Refinancing rental property could be a good idea for you IF
- your interest rate is more than 1.5 - 2 percent or more higher than the current average
- you own the property free and clear and want to take some cash out
Keep in mind interest rates on investment properties are higher than on a primary residence. Every lender is different, as well as every investment property's situation... but generally lenders charge about .5 - 1 percent higher for refinancing (or financing) a rental property. However, this still means in 2017 so far... your interest rate will BE AT A HISTORICALLY LOW RATE!
Your lender will want to know this rate. And they typically won't refinance investment properties with more than a 70% Loan to Value. Why? The higher the number, the riskier the investment for them.
How to figure it out? Appraised Value / Mortgage Amount = LTV
[example: $200,000 appraised value, divided by a $100,000 loan = 50% LTV).
In this example, most lenders will love refinancing rental property. If the LTV rate is above 75%, lenders will decline.
Lenders will also factor in your personal credit score, just as they would if they were financing your primary home. Credit scores above a 750 seem to get the best rates and service. If you have lower than a 670... it's going to take a lot of work to find a lender willing to loan to you for a rental property refinance. And if you find one, that interest rate is likely to be much higher than average. If your credit score isn't good, seriously consider ways you can quickly raise your score up. There ARE ways!
Debt to Income ratio:
Just as a lender is going to calculate for buying a primary residence, lenders will use your debt to income ratio to determine your refinancing rental property worthiness with this number. Why? They already view rental property loans as riskier than primary home financing, so they want to make sure the person they are loaning money to, can definitely afford to pay them back!
Be prepared to provide tax returns, pay stubs, rental income statements and documentation on other assets you may have.
And most lenders will require you to show that you have a minimum of six months reserves in the bank. Reserve money is money that could be used in the event of a rental property vacancy, or other major issues where you either don't have rental income coming in, or you have a major expense that eats up your income.
Most lenders will require you to pay for an appraisal of the property. And as with most everything else involving rental properties, expect the charge for appraising a rental property to be higher than an appraisal on a primary residence by $100- $200 more than average. Make sure if they require an on-site appraisal, that you are COMPLETELY prepared for it! This means if you have a tenant in place, make sure ahead of time the exterior and interior look well-maintained and clean. Outline your expectations for how you want your tenants to prepare for the appraiser's visit. And make sure you give your tenants plenty (at least one week) of notice if you expect them to do any extra cleaning. Check out the home staging checklist here for quick ways to make sure your property looks its best. You will need that appraised value to come in as high as possible!
Refinancing rental property is a different process than if you were financing your primary residence. The requirements are different, and the interest rates will most likely be a little higher than the regular current interest rates.
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