When refinancing a mortgage, essentially, you have two choices. If you refinance your existing loan to get a lower interest rate or change the terms, it is called a rate-and-term refinance. If you want to extract some of the equity in your home—perhaps to do a renovation, pay down debts, or help pay college costs—you may take a cash-out loan.
But it’s important to understand how these two refinance options can affect your financial position.
- The basic options when refinancing a mortgage are a cash-out, or rate-and-term refinance.
- You can extract some of the equity in your home with a cash-out refi.
In a rate-and-term refinance, you exchange the current loan for one with better terms.
- Cash-out loans generally come with added fees, points, or a higher interest rate, because they carry a greater risk to the lender.
- It may be possible to extract some cash from your refinance without incurring the extra fees of a cash-out loan by taking advantage of the overlap of funds at the end of one loan and the beginning of another.
An Investment Property Refinance Can Make Your Loan More Manageable and Give You the Cash You Need to Improve Your Tenant’s Space. Here’s A Quick How-To Guide.
Refinance an Investment Property: The Advantages
Refinancing Your Investment Property Gives You a Number of Advantages. Here Are Some of The Reasons Why You Might Want to Refinance Your Investment Property.
Lower the Refinance Rates for Your Investment Property
You Might Be Surprised by The Difference Between an Investment Property and A Primary Property’s Interest Rate. Typically, The Interest Rate for An Investment Property Runs At Least 0.5% – 0.75% Higher Than What the Same Borrower Might Pay for A Mortgage on Their Primary Residence.
Investment Properties Represent a Larger Risk for Lenders. Banks and Online Lenders Know That If You Run into Financial Hardship and Can Only Afford a Single Mortgage Payment, You’ll Always Choose Your Personal Home.
To Account for This Risk, Lenders Charge More in Interest on Investment Properties. Two Mortgage Payments Can Be Unsustainable, So You Might Want to Search for A Lower Rate by Refinancing.
Refinancing Can Give You Access to Lower Rates If You Can Show That You Are Successfully Managing Your Rental Property. Compare Your Current Interest Rate with Offers from Lenders Before You Refinance.
Change the Mortgage Term.
Have You Thought About Changing Your Investment Property’s Loan Terms So You Own Your Investment Property Free and Clear Sooner? You Pay More Each Month, But You Accrue Less Interest Over Time When You Shorten Your Loan’s Term.
You May Also Be Able to Refinance from An Adjustable-Rate Mortgage to A Fixed-Rate Mortgage. Investment Property Owners Often Choose to Switch to A Fixed Interest Rate Because Their Rates Don’t Change on A Month-To-Month Basis, Which Gives You a More Consistent Set of Monthly Expenses.
Until Your Mortgage Balance Is Zero, You Don’t Technically Own Your Home Free and Clear. Your Lender Keeps a Lien on The Property Until You Pay Back Your Mortgage. A Lien Means That Your Lender May Seize the Property If You Don’t Pay Back What You Borrowed. This System Is the Same Whether You Own Personal Property or Investment Property.
Increase Your Rental Income
Are You Getting the Most Rent Possible Out of Your Investment Property? Refinancing to Make A Few Improvements or Repairs Might Allow You to Rent the Property Out for More Money. Some of The Most Common Upgrades You Can Make to Increase Your Cash Flow Include:
- Adding an Additional Segment to The Home to Increase Living Space
- Finishing A Basement and Renting It Out as A Separate Apartment
- Replacing the Roof and Missing Tiles
- Upgrading the Major Appliances, Cabinets and Floors
- Repainting the Interior Rooms to Make the Property Look Nicer
- Finishing or Maintaining an Outdoor Structure Like a Pool or Fence
- Upgrading the Furnace or Central Cooling System
Finance Other Real Estate Investments
You May Want to Use Your Home Equity to Finance a Down Payment If You See a Real Estate Investment That You Need to Snatch Up Quickly. As Your Home Grows in Value Over Time, Your Equity Increases in Value Beyond What You Pay on Your Principal.
