Refinancing can be a great way to obtain lower interest rates on your mortgage — even for investment properties.
In most cases, people consider refinancing in order to reduce their monthly mortgage payments. If your financial situation has changed and you believe you could qualify for better loan terms, refinancing can be a great option. For real estate investors, in particular, this can help increase profits as they charge the same amount for the property while chipping away at their payments.
However, refinancing an investment property is different than refinancing your own home. Here’s what you need to know about refinancing an investment property.
Strict LTV Requirements
Loan to value ratio (LTV) is your mortgage amount divided by the estimated value of your property. Your LTV demonstrates how much equity you have in the property.
If your LTV is high, it likely means that you haven’t built up much equity — meaning you’ll likely be seen as a higher risk to lenders. As a result, you’ll typically have to pay higher interest rates.
If you’re trying to refinance an investment property, lenders will usually require you to have an LTV of 75% or lower. This is generally stricter than what is required for refinancing your primary residence.
Interest rates are often dependent on risk. If a lender views you as a high-risk borrower, your interest rates will be higher. This is to protect lenders in case you eventually default on your loan.
Unfortunately for real estate investors, lenders often view investment properties as high risk as you are likely to prioritize the mortgage on your primary residence over the mortgage on your investment property.
Of course, interest rates are entirely dependent on the lender, but you can expect your interest rate on your investment property to be around half a percent higher than the interest rate on your primary residence.
Your credit score is very important when applying for any type of loan. However, credit score requirements are often stricter when applying to refinance an investment property.
To get a reasonable refinancing offer, you should aim for a credit score of at least 660, which is very obtainable. However, for the best interest rates available, you may need a credit score of up to and above 760, which may be unrealistic for many borrowers.
What Lenders Look For
Lenders consider a number of other factors when a borrower applies to refinance an investment property. Some of these include:
- Proof of Income
- Homeowners Insurance
- Favorable Debt-to-Income Ratio
- Records of Assets
- Current Appraisal
These factors, among many other aspects of your financial wellbeing, may be taken into consideration by a lender before agreeing to refinance your investment property. You might also be required to provide proof of income from rentals.
Before agreeing to new mortgage terms, be sure to shop around and receive offers from several different lenders. Get at least three quotes to ensure that you are receiving the best deal possible.
Refinancing a rental property is often more difficult than refinancing a primary residence as lenders often have stricter requirements.