With mortgage rates hitting record lows, refinancing is more popular than ever. This trend applies not only to primary residences but also to investment properties. When refinancing an investment property, it’s important to consider factors such as your current interest rate, the closing costs involved, and the types of loans available. This article explores how to find the best options for refinancing and what banks evaluate during the refinancing process.

What Banks Evaluate for Refinancing an Investment Property

Refinancing an investment property follows a similar process to refinancing a primary residence, though there are some differences. Banks will assess several key factors during the refinance of an investment property.

A Strong Credit Score

A primary consideration for banks is your credit score. If yours is less than ideal, work on improving it or consider partnering with someone who has a stronger credit profile. A high credit score can secure you a better interest rate, which can help you accumulate equity more quickly and cost-effectively.

A Consistent Debt-to-Income Ratio

Lenders prefer to lend to individuals who can manage and repay their debt effectively. Your debt-to-income ratio, which measures the portion of your income used for debt payments, helps indicate your ability to handle additional borrowing. This ratio is crucial in assessing how much you can borrow and is often as significant as your credit score. Ideally, your debt-to-income ratio should be 36% or lower, according to NerdWallet.

A Clear Understanding of Your Needs

When seeking a refinance for your investment property, it’s important to have a clear idea of the type of mortgage you want. Whether you’re interested in an adjustable-rate mortgage or a cash-out refinance, knowing your preference will guide your discussions with the lender. For a cash-out refinance, be prepared to use your equity to cover expenses like renovations. Entering into discussions with a defined goal will help streamline the process.

No More Than 10 Financed Properties

In 2009, the government increased the maximum number of financed properties an investor could hold from 4 to 10. To refinance your investment property, ensure you have no more than 10 financed properties. Having more properties means more paperwork and potentially a slower approval process. If you have multiple financed properties, consider addressing this at the start of your refinancing process or paying off some loans beforehand, as some lenders may be reluctant to handle such cases.

Higher Equity Requirements

When refinancing an investment property, lenders typically require a higher equity threshold. Generally, the loan-to-value ratio for such refinances is about 75%, meaning you should have at least 25% equity in the property before you can proceed with refinancing.

How to Refinance an Investment Property

Refinancing an investment property is similar to refinancing your primary residence. If you’ve previously applied for a mortgage, you’re likely familiar with much of the process. However, it's essential to have all necessary documentation in order before approaching a lender for refinancing.

Gather the Necessary Documents

Before starting the refinance process, collect the documents the lender will need. These include proof of income such as pay stubs, W-2 forms, tax returns, business tax returns, and proof of any disability or pension income if applicable. You will also need detailed information on rental income from your investment properties. Generally, information from the past two years is required, along with a Schedule E from your personal tax return to help the lender assess the net income from the investment property over time.

Additionally, lenders will require proof of assets and documentation of your ownership of the investment property. Be ready to provide information on your current debts and obligations, including other loans and credit card balances, as well as a recent mortgage statement.

Locking in Your Interest Rate

Once you apply for a refinance, the next step is to lock in your interest rate. By doing this, the bank ensures that the offered rate will remain fixed for a specific period. This means you won't have to worry about rate increases between the offer and the closing of the loan. Typically, a rate lock lasts between 30 to 60 days.

Underwriting

During the refinancing process, your application will go through underwriting, where the bank verifies all the documentation you have provided. After this review, the bank will give final approval for the refinance.

Closing

When it’s time to close on your refinance, the process is similar to closing on a primary residence. Make sure to bring a cashier’s check for the closing costs and your identification. You will sign documents such as a closing disclosure, which provides a detailed breakdown of all costs and fees.

How to Choose the Right Bank for Refinancing Your Investment Property

Ask for Referrals

To find a suitable bank for refinancing your investment property, start by asking for recommendations. People are usually willing to share their experiences with various lenders. Gathering as much information as possible early on will help streamline the refinancing process.

Conduct Research

There's a wealth of information available online. Look for reviews and personal accounts from other investors who have worked with specific banks for refinancing. Use this information to compare options and find the best deal with excellent customer service.

Frequently Asked Questions

Can You Refinance an Investment Property?

Yes, refinancing an investment property is possible. Although it involves additional requirements and restrictions, the process is similar to refinancing a mortgage on a primary residence.

How Often Can You Refinance?

You can refinance an investment property as often as you like, as long as it is financially beneficial. Evaluate your break-even point to determine if refinancing is a wise decision.

What Documents Are Needed to Refinance?

For refinancing, you'll generally need documents that provide proof of income, proof of assets, a credit report, a list of debts, and your current mortgage statement.