Many people want to get into real estate investing but don’t know the best way to approach it. Real estate brokers or investors know the importance of making a profit. A proven way to do that is by investing in a rental property.
Another important thing is finding the correct loan terms. With the right loan, you can buy or refinance your rental property at a great rate. But what if you don’t have the right loan? In that case, you’ll probably have to pay high-interest rates, which will affect your bottom line.
In this post, we’ll go over the most common questions when people are looking for rental property. You should know about rental property refinance rates and how you can get the best out of rental property investments.
What Mortgage Rates Apply to Rental Property?
Mortgage interest rates for rental properties are the costs that lenders impose on investors who borrow money for such properties. Your financial and credit history and the amount of your down payment will affect the rate you receive.
Rates on investment properties are typically 0.5 to 0.75% higher than average rates. Today’s average rates portray a prime borrower profile, which includes a credit score of 740 and a 30% down payment. Your interest rate will likely be more significant than average if you have poor credit or a small down payment.
Comparison of Rates for Conventional and Rental Property
Because investment properties have a more significant risk than primary residences, their interest rates are always higher than conventional loans. You could likely default on the loan if your tenant doesn’t pay rent. That is why relying on rental income from a tenant to help you finance the mortgage payments for the rental property isn’t a solid plan.
Despite increased rates, long-term real estate investing is frequently an intelligent choice. You can instantly start generating cash flow if you purchase an investment property at the right price and finance it adequately. That doesn’t mean there aren’t t excellent short-term rental property investment options.
However, obtaining a mortgage rate for a rental or rental property is more complex than a personal home. It is this way because lenders demand higher fees for non-owner-occupied deals.
The Procedure For Refinancing A Rental Property
Refinancing a rental property is an integral part of real estate investing. It can help you unlock more value in a property, lower your costs, or even get the cash to invest in another property. But if you’re a new investor, you might not know what it takes to get the best rental property refinance rates and what you need to do to get approved.
— Create equity
It would be best to accrue some equity before refinancing your rental property. The amount of equity you must have before refinancing a rental property varies depending on the lender. However, many prefer to see a loan-to-value ratio lower than 75%, meaning you must have at least 25% equity in your home.
— Obtain the necessary paperwork
To start the refinancing process, your lender will need the following documents from you:
- Evidence of income. You will often need to provide the lender with actual payslips from the last 30 days as proof of your income. If you’re self-employed, your lender might require a bank statement or another type of proof of payment.
- Information about your assets. Your lender will require proof of your assets, such as bank statements, information on investment accounts, and retirement funds.
- W-2 forms or 1099 forms. Lenders need copies of your W-2 or 1099 forms because these documents prove your income and employment history. If you’re self-employed, your lender might also request to see your entire tax return. They will also need financial records from anyone else you include on the loan.
- A copy of your title insurance is required since it lets your lender confirm that the property is yours before approving a refinance. In addition, it gives the lender the property’s legal description and tax data.
- Proof of homeowners insurance. A copy of your home insurance policy demonstrates to the lender that you have adequate protection for your investment.
— Present your application
After you’ve prepared your documents, you can easily apply online. Most of the time, refinancing is less complicated than purchasing a property. To begin, get in touch with your lender. Fill out the lender’s application, send your paperwork, and answer any questions immediately.
— Secure Your New, Refinanced Rate
You often have the choice to lock in your interest rate once your lender has approved your application. This strategy allows you to read the terms of your refinance without being concerned that they will change. Review the contract’s conditions and shop around for a better deal. Pay close attention to the fee and interest schedule.
If you like the offer, you should lock in your pricing as soon as possible. Depending on your lender, rate locks might be in place for 15 to 60 days. How long your rate lock lasts could vary depending on your region and type of loan.
If you don’t want to lock your rate, you can float it and continue with the loan. If you hover, be aware that your rate could alter based on how market rates shift.
— Await underwriting
Following the rate lock, your lender will start the underwriting process. They must examine your supporting papers to confirm details about your income, assets, and property’s state. A week or more may pass during the underwriting stage. After that, the lender will do an appraisal of your property.
