Refinancing Your Rental Property Mortgage

Key Takeaways

• Refinancing a rental property can help you secure better loan terms, boost cash flow, or leverage built-up equity, but it’s important to understand the process and requirements before moving forward.
• Lenders typically look for solid financials, such as good credit, sufficient equity, and strong income, to approve rental property refinancing.
• Proper preparation, documentation, and professional guidance can help landlords navigate the refinancing steps smoothly and make informed long-term investment decisions.

Are you thinking of refinancing your rental property mortgage? If you are, it can be a great move but make sure to do due diligence first. Understand the reasons for doing so, the applicable requirements, and the pros and cons, among other details.

At a surface level, refinancing an investment property doesn’t differ much from refinancing a home. However, some important distinctions do apply. In today’s blog by TJC Real Estate and Management, you’ll learn important basics of what exactly goes into refinancing a rental property mortgage.

Reasons to Refinance a Rental Property

First you need to properly understand what rental property mortgage refinancing consists of. It’s a process of replacing an existing mortgage on a rental property with a new one. The reasons for doing so can include securing better loan terms, and accessing the property’s equity.

The following are common reasons that compel landlords to consider refinancing their rental property mortgage:

Lower the Annual Percentage Rate (APR)

A lower APR can save you a large sum over the lifespan of your loan. A one percentage drop on a 6% APR, 30-year, $150,000 loan, for instance, could save you almost $34,000. But, how much APR drop you can get will depend on various factors including, your credit score, the prevailing interest rate, and other lender requirements.

When seeking a lower APR make sure to have your financial documents to justify to lenders why you’re a good candidate for reduces rates.

Own the Property Sooner

You may also want to consider refinancing your rental property mortgage if you wish to own the property sooner. To own the property outright sooner, though, you’ll need to make higher monthly payments. And with higher monthly payments, this will also result in reduced interest. Assess your long-term goals and adjust your budgets to ensure you can handle higher monthly payments.

Improve Cash Flow

For most landlords, the main goal of investing in a rental property is generating positive cash flow and passive income. However, if you purchase the property through mortgage financing, the monthly payments are bound to take a significant portion of your profits.

Luckily for you, refinancing the mortgage can open up more cash flow and you can do this in either of two ways:

• You can open up more cash flow by extending the payment period. However, this will cost more in interest charges over the life of the loan.
• You can improve cash flow is by securing a lower annual percentage rate (APR).

Take Advantage of the Property’s Equity

Equity on a property is the difference between the current market value of a rental property and the amount owed on its mortgage. It represents the portion of the property that you outrightly own.

Assume, for instance, that your rental property has a current market value of $500,000. If you still owe $300,000 on the mortgage, then the equity built up on the property would be $200,000. Speak with lenders and financial advisors to see how you can leverage equity to reduce mortgage rates.

Invest in Amenities

You can also consider refinancing your rental property mortgage to invest in the right amenities. These can help boost your rental property’s appeal, allowing you to not only attract and retain quality residents, but also charge more rent.

Steps to Follow to Refinance a Rental Property

The following are the steps you must follow to prepare and keep the ball rolling:

• Gather the required paperwork, which usually includes W-2 forms, pay stubs, and bank or savings accounts.
• Submit the application that you have duly filled out.
• Wait for the lender to review your application. If successful, lock in the rate if you’re satisfied.
• Wait for the underwriting process to complete. The lender will examine all your documentation and verify all the information you have provided.
• Meet with the lender and close on the loan if you are satisfied with the final contract.

Requirements for Rental Property Refinancing

For you to successfully refinance your rental property, there are certain requirements that you must follow.

They include the following:

• Have more equity built up. Determine what your financial institutions loan-to-value ratio to refinance a rental is.
• Have good credit of at least 620. The higher it is, the lower the interest rate will be, and vice versa.
• Have good income sources. Lenders will want to know that you’ll be able to keep up with payments even when the property has no resident. Note, however, that rental income may not qualify.
• Have a good debt-to-income ratio. This is also another requirement that you’ll need to follow to successfully refinance your rental property.

Bottom Line

These are the basics to know when it comes to refinancing your rental property. Before considering the option, though, make sure to do proper due diligence to understand the pros and cons of doing it. Ideally, consult a professional for sound financial and management decision-making.

TJC Real Estate and Management has over 20 years of experience in the Greater Denver area. You can count on us for diligent real estate advice and expert property management help. Get in touch to learn more!