How To Refinance an Investment Property

See How Much You Can Save by Refinancing Your Investment Property

An investment property can be a great source of income. And for some people, refinancing the mortgage loan on an investment or rental property can offer additional financial benefits.

A mortgage refinance can be a strategic move that allows investors to access funds for upgrades, or to secure a lower interest rate and more favorable loan terms. Learn about different types of investment property refinance loans, how to refinance, and when refinancing aligns with your goals as an investor.

What Is an Investment Property Refinance?

An investment property refinance is similar to refinancing a mortgage on your primary home. You replace the existing investment or rental property mortgage with a new home loan, ideally one with terms that can boost your profits.

Securing a loan for refinancing a rental property or other type of investment property can be more difficult than refinancing a primary residence. Lenders often consider investment properties a higher risk, so requirements can be stricter.

When Does Refinancing an Investment Property Make Sense?

You could consider an investment property refinance for several reasons, including:

• Lower your interest rate and monthly payment: If interest rates have dropped since you purchased your investment property, a refinance could lower your monthly mortgage payments and increase your profits.
• Tap into your equity: Investment properties can build significant equity over time, and you can potentially borrow against that equity with a low rate to fund renovations and increase the value of your investment property even more. You could also use the money to pay down higher‑interest debt or invest in additional real estate properties.
• Adjust your loan term: Shortening or lengthening your loan term could help align your loan with your investment strategy and goals, like lowering your monthly payment, building equity faster, or switching from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage.
• Consolidate loans: A refinance can help simplify your finances by combining multiple property loans into one or transferring equity from one property to another. This could make your payments easier to manage and help with your overall investment strategy.

If you think a refinance is the right move for you, the next step is to make sure you meet all general mortgage refinancing requirements.

Requirements for Investment Property Refinances

Investment property refinances typically have more rigid criteria than primary home purchases and refinances. Investment refinances might be expected to meet the following requirements:

• Credit score: You'll likely need a credit score of at least 620, but higher scores will help you benefit from better (lower) refinance rates.
• Loan-to-value (LTV) ratio: Many lenders set an LTV limit of 75% for a cash out refinance on a 1-unit investment property, meaning you'll likely need at least 25% equity.
• Debt service coverage ratio (DSCR): While LTV looks at how much equity you have in a property, DSCR measures whether your rental income is enough to cover the new mortgage payments. Lenders often prefer a DSCR of at least 1.25 for investment property refinances.
• Debt-to-income (DTI) ratio: A lower DTI is preferred, but usually your DTI must be no more than 50%. The maximum DTI allowed varies by lender and could be 36% (or lower) in some cases.
• Cash reserves: Depending on the lender you're working with, you may be required to have six months of mortgage payments in reserve.
• Property seasoning: Most lenders require the investment property to be owned for a specific period of time before refinancing, typically between 6 and 12 months.

These standards can help lenders offset the higher risk of properties that aren't constantly owner‑occupied, like second homes and rental properties.

Investment Property Refinance Options

The right refinance choice for you will depend on your investment goals, which could include increasing your monthly cash flow, reducing your mortgage payment, or leveraging your property's equity for other investments. Here are the main options to consider:

Cash Out Refinance

Cash out refinancing lets you replace your current mortgage with a larger one and get the difference in cash after paying off your original mortgage. Lenders typically require your investment property to have at least 25% equity to qualify, and these refinances often come with slightly higher interest rates. Plus, all mortgage types usually have stricter credit and financial requirements for investment properties than primary residences.

Rate-and-Term Refinance

With a rate-and-term refinance, your loan is replaced with one that has a different loan term, rate, or both, in some cases. You can refinance an ARM into a fixed-rate mortgage for a more stable monthly payment. You can also refinance your loan term from 15 to 30 years or vice versa, depending on your cash-flow goals.

How To Refinance an Investment Property

Here's what it can look like to do an investment property refi:

1. Calculate your break‑even point: Weigh the savings you're likely to see from refinancing against the upfront costs and interest costs. If you plan to sell the property before you recoup those costs, refinancing may not make sense right now. But that could change with time.
2. Check your eligibility: Review your credit score, equity, cash reserves, and rental income to ensure you meet most minimum typical lender requirements.
3. Gather the required documentation: You can expect to provide tax returns, W‑2s or 1099s, rental income statements, pay stubs, bank statements, property insurance, and mortgage statements.
4. Browse lenders and compare offers: Mortgage rates and fees can vary widely, so comparing APRs, closing costs, and loan types can help you find the best fit for your financial goals. Check with your current lender to see if they offer any deals for existing customers.
5. Submit your application: Apply, provide documents, and prepare for an appraisal, which is when your lender will reassess the property's current market value.

After you get approved, you'll close on the loan and pay any closing costs.

Final Thoughts on Investment Property Refinances

Refinancing an investment property can help you lower monthly costs, tap into equity at low interest rates, and grow your real estate investment portfolio. But you should consider what you want to get from the refinance, study current market conditions, and check lender and loan requirements before moving forward.

Freedom Mortgage is here to help with your investment goals, whether your current mortgage is with us or you're a new customer hoping to save money with a refinance. Get started today and explore your options.