How To Refinance a Rental Property

Steps and Tips for Refinancing an Investment Property

A couple takes house keys from an agent.
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Owning a rental property can be a profitable long-term investment, because you can build equity from putting renters’ payments toward the mortgage. If you own a rental home and have substantial equity already, you may consider refinancing if the interest rate is right.

Let’s review what you need to know before making a decision on whether to refinance a rental property. Learn how refinancing a rental property mortgage can benefit you, and how it may be different from refinancing a mortgage on your primary home.

Key Takeaways

  • You can refinance mortgages on rental properties just like you can refinance a mortgage on an owner-occupied home.
  • Refinancing benefits can include a lower interest rate, which can save you money in the long term, or access to equity.
  • Requirements for refinancing a rental property may be stricter than requirements for refinancing your primary home’s mortgage.
  • Cash-out refinances and rate and term refinances are among the refinancing options for mortgages on rentals.

What To Know Before You Refinance

Refinancing is paying off your existing mortgage with a new mortgage, so you essentially have a new loan. Many homeowners refinance to take advantage of lower interest rates, which can save significantly on interest payments in the long term.

You can refinance for rental properties just like you can refinance for your primary home, but there are some differences in the processes. For one, refinancing on investment properties may have stricter requirements for rental properties, such as stricter loan-to-value ratios. As with financing a mortgage, you’ll want to keep a stable income, avoid acquiring new debt, and maintain a good credit score.

Rate and term refinances, also called no-cash-out refinances, allow you to adjust both the length and the interest rate of your mortgage without taking any money out from the property.

Some homeowners may want to refinance to tap equity, or the value in their home. Equity builds as you pay off your mortgage, and also when home prices increase. A cash-out refinance provides a lump sum of cash, but you will have a larger loan than you currently have.

Refinancing a rental property with a cash-out loan can give you money to use as a down payment on another rental property, to remodel your home, or fund your child’s college education.

If you want to take out equity from your rental property with a larger loan, consider whether you can afford the new mortgage payment. The new payment will be based on the terms of your refinanced loan, which may drive up the cost significantly if you’re withdrawing a lot of equity.

Refinancing a property is similar to the process of taking out a mortgage, and it can entail the same costs, such as closing costs. Be sure there’s enough equity in the property to make the process worth it.

Calculate how much you will save with a new loan, both in monthly payments and in overall interest. Refinancing may not be ideal if you’ve had the mortgage on your rental for a long time and are paying a significant percentage of your monthly payments toward principal.

How To Refinance Your Rental Property

Refinancing a rental property is similar to refinancing a mortgage on your primary home.

Find the Right Lender

You’ll need to find a bank that offers refinancing for rental properties. You may want to start off with your current lender. Some lenders are willing to offer discounts such as waived application fees and reimbursed appraisal costs if you refinance their loan with them.

Organize Documents

Gather important documents. These include pay stubs, bank statements, and tax returns. If you’re using the income from your rental property to qualify, you’ll also want to have that information on hand. Lenders may, for example, accept executed leases or tax returns as proof of income for your rental property.

Apply for the Loan

Like with a typical mortgage, when you apply for a refinance, your lender will ask for information about your specific financial situation, including information on your income, assets, credit score, debts, value of the property, and the amount you are requesting to borrow.

Lenders will also require you have sufficient cash reserves on hand. The amount you’ll need will vary according to the number of units on the property and the number of properties you currently have financed, among other criteria.

Some lenders allow you to roll the closing costs of refinancing your rental property into the loan.

Underwriting and Appraisal

Once a lender has your information, they’ll need time to determine whether you meet their criteria. They’ll consider factors such as your debt-to-income ratio and credit score, as well as whether you have sufficient equity in your property.

You’ll be required to get an appraisal with a refinance. If your rental home is currently occupied, you may have to negotiate a time with the tenant for an appraiser to enter the home.

Closing

Finally, like with a first mortgage, you’ll close on a refinance loan by reviewing and signing documents, and paying any closing costs you owe. The closing process for a refinance can be faster than for a home purchase.

Refinancing a Rental Property vs. Owner Occupied

The process for refinancing a rental property is very similar to refinancing a mortgage for your primary residence, which, in turn, is similar to the process of getting a mortgage for a home you buy.

However, there are some differences between refinancing for a rental compared to refinancing your main home. Lenders generally have stricter criteria for loans on your investment property, so you may, for example, have to prove a better loan-to-value ratio. Mortgages for rentals also tend to have higher interest rates.

Rental Property Owner Occupied
Multiple refinance options available Multiple refinance options available
Potentially higher interest rates Generally lower interest rates
Stricter qualification requirements More lenient qualification requirements

The Bottom Line

Refinancing a rental property can offer significant money-saving advantages or allow you to access your equity. The process is similar to financing a mortgage for a home you buy, but keep in mind the differences, such as stricter lending requirements and potentially higher rates. In general, you’ll need to have enough equity in the property and a healthy financial history to get approved.

Frequently Asked Questions (FAQs)

When does it make sense to refinance a rental property?

You might want to consider refinancing a rental property if you’d like to save money and can get a lower interest rate. Refinancing may also be a good option for homeowners who want to withdraw equity, or change the terms of their mortgage, such as the length.

How do you deduct refinancing fees for a rental property on your taxes?

You’ll generally use Schedule E (Form 1040) to report both income and losses on your rental property. However, not all closing costs are deductible. You can deduct costs related to interest and property taxes, but not other services fees, such as for title insurance.

How much equity is required for a cash-out refinance on a rental property?

Many lenders will require you to have at least 20% equity in the home before refinancing. In that case, you could only cash out up to 80% the value of your home.

Article Sources

  1. Quicken Loans. “How To Refinance an Investment Property.” Accessed Dec. 23, 2021.

  2. Federal Reserve. “A Consumer's Guide to Mortgage Refinancings.” Accessed Dec. 23, 2021.

  3. Ark Mortgage. “Improve Your Real Estate Investment ROI.” Accessed Dec. 23, 2021.

  4. IRS. “Know the Tax Facts About Renting Out Residential Property.” Accessed Dec. 23, 2021.

  5. IRS. “Rental Expenses.” Accessed Dec. 23, 2021.

  6. Chase. "Beginner's Guide to Cash-Out Refinance." Accessed Dec. 23, 2021.