In today’s low-interest-rate environment, investor property owners have likely been thinking about refinancing. But refinancing an investment property is a little different from refinancing a primary home, so it is important that proprietors of investment property understand what they are up against. Let’s first look at the top reasons for refinancing your investment real estate:
Why Refinance Your Investment Property
- Lower your monthly mortgage payment
- Maximize investment returns
- Increase your rental revenue
- Use the equity to buy additional properties in your investment property
- Using the equity to fund other investments
Now let’s remember what you need to know before refinancing your investment property:
Expect a higher rate of interest than on a primary residence
Loans for investment properties are perceived by lenders to be more risky than loans for primary residences, in part because people in financial difficulty are likely to make payments on their primary residence before their investment property so they don’t lose their home. It means investment property loans also come with higher interest rates — 0.5 percent more is common, although this differs from lender to lender — than primary residence loans. This higher interest rate may mean that refinancing your investment property doesn’t make sense.
Prepare for more stricter LTV criteria than with primary residences
Your loan-to-value ratio — that’s the mortgage amount divided by the property’s appraised value — tells lenders how much equity you have in your home. So, if your investment property is priced at $200,000 and you have a $100,000 mortgage, your LTV would be 50% ($100,000/$200,000). The higher your LTV ratio, the more risk you pose to the lender (because you don’t have that much equity built up in your property) and hence the higher interest rate you can expect to be charged. Most lenders would only let borrowers who have a 75 percent LTV or lower refinance for investment properties. This is more stringent than with primary residential refis. But note that LTV investment property specifications vary from lender to lender.
Know What Lenders Are Looking For
Just as for a primary residence refinancing, your credit score (most of the time, you’ll need 660 or higher to get a traditional refi, and above 760 to get the best rates), debt-to-income ratio (the amount of debt you have relative to your income) and revenue matter to get a refinancing on an investment property. But because lenders think investment property loans are more risky than primary residence loans, they will often evaluate you slightly differently.
Next, in addition to the usual financial documentation provided by lenders such as tax returns and statements outlining assets and debts, investment property owners may be expected to have regular mortgage payments in the bank for six months or more.
While investment property owners earn rental income from their tenants, they will not be able to count it as part of their profits if they do not have tenants paying rent for two consecutive years or more; if they have tenants for two years or more, they may have to show — with checks, bank statements and other documents — that tenants have paid.
Investment property owners should also expect to pay $150+ more for an assessment than a primary residence owner would have, and they will likely face higher LTV standards (see above).
Different lenders have different requirements and terms for refis on investment property which makes shopping around important. Get three quotes or more from different lenders. Don’t forget to find Fannie Mae and Freddie Mac programs: You will be able to refinance an investment property of up to four units through the Home Affordable Refinance Program (HARP).