Refinancing a rental property can be very beneficial for a property investor. There are several steps you should take that can help you determine if you could qualify for a refinance. Learn how to find a lender, the steps in the application process, and how long it can take to get the loan.
Reasons to Refinance
- Lower interest rate: One main reason to refinance is to get a lower interest rate on your loan. This will decrease your monthly mortgage payments, leaving you with more money in your pocket each month. This is money that you can save or invest elsewhere.
- Better terms: By refinancing, you may be able to get a loan with better terms. You can negotiate a mortgage with less money down or a longer or shorter term, depending on your needs.
- Take money out: Another benefit of refinancing is the ability to take out the equity you have in the house. You can then use this money to purchase another investment property.
Determine the Value of Your Property
- Online: If you own a type of investment property that is commonly bought or traded, such as a condo, single-family home, or small multifamily, then you can visit sites like Zillow or Realtor.com and conduct a search in your area to see what similar properties are selling for. This is a good first start to determine the ballpark value of your property and it will not cost you anything.
- Broker price opinion: If you own a type of investment property that is difficult to self appraise, such as a larger multifamily or mixed-use property, or if you just want someone else’s opinion, you can contact a local realtor and request a broker price opinion, also known as a BPO. The broker may be willing to give you this analysis for free in the hopes that you will buy or sell with them in the future.
Loan to Value Ratio
Banks will only loan money as a percentage of the property's underlying value. This is called the loan to value ratio or LTV. Every bank or lending institution will have its own set of loan to value requirements. In general, for rental properties, the lender will require an LTV somewhere around 75% or lower. Some lenders will have slightly higher LTV requirements.
Once you have a ballpark value for your property, you can compare it to your current mortgage to determine the general LTV range you would fall into. If you would calculate that you need between 50 and 80% of your property’s value with a refinanced mortgage, then you should take the next steps to begin the refinancing process.
Choosing a Lender
Reach out to several lending institutions or mortgage brokers and request quotes. Make sure to get a quote from your current lender because they may be able to give you better terms. You can request quotes from brick and mortar lenders, from online brokers, or from a private online lender such as RCN Capital.
You should request rates for a 15 and a 30 year fixed mortgage, as well as for different adjustable-rate mortgages, or ARMs, that they offer. The lender will provide you with their general lending requirements and current mortgage rates. You want to make sure you understand their minimum qualifications and terms for refinancing a property, such as:
- Credit score
- Loan to value requirements
- Length of ownership
- Additional application or appraisal fees
- Closing costs
- Timeframe for receiving the loan
Applying for the Loan
After receiving several quotes, it is time to choose a lender and begin the formal application process. The lender will request several documents to begin the process, which may include,
- Government Issued Identification
- Social Security Number
- Property Deed
- Tax Returns
- Bank Statements and/or Pay Stubs
- Mortgage Statements
- Rent Receipts
To loan you money, lenders are generally looking for a minimum credit score in the mid-600s, property ownership, and/or rental history of at least six months, a stable income, and an LTV of less than 75%-80%.
Once you have formally submitted your application and required documentation, the lender will begin reviewing and verifying the information. This is also the time when the lender will order the appraisal on your property. You will usually have the ability to lock in an interest rate at this point as well. This rate will be valid from 45 to 90 days depending on the lender, which is usually enough time to close out the refinance.
If your finances look good and your property appraises, you will be scheduled for a loan closing. The entire refinance process from start to finish usually takes between 30 and 45 days.
At closing, you will have to pay closing costs, which can include the application fee, appraisal fee, title insurance, loan origination fee, and a recording fee. You will sign the refinance documents and formally pay off the previous loan.