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The Definitive Guide to Investment Property Refinance Rates

Here’s what investors need to know before refinancing.


[Updated: Feb 04, 2021] Dec 10, 2020 by Tara Mastroeni
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Interest rates are at record lows, which means that most homeowners are considering refinancing in order to lower their monthly payment. However, when you invest in real estate, there are some extra components to consider beyond just how the interest rate that you're given will affect your cash flow on a regular basis.

With that in mind, below is your guide to investment property refinance rates. Armed with this knowledge, you should have a better idea of whether or not refinancing your investment property is the right option for you.

What are investment property refinance rates?

If you've been thinking about refinancing your rental property, the first thing that you want to check is current interest rates. As of the time of writing, a 30-year fixed rate mortgage has an average rate of 2.71% while a 15-year fixed rate mortgage has an average rate of 2.26%, according to Freddie Mac.

That said, it's important to note that even if you have an excellent credit score, you likely won't get the best rate available on your refinance loan. Unfortunately, mortgage lenders tend to view rental property mortgages as riskier than loans on primary residences.

Put simply, they believe that if you had to make a choice between paying your primary mortgage and paying the loan on your investment property, you would be more likely to default on the latter. With that in mind, as an investor, you should expect to be given a higher interest rate than the going market rate.

Refinance rates: A practical example

Let's say, for example, your home is worth $300,000. If you have a current loan balance of $189,000 and a current interest rate of 4.5% on a 30-year fixed rate mortgage, your current monthly payment would be about $1,240. If you got a new 30-year, fixed rate loan at an interest rate of 3.5%, your monthly payment could be as low as $1,132. That's a savings of $108 per month.

What are the pros and cons of refinancing an investment property loan?

Still, even at a higher interest rate, refinancing can have big benefits. To that end, we've listed some pros and cons of refinancing below.

Pros

At its core, refinancing into a loan program with a lower interest rate gives you a chance to lower your monthly mortgage payment, which would increase the total amount of rental income that you receive from the property.

However, beyond that, refinancing gives you the ability to change your loan terms. For example, you could switch from an adjustable-rate mortgage into a fixed-rate option in order to give your payments more stability. On the other hand, if your loan has a mortgage insurance requirement, but you build up more equity in the home over time, you may be able to get rid of that requirement by refinancing.

Finally, if you choose to do a cash-out refinance, you will have the ability to leverage your home equity to find other costs, such as adding another property to your portfolio or paying for improvements to the property.

Cons

As an investor, the biggest downside to refinancing is that it does come with a few fees. Similarly to when you first took out the mortgage on the property, you'll be expected to pay closing costs in order to take out your new loan. Given that, if you're thinking of refinancing, it's crucial that you find your break-even point to get a better sense of whether or not refinancing is a smart financial move.

How to refinance an investment property mortgage

Now that you know more about what type of mortgage rate you can expect when refinancing an investment property as opposed to a primary residence, as well as some of the benefits and disadvantages of refinancing, the next step is to learn more about how the refinancing process works. Read over each of the steps below so that you have a sense of what to expect from the process as a borrower.

Shop around for the best rate

Anytime you're looking for a new loan option, the first step should always be to shop around for the best rate. Truthfully, every lender charges different fees and will give you a different rate, based on your financial qualifications and credit score. With that in mind, it's in your best interest to get quotes from at least three different lenders before you decide where to apply.

While you're getting quotes, make sure you're giving each lender the same information. That will make it easier to make an apples-to-apples comparison when you have all three loan estimates in hand.

Apply for a new mortgage loan and submit your documentation

Though the process of refinancing is usually much easier than getting a loan for your primary residence, you still have to fill out an application and submit your relevant financial documentation. While every lender will have different requirements, you can generally expect to need to provide the following:

  1. Two years of W-2s or tax returns.
  2. Copies of your recent pay stubs.
  3. Copies of any asset statements from your bank accounts or retirement accounts.
  4. Copy of your title insurance policy.
  5. Proof of homeowner's insurance.

Go through underwriting

Once all your documents have been submitted, your loan officer will give them to the underwriter. They will vet your financial documents in order to make an assessment of your creditworthiness. As long as there are no red flags, the only other factor to consider will be the condition of the property. The underwriter will likely order an appraisal in order to verify that the appraised value of the property is appropriate for the loan amount.

Attend closing

After you've received approval on the loan, the last step is to go to closing. At closing, you will sign all of your new loan documents and pay your closing costs, provided that they haven't been rolled into the loan. Once that's done, the funds will be disbursed as needed. In the event that you did a cash-out refinance, you may even walk out of closing with some money in hand.

The bottom line

At the end of the day, if you're curious about investment property refinance rates, the best thing to do is to talk to a lender. An experienced loan officer can help you review the details of your current loan and your financial situation in order to help you decide if refinancing is appropriate for you. Once you