Can You Refinance an Investment Property?

Refinancing an investment property involves replacing an existing mortgage with a new one. This financial strategy allows property owners to adjust loan terms, access equity, improve cash flow, or reduce interest expenses. It can also finance further investments and manage real estate portfolios.

Types of Investment Property Refinancing

Two primary types of refinancing options for investment properties are cash-out refinance and rate-and-term refinance.

Cash-out refinance

A cash-out refinance allows property owners to borrow against their investment property’s accumulated equity. This involves taking out a new mortgage for an amount greater than the outstanding balance of the current loan, with the difference provided to the borrower as a lump sum of cash at closing. This capital can be used for property improvements, expanding a real estate portfolio by purchasing additional properties, or consolidating other debts. Lenders typically require a minimum of 20-30% equity in the property for approval.

Rate-and-term refinance

A rate-and-term refinance focuses on changing the interest rate, the loan term, or both, without withdrawing additional cash from the property’s equity. This type of refinance is often pursued to secure a lower interest rate, which can lead to reduced monthly mortgage payments and significant savings over the life of the loan. Property owners might also opt to change the loan term, such as converting a 30-year mortgage to a 15-year one to pay off the loan faster, or extending a shorter term to reduce monthly payments.

Eligibility Requirements

Qualifying for an investment property refinance involves meeting specific criteria related to both the borrower and the property. Lenders assess several factors to determine eligibility and the terms of the new loan.

Borrower qualifications

Borrower qualifications include credit score, debt-to-income (DTI) ratio, and financial reserves. Lenders typically require a minimum credit score around 620. The DTI ratio, which compares monthly debt payments to gross monthly income, is a significant factor, often with a maximum of 50%. Lenders also require evidence of sufficient liquidity, such as several months’ worth of mortgage payments in reserve, to demonstrate financial stability.

Property qualifications

Property qualifications focus on the property’s equity, type, and occupancy status. Lenders generally require a substantial amount of equity in the investment property, often around 25% to 30% for a rate-and-term refinance, and 20% to 30% for a cash-out refinance. The loan-to-value (LTV) ratio, which is the loan amount divided by the property’s appraised value, is a key metric. Maximum LTVs typically range from 70% to 80% for investment properties. The property must be designated as an investment property, not the borrower’s primary residence, and typically rented or intended for rental.

Lenders also consider the property’s condition and income-generating potential. An appraisal determines the current market value, which directly impacts the LTV calculation. Rental income generated by the property is often factored into the borrower’s overall income, demonstrating its ability to support new mortgage payments.

The Refinancing Process

The refinancing process for an investment property typically follows a structured sequence of steps. It begins with the formal application and moves through several stages leading to the finalization of the new loan.

Application

The first step involves submitting a loan application to a chosen lender. This application will require detailed personal and financial information, including income verification, employment history, assets, and liabilities. Property-specific details, such as current mortgage statements and rental agreements, are also requested to assess the investment’s financial performance. Many lenders offer online application portals.

Appraisal and Underwriting

Following the application, the lender will typically order an appraisal of the investment property to determine its current market value. This valuation is crucial as it directly influences the maximum loan amount and the loan-to-value ratio for the new mortgage. Simultaneously, the lender will initiate the underwriting process, which involves a thorough review of all submitted documentation to verify the borrower’s financial standing and the property’s eligibility.

Underwriting and Closing

During underwriting, the lender may request additional documents or clarifications. This stage also includes a title search to ensure no liens or encumbrances affect the new loan. Once underwriting is complete and the loan is approved, the final step is closing. At closing, all parties sign the necessary legal documents, funds are disbursed, and the new mortgage replaces the old one.

Refinancing Costs

Refinancing an investment property involves various fees and expenses, known as closing costs. Understanding these costs beforehand is important for budgeting and determining the true cost-effectiveness of refinancing.

Specific Costs

One common expense is the appraisal fee, which covers the cost of valuing the property to determine its current market worth. This fee typically ranges from a few hundred to several hundred dollars. Lenders also charge loan origination fees, which are compensation for processing the new loan and can be a percentage of the loan amount, often between 0.5% and 1% or more.

Other Costs

Other significant costs include title insurance, which protects both the lender and the borrower against future claims on the property’s title. This fee can vary widely based on the loan amount and state regulations. Attorney or escrow fees may also be incurred for legal services related to the closing. Recording fees are paid to the local government to register the new mortgage deed.

These costs are generally paid at the loan closing and can be a substantial amount, often ranging from 2% to 5% of the total loan amount. While some costs might be negotiable or potentially rolled into the new loan, doing so would increase the principal balance and the total interest paid over time.