rate isn’t offering you the best deal overall.