An appraisal establishes a home’s fair market value and proves to your lender that the purchase price you have agreed on is reasonable. Additionally, property tax estimates are frequently based on appraisals as well. Before your appraiser arrives, make sure your home is in top condition.
— Close the loan
Refinance closings take place faster than home purchases do. Your lender offers you a document known as a Closing Disclosure three working days or more before your closing meeting.
After the underwriters have given you the all-clear to close, you’ll meet with your lender to review the final contract, pay the closing expenses, and finalize the refinance. Your Closing Disclosure includes information about your new loan’s terms. At the closing, you will sign all of your paperwork and ask any last-minute queries you may have regarding your loan. You’ll notice the money in your bank account if your lender owes you cash within a few days.
As of June 2021, ICE Mortgage Technology reported that the average time to complete a refinance and close a loan was 48 days.
Requirements for Refinancing of Rental Property
Many real estate investors want to get out of the rental business because of the expenses and headaches involved. To keep your rentals, you will need to find a way to keep them profitable. You will want to find a way to reduce your expenses and increase your income.
If you are looking to refinance a rental property or buy more rental properties, you will need to meet specific requirements. You need to know these before applying:
— Decent credit
Before submitting a refinancing application, you should ensure your credit is in excellent standing. Most lenders will give you good refinance rental property rates with a credit score of at least 620. You can still receive the best rates if your credit score is decent (at least 670) or exceptional (800 or above).
— Loan-to-Value ratio
Lenders require you to have more significant equity built up than a conventional mortgage when refinancing a rental property. These loans carry a higher risk because lenders know that borrowers are more likely to fail on investment property loans than on their home mortgages in the case of a financial crisis.
Freddie Mac has a maximum loan-to-value ratio of 75% to refinance an investment property with two to four units, implying you need at least 25% equity. In contrast, Freddie Mac allows you to refinance a one-unit main house up to a 95% LTV.
— Earning potential
Additional important factors are your income level and its sources. Rental income might not be included in the refinance. The lender will be more likely to approve your application if you have roughly six months’ worth of payments saved up in the bank, demonstrating your ability to make payments even if your property is unoccupied.
— Debt-to-income ratio
A lending decision for refinancing a rental property will also consider your debt-to-income ratio. Lenders will want to ensure you aren’t taking on too much debt. A DTI of up to 50% may be sufficient for approval.
Benefits of Refinancing Rental Property
There are many reasons to refinance a rental property. From lowering your interest rate to improving your cash flow, there are many good reasons to refinance a rental property.
— Obtaining a cheaper rate of interest
Rental property interest rates are at least 0.5% – 0.75% higher than they would be for a mortgage on the same borrower’s primary house. With rental property refinance rates, you can save roughly $34,000 over a 30-year on a $150,000 mortgage.
Refinancing may allow you to obtain lower rates if you demonstrate that you manage your rental property effectively. However, remember that refinancing rental property is typically more expensive, both in the interest rate and costs, due to the higher risk.
— Gain more rental income
As the owner of a real estate property, you understand the challenge of keeping up with all the expenses and responsibilities that come along with it. The loan payments and the taxes are constant, but you also have maintenance costs that can vary over time.
With a refinance, you can upgrade the property and increase the amount you earn. Below are some of the improvements to increase your cash flow:
- Improvements to the primary appliances, cabinetry, and floors
- Putting a basement to use as a separate apartment and renting it out
- Interior room painting to improve the appearance of the building
- Improvements to the central heating or cooling system
- The completion or upkeep of exterior construction, such as a fence or pool
— Withdrawing your equity
Your ownership of a rental property increases when you make your regular payments. The financial stake you have in a property is called home equity. All down payments and principal repayments get included in your home equity.
You can borrow money through a cash-out refinance or a home equity loan against the value of your house and get access to the money right away. The cash-out funds can get used to purchase additional real estate or settle other debts or costs. But it’s critical to consider any drawbacks thoroughly.
