Refinancing Your investment Property
The major difference between refinancing your primary residence and an investment or rental property, is that in addition to the standard paperwork, a lender usually requires at least six months’ worth of mortgage payments (as liquid assets) and a higher loan-to-value ratio for mortgages on investment properties.
What could refinancing do for profitability or return on investment (ROI)?
- If you need to get cash out of the property to purchase other investments.
- If you want to benefit from a drop in interest rates.
- If you plan to move out of your current location and wish to rent the property and/or the loan is due.
- If you want to maximize your (ROI) by lowering your monthly mortgage payment and increasing your rental income.
If you have ample equity, meet borrower requirements, and will benefit from a drop in interest rate, there are just a few more things to consider before you move forward with refinancing.
- LTV Requirements. LTV stands for loan to value ratio, which means exactly what it sounds like. The higher the percentage, the closer your loan amount is to the appraised value of your property. Of course, the higher that percentage, the less equity you have built up in your property.
- You need to have equity in your property to refinance it – plan on at least 20%. Realizing that the more equity you have, the better position you’ll be in to qualify and reap the benefits of a new loan.
- Additional Debt and Loan Eligibility. If you have long term goals of purchasing more rental properties, be mindful that taking on additional debt could have an effect on your eligibility for future loans.
- Mortgage Rates: Lenders consider investment properties riskier than primary residences. Mortgage rates for investment properties usually run about 1 percentage point above owner-occupied residential mortgages.
- NOTE: Lenders will typically not refinance a home that is currently listed for sale.
Even though it is slightly more difficult to refinance the mortgage on your investment or rental property than it is to refinance the mortgage on your primary residence, depending on your current interest rate and loan terms it may be worth the added “hassle” in the long run. Even a small decrease in interest rates or a refinance to a shorter loan term can save you thousands or more over the life of your mortgage loan. If you think it will be beneficial to refinance, reach out to a lender, compare rates available on investment or rental property refinances – then calculate the savings before you move forward with the refinancing on your investment property.