You Can Even Parlay This Built Equity into More Profit by Using It to Put Money Down on Another Investment. You Might Even Have Bigger Goals, Such as Using the Money You Get from Your Refinance to Invest in A Different Type of Real Estate Venture, Like A Commercial Property.
The Process of Refinancing a Rental Property or Investment Property.
Step 1: Build Equity
Before You Can Refinance Your Investment Property, You’ll Need to Build Some Equity. Lenders Have Different Requirements for How Much Equity You Have to Have in Your Property Before You Can Refinance, But Many Want to See A Loan-To-Value Ratio That’s Lower Than 75%, Meaning You’d Need to Have At Least 25% Equity in Your Property.
Step 2: Gather the Proper Documents
- Proof of Income: You’ll Usually Have to Show the Lender Your Original Pay Stubs from The Last 30 Days. Your Lender May Ask for A Bank Statement or Another Form of Income Validation If You’re Self-Employed.
- Copies of Your W-2 Or 1099 Forms: Lenders Require Your W-2s or 1099 Forms Because They Use Them to Verify Your Employment History and Your Income. Your Lender May Also Ask to See Your Full Tax Return If You’re Self-Employed, And Will Require This Information from Everyone You Include on The Loan.
- Proof of Homeowners Insurance: This Shows the Lender That You Have Enough Coverage on The Property to Protect Your Investment.
- Copy of Your Title Insurance: Your Title Insurance Helps Your Lender Verify That the Property Is Yours to Refinance. It Also Provides the Lender with A Legal Description of The Property and Information on Taxes.
- Copies of Your Asset Information: Your Lender Will Want to See Your Assets, Including Bank Statements, Investment Account Information and Retirement Savings.
Gather the Proper Documentation Before You Apply for Refinancing to Help Speed Up the Process. Keep More Than One Copy Available in Case You Need to Resend Any Documents.
Step 3: Apply
Refinancing Your Home Is Usually Less Complicated Than Buying a Home. Contact Your Lender and Begin the Application Process. Complete the Lender’s Application, Submit Your Documents and Respond to Any Inquiries Quickly.
Step 4: Lock Your New, Refinanced Rate
Once Your Lender Approves Your Application, You’ll Usually Have the Option to Lock Down Your Interest Rate. This Gives You Time to Read Your Refinancing Terms Without Worrying About Your Interest Rate Changing. Rate Locks May Last Between 15 And 60 Days, Depending on Your Lender. Your Location and Loan Type May Also Play a Role in How Long Your Rate Lock Lasts.
If You’re Happy with The Rate You Get, Lock It in Through Your Lender As Soon As Possible. If Not, You Can “Float” Your Rate and Proceed with The Loan. If You Float, Keep in Mind That Your Rate May Either Go Up or Down, Depending on How Market Rates Change.
Step 5: Underwriting
An Appraisal Determines the Fair Market Value for A Home and Shows Your Lender That the Price You’ve Agreed to Pay for A Home Is Fair. Appraisals Are Also Often Used to Estimate Property Taxes. Make Sure Your Home Is Looking Its Best Before Your Appraiser Arrives. You May Also Want to Put Together a List of Upgrades You’ve Made to The Home Since You Moved In.
Step 6: Closing
After Underwriting Concludes, It’s Time to Close on Your New Loan. Closings for Refinances Happen More Quickly Than Home Purchases. At Least 3 Business Days Before Your Closing Meeting, Your Lender Gives You A Document Called A Closing Disclosure.
Your Closing Disclosure Covers the Details of Your New Loan, As Well As Any Closing Costs or Fees You Need to Pay. At Your Closing, You’ll Sign All of Your Documents and Ask Any Last Questions You Have About Your Loan. If Your Lender Owes You Money, Such as During A Cash-Out Refinance, You’ll See It in Your Bank Account Within the Next Few Days.