You don’t own your home outright until your mortgage gets paid off. Until your mortgage gets repaid, your lender maintains a lien on the property. With a lien, your property may be seized by your lender if you cannot repay the loan.
— Shorter loan duration
Refinancing rental property helps reduce the length of your payment period. Even though the monthly payments will be more outstanding, the total interest paid will be lower due to the shorter loan duration. If you’re having problems making payments, a more extended repayment period will result in reduced monthly installments.
You might consider extending your term if you have difficulties paying your monthly premiums. However, your interest rate may not change if you refinance and lengthen your mortgage.
— From Variable To Fixed Rate
If interest rates rise over the long term, an adjustable-rate mortgage can become a nightmare. In a short time, it may result in lower home payments. Investors can get protection from impending interest rate increases by locking in a fixed rate. Regardless of present market condition, a fixed-rate mortgage guarantees that payments will stay the same over the loan’s lifetime.
— Investments in other real estate
You could decide to leverage the equity in your home to finance a down payment for a new real estate investment. Over time, as the value of your house rises, so does the value of your equity. You can leverage this built-up equity into more significant profit by using it to put money down on another asset.
Unlike the other loan options, you can use the money you receive from a refinance for anything, such as investing in short-term vacation rentals or long-term rental properties. You may use the money you get from refinancing for nearly anything you need, and it’s a simple source of cash. With the help of your home equity, you can materialize any goal you may have.
Risks Associated with Refinancing Rental Property
Refinancing risk is the likelihood that a person or business will be unable to refinance existing debt at a crucial point. Lenders emphasize a borrower’s track record of timely debt repayment to reduce refinancing risk. However, variables like changes in interest rates and the state of the credit market often have an even more significant impact on a borrower’s capacity to refinance.
One drawback of refinancing is closing expenses that roll into the loan principal. These can amount to thousands of dollars, usually around 2% of the loan amount. The interest could outweigh any savings you might have realized from refinancing you will have to pay.
When you take out a loan, you usually pay the interest up front. But when you refinance, the payment schedule is altered, and you must pay down the loan’s interest before making principal payments. Before deciding if refinancing is right, carefully evaluate your financial condition.
Selecting the Best Lender
When refinancing rates for rental property, you have a wide range of lenders to pick from. Since you already have a relationship with the lender of your present rental property mortgage, and they may offer you more favorable terms in exchange for sticking with them, it is typically best to go to them first.
However, before choosing, you should compare terms with multiple lenders. Local banks, credit unions, and independent and online lenders are just a few of the numerous lenders you could use. Also, research several federal programs, including Home Affordable Refinance Program (HARP), Freddie Mac, and Fannie Mae.
Additionally, there are specific details you should consider before selecting a lender. Some of these details include:
- Start by finding out if the lender provides loans for refinancing rental properties. Some lenders find it too risky, especially in areas where the real estate market isn’t booming.
- Knowing the lender’s minimum credit score is essential if your credit isn’t in great shape. Find out if they can overlook your credit score if you can demonstrate other aspects of creditworthiness, such as a low debt load.
- Find out the interest rate based on your credit score. If you can reduce the interest rate, you might want to wait and raise your score.
- Add all associated fees, such as the appraisal, loan application, and closing charges. This detail can help you determine the loan’s up-front fees and your ability to repay it.
- Find out your lender’s terms and conditions. If you’re choosing a lender for a cash-out refinance loan, this could be a crucial consideration. It should take from 30 to 45 days. If it takes too long, another investor might buy the rental property you wish to purchase.
The Bottom Line
Refinancing a rental property is a great way to turn a good deal into a great deal. It helps you capitalize on the equity in your properties and repay your loan at a lower interest rate. But it’s essential to ensure that refinancing rental property is right for you and that you get the best rental property refinancing rates.
The Short Term Shop provides the best refinancing options and rates. We can work with you to find out what is best for your unique financial situation and help you establish a strong base in real estate. Contact us right away!