Category: 

How Do I Refinance Investment Property?

Most people shop around to see what different lenders have to offer before signing a contract.
It is important for potential buyers to have an appraisal done to determine the value of property they're interested in buying.
Article Details
  • Originally Written By: Barbi Trejo
  • Revised By: Wanda Marie Thibodeaux
  • Edited By: J.T. Gale
  • Last Modified Date: 11 August 2014
  • Copyright Protected:
    2003-2014
    Conjecture Corporation
  • Print this Article
Free Widgets for your Site/Blog
A chameleon’s tongue is 1.5 times the length of its body.  more...

September 1 ,  1939 :  The Nazis invaded Poland, starting World War II.  more...

To refinance an investment property, you should examine your current debts, as well as the market value and equity in the home. It’s also necessary to look at how the new loan will affect your taxes and how long you plan to be at the house, selecting the term length that is appropriate for your goals and situation. Making an effort to keep your interest rate and fees low will save you money, as will being able to put more into a down payment. Almost all banks will want you to have an appraisal done and provide documentation proving you qualify, but you can find the best deal by shopping around.

Other Debt

The first thing to do when you want to refinance investment property is look at the other debt you have. On the most basic level, banks generally look at your debt-to-income ratio, or the amount of money you owe divided by the money you’re bringing in, to see if you can afford to take on a loan, so if the ratio is high, refinancing at a decent interest rate might be difficult. Another reason to look at the other creditors you’re currently paying is that mortgage refinance agreements usually offer lower interest rates. If you consolidate, you can pay off the bills that charge more and pay a reduced rate of interest to the new lender.

Ad

Legally speaking, a bank typically prefers that you pay off an existing home equity line of credit (HELOC) before approving your loan application. This has to do with whether it is considered “superior” or in “first lien” position — that is, whether it would get paid first if you defaulted and the investment property were sold. Lenders want first lien position because it reduces the risk of loss. In many jurisdictions, superiority is determined by the date the mortgage is recorded, so if you already have a HELOC, a bank might be less willing to put your request through. In some cases, more generous financial institutions might allow you to use the loan to pay off the HELOC, and occasionally, they’ll consider willingly subordinating their lien position, or you can see if the bank that gave you your home equity line of credit will consider offering a new refinance contract.

Market Value and Equity

Equity is the difference between the market value of your home and the amount you have left to pay on your mortgage. As an example, if your property is worth $350,000 USD and it sells for that amount, if you have $50,000 left to pay, the equity is $350,000 - $50,000, or $300,000. Banks usually require larger equity on investment properties, with some looking for as much as 50%, because this indicates you have a significant ownership interest in the home. Some lending organizations, such as the United States Federal Housing Administration (FHA), provide lower equity requirements and have less stringent guidelines.

Taxes

In many areas, such as the United States, tax regulations control how you must handle refinance loan interest. You may or may not be able to take a deduction on it, depending on your reason for taking on the new debt. It is advisable to consult an attorney or certified public accountant (CPA) before beginning the application process, because these laws can be quite complicated.

Time

In most cases, it is a good idea to refinance investment property only if you plan to be at that location for at least 10 years. It generally takes at least this long before all the closing costs and other fees get recouped, which is a major reason why most lenders usually don’t offer agreements any shorter than this. Another way to consider time is to look at your monthly budget. The longer your term, the lower your monthly payments typically will be, which some people need. The tradeoff, however, usually is a higher interest rate. If you’d rather pay less in total over the life of the loan, then the best way to go often is a shorter contract, which provides a better rate of interest but which requires a higher monthly charge.

Interest Rate

For most people, locking in a lower rate of interest is one of the main reasons to refinance. Many banks will allow you to lock in the percentage you pay, but other options are available for investors, as well. Some people, for example, like a mortgage with an adjustable rate, often because the initial payments usually are initially very low. Others look into 5/1 agreements, which have a fixed rate for the first five years and then switch to a variable one. Your financial goals and circumstances both determine which strategy is right for you when you set up your refinance contract.

When you talk with possible lenders, you might hear them talk about “points” in connection with interest. A point is the difference between the current prime interest rate and the rate the bank is going to offer to you, expressed as a percent. If it suggests “prime + three,” for example, it means your interest rate will be three points, or 3%, higher than the prime rate. Point also can refer to all the fees charged, with 1% of the loan amount being one point — a $500,000 contract with $10,000 in fees, for example, would have two points. In either case, ideally, you should keep the number of points as low as you can.

PMI and Downpayment

As you think about whether you should refinance investment property, you’ll need to consider how much you can put toward a down payment. In general, the more you can offer upfront, the less likely it is that you’ll need to buy private mortgage insurance (PMI), which protects the bank in case you default on the loan. Most banks want you to give 20% before they’ll wave this requirement.

Appraisal

Many lenders advise borrowers to obtain an appraisal before getting a new mortgage, because the value of the property determines how much the bank is willing to loan. By having a professional attest to what the home would sell for, you have a better idea of how much money you’ll be dealing with and, subsequently, the likely interest rate and monthly payment amount. You typically must pay up-front for the appraisal, but an added benefit of having one done is that the appraiser can explain exactly what is “good” or “bad” about the house, which lets you make plans for improvements that will bump up how much it’s worth.

Documentation

Once you’re fairly sure you’re going to go ahead with a new contract, you should get all your documentation in order. In short, the lender wants evidence that you really qualify. It likely will ask for proof of income, two monthly checking-account statements, two years of W-2 forms, and a net sheet documenting investments. If you are self-employed, the bank typically will want to see tax returns from the previous two years. Getting a copy of your credit history and score is also important — the lender uses this information to get an idea of your likelihood to repay, and to figure out what interest rate to offer you. Requesting a report also can alert you to any irregularities such as delinquencies and collections that you can remedy for a better contract.

Shopping Around

Not all banks are created equal when it comes to the terms and conditions of their mortgages. Shopping around is the only way to see where the best deal is, and in some cases, knowing what another lender can offer allows you to negotiate for something better. Although time can be of the essence in terms of getting the loan money, it’s generally better to spend a few days or weeks considering all your options than it is to lock yourself into an agreement you end up hating.

Ad

Discuss this Article

Bhutan
Post 5

SurfNturf- Banks do an entire financial analysis of a condominium and if they find that the condo for example, had less than fifty percent owner occupants, the banks will not finance such a property.

Their thinking for this is that owners care for the properties more than renters and a building with more renters than owners will cause high maintenance fees because of the extra damage that will be caused.

Also, banks have a certain criteria with respect to foreclosures. Many banks will not finance condos with complexes that have a higher than 10% foreclosure rate. The best way to get financing in these properties is to check the Fannie Mae site and check their bank owned properties.

Fannie Mae has a Home Path financing program in which they allow a three percent down payment with no private mortgage insurance and great discounted properties. I live in a building that most lenders would not offer financing due to the high rate of foreclosures, but some of the units were available through Fannie Mae. So these units were sold quickly because financing was available.

surfNturf
Post 4

Subway11-The only time I can see a cash out refinance on an investment property is if the investor has had the property for a long time and wants to buy another property that is not financeable. Usually these properties may have foundation or structural issues that the bank decides is to risky to loan money out to. Another category of homes that you can not obtain financing for are condominiums that have a high amount of renters versus owner occupants and a high rate of foreclosures and defaults with respect to maintenance fees. These properties are situated in resort areas with a high degree of seasonal renters.

subway11
Post 3

Suntan12-Property loans regarding a rental property mortgage offer slightly higher interest rates and may require a higher down payment.

These types of investment mortgage loans are riskier for banks because it is not your primary residence and if you have a mortgage on your primary residence, the bank knows that that property would be paid first and if you got into financial trouble the investment property would not be paid.

Some banks charge up to a percentage point higher for a rental property mortgage and may require up to twenty-five percent down payment in the home.

The bank will use an investment property calculator and determine your rental income and overall possible return on your investment. Rental property loans are smart investments if you do not have any other mortgages. This way the investment will be less risky for the bank.

suntan12
Post 2

Bookworm-Bookworm- I agree that I would not do a cash out refinance on an investment property. The real estate market right now is too crazy and if you take out too much equity with a cash out refinance on the investment property, you might put yourself in a position of not being able to sell the property because you suddenly owe more than it is worth.

This is happening to a lot of people and it is a scary situation. If your refinance your investment property and receive lower mortgage rates which results in a lower mortgage payment, then that makes more sense.

The lower monthly payment would produce better cash flow that would give you a better return on your investment every month.

bookworm
Post 1

It is a good idea to refinance if the interest rates drop, but it is not a good idea to refinance and take extra money out.

If times get tough and there is a high vacancy rate you still have to be able to make mortgage payments on your investment property.

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email