At some point in their careers, many investors wonder if it's possible to refinance their investment property. Luckily, it is possible and the process is fairly easy. With that in mind, below is your guide to the process. Keep reading to learn how refinancing rental property works, the different types of refinances that are available to investors, and the pros and cons of making that decision.
What does it mean to refinance a rental property?
In real estate, refinancing a property is the process of taking out a new mortgage and using it to pay off your existing loan. Typically, your new mortgage will have better terms than your existing loan, which is why it makes sense to go through the hassle of replacing your financing. Usually, people refinance loans in order to lower their monthly payment amount, shorten their long-term, or borrow against their equity in the property.
Fortunately, for the most part, refinancing a rental property works in much the same way as refinancing your primary residence. However, since lenders tend to view investment properties as a greater risk, you may face stricter qualifying standards and be subject to higher interest rates.
How does refinancing rental property work?
Now that you know what it means to refinance an investment property, the next step is to take a closer look at how refinancing investment property works. To that end, we've laid out the steps for you below. Look them over to get a better idea of how this process works.
Gather your paperwork
Just like when you originally took out your mortgage loan, refinancing investment property is all about the paperwork. If you've been thinking of doing a mortgage refinance, it's a good idea to start gathering your paperwork ahead of time so you can help move the loan approval process along.
While every borrower's situation is different, in general, you can expect to provide the following documents:
- Proof of income: Usually, a copy of a recent pay stub will be enough to satisfy your lender, but if you're self-employed, you may need to provide other documents such as bank statements.
- Tax returns or W-2s: Again, these documents will help your mortgage lender verify your income and employment history. Typically, you'll be expected to provide copies of these documents from the last two years.
- Financial statements: Next, you'll need to provide recent statements for any assets you have, including investment accounts and retirement accounts.
- Proof of homeowner's insurance: Here, you'll be expected to provide proof that your investment property is adequately covered by a home insurance policy. Typically, either a copy of the policy or a recent bill will suffice.
- Proof of title insurance: A copy of your title insurance policy will prove to the lender that you're the rightful owner of the property. It will also provide the lender with a lot of information about the property.
- Proof of rental viability: Investment property owners typically need to go one extra step and prove that their investment is a viable rental property. You'll usually be asked to provide proof of rental income and any existing lease agreements.
Shop around for the best rate
Once you have all the paperwork in hand, it's a good idea to get rate quotes from a few different lenders. While going with your current lender may make things easier, there's a possibility that you could be missing out on a lower interest rate. As a rule of thumb, you want to get at least three quotes before applying for a refinance loan. Be sure to provide the same information for each one so you can make an apples-to-apples comparison.
Apply for a loan
The process for applying for a refinance loan is generally less complicated than applying for a new mortgage. However, it still starts with contacting your loan officer and filling out an application. Once that's done, be sure to submit all the documentation that they request and to respond to any inquiries quickly.
Lock in your new interest rate
Many investment property owners decide to take out a new rental property loan in order to secure a better interest rate, which makes locking in your rate a very important step in this process. After you've submitted your application, your lender will give you an offer. Read it over carefully. paying special attention to the interest rate and fee structure. If you're happy with the terms you've been given, lock in your mortgage rate.
Rate locks typically last from anywhere from 30-60 days. On your end, it's important to respond to inquiries quickly so you can be sure to receive loan approval before your rate lock expires. In some cases, you may get the offer to "float your rate," but be aware that this means your rate may go up and down based on prevailing market rates.
Go through underwriting
Next, your refinance application has to go through underwriting. During this step of the process, an underwriter will vet the financial documentation you've submitted, along with the information on your loan application. This step is usually the longest part of refinancing a rental property mortgage. It can take anywhere from a few days to a few weeks to complete.
Close on your new investment property loan
Once you've received a "clear to close," the last step in the process is to go to closing. At closing, you'll sign all the documentation for your new rental property loan and pay your closing costs. In total, the process usually takes between 30 and 60 days to complete.