should you pay off or refinance

Ultimate Guide to Refinancing a Rental Property

As the owner of a rental property, your goal is to reduce your expenses and maximize your profits. Refinancing can help you achieve this goal. It can enable you to lower your interest rate and slash years off the term on your mortgage.

But how do you know if and when it’s smart for you to refinance your rental property? And what can you expect from the process? Here’s everything you need to know.

Why should you refinance a rental property?

Refinancing a rental property can be a good idea for several reasons. But one of the best reasons is the chance to reduce your interest rate.

With a lower interest rate, you can enjoy lower monthly payments and save money on the overall cost of the mortgage.

And once your mortgage is paid off, you’ll be able to use your rental income to maintain or improve your property or simply increase its profitability.

What are the requirements for refinancing a rental property? 

Refinancing a rental property is similar to refinancing a primary residence. Certain requirements may vary, however, due to the increased risk.

For example, credit requirements are typically more strict when refinancing a rental property. Interest rates on loans tend to be higher as well.

Loan-to-value ratio

In most cases, lenders require a minimum loan-to-value (LTV) ratio of 75%. That means you need to have at least 25% equity in your rental property to refinance it.

If you’re concerned you won’t meet the requirements, the Home Affordable Refinance Program (HARP) may be a good option for you (more details on that below).

Even if you meet the 25% equity requirement, your interest rate will likely be about 0.5% higher than it would be for a similar loan on a primary residence.

Fortunately, a higher credit score could help you secure a lower rate.

Credit score

Again, credit requirements are generally more strict when refinancing a rental property.

In most cases, you’ll need a credit score of at least 620 to qualify. But a score of 740 or higher can help you qualify for a better rate.

Debt-to-income ratio

In addition to the above, lenders will also consider your debt-to-income ratio. Your debt-to-income ratio is the sum of your monthly debt payments divided by your gross monthly income.

You’re generally required to have a debt-to-income ratio of 43% or less. It may vary, however, depending on the lender. So, it’s important to do your research ahead of time.

What documentation will I need to provide?  

The necessary documentation for refinancing a rental property varies from lender to lender. However, most lenders require the following:

  • Homeowners insurance.
  • Rental lease.
  • Two recent bank statements.
  • Two recent pay stubs.
  • Recent investment account details.
  • Two years of tax returns.
  • A payment statement showing the breakdown of the principal, insurance, and taxes.

It’s also a good idea to keep a minimum of six months of mortgage payments in a bank account for the property you hope to refinance. By doing so, you can prove to the lender that you’re able to make payments if the property experiences a long vacancy period.

Can I refinance a rental property under HARP?

In 2009, the government established the Home Affordable Refinance Program (HARP). This program allows individuals with minimal equity in their home to refinance their mortgage.

So, if you don’t meet the minimum loan-to-value requirements, HARP may make it possible for you to refinance your rental property.

What are some other benefits of HARP?

  • It gives you the opportunity to refinance even if your property has decreased in value and you owe more on your mortgage than the property is worth.
  • There are no credit score requirements or appraisals necessary, making it fairly easy to qualify.
  • It doesn’t involve an underwriting process, so refinancing tends to be quicker and easier with HARP.

How do you qualify for HARP?

You must meet the following requirements to qualify for HARP:

  • During the last six months, you haven’t had any late mortgage payments older than 30 days.
  • You only have one late payment during the past 12 months.
  • The property you’d like to refinance must be your primary residence, 1-unit second home, or 1-4 unit investment property.
  • Fannie Mae or Freddie Mac owns your current loans.
  • Your current loans must have originated on or before May 31, 2009
  • Your loan-to-value ratio is greater than 80%

5 steps to refinancing a rental property 

Once you’ve decided you want to refinance your rental property, there are a few steps you’ll need to follow to secure your new loan.

1. Contact your current lender and shop around

Find out what your current lender can offer you, but don’t stop there. Continue shopping around to ensure you get the best deal. You may also wan to consider working with a mortgage broker who can help you through the process.

Be sure to request an estimated closing statement from each lender. The estimated closing statement is designed to itemize all closing costs and provide you with a good idea of how much you will be required to pay.

2. Select your refinance lender

As soon as you’ve completed your shopping and compared all of the rates offered to you, you’ll need to select a lender. Keep in mind that opting for a trustworthy lender is just as important as choosing one that offers you a good interest rate. Go with your gut feeling and select a lender that you believe you can depend on.

3. Provide additional documentation if necessary

When the lender you’ve selected receives your signed loan papers, the underwriting process will commence. During this process, your lender may request additional documentation to confirm your eligibility and finalize everything.

4. Schedule a property appraisal

A lender will likely require a property appraisal to verify the value of your property. It’s your job to schedule the appraisal—and remember to inform your tenants (if you have any).

5. Sign the final loan documents

The final step is to sign and return the loan documents to your lender. They will confirm the information and collect your closing costs and any other required payments.

As soon as your lender receives the funds, they will send a payment to your old lender so that your old mortgage can be paid up. At this point, you’ll be ready to make your new payments.

Rental property refinancing FAQs

Can you deduct refinancing costs for a rental property?

On your primary residence, you can only deduct qualified points and interest. However, you may deduct all costs associated with obtaining a new mortgage for your rental property. These costs can include points, loan origination fees, mortgage insurance premiums, credit report fees, and appraisal fees.

Yael Ishakis, Vice President of FM Home Loans, explains that many accountants will write off expenses to save their clients on taxes. She states that this may negatively affect their client’s rental mortgage.

For instance, one of her clients told her that he makes $30,000 a year on his rental. When she looked at his tax return, he was actually in the negative after his deductions.

“Rental property borrowers should be prudent in making sure their tax returns aren’t expense heavy,” suggests Ishakis.

Can you get a home equity line of credit (HELOC) on a rental property?

You may wonder whether you can get a HELOC on a rental property to help fund a home improvement project or perhaps pay off some debt.  While you may be able to find a HELOC lender that allows you to do so, it will be a challenging process.

Many lenders believe that you don’t have as much of an incentive to keep up on your payments since you aren’t the individual occupying the home.

As a result, it’s uncommon for lenders to offer HELOCs on rental properties. And if you are able to find a lender that does, you’ll likely have to meet stricter requirements.

Get started

Once you’ve decided you want to refinance your rental property, the next step is to find your best offer. But it can be difficult sifting through all your options to get there.

Simplify the process by heading over to our mortgage refinance review page. You’ll be able to review and compare today’s leading lenders side-by-side to find the right one for you.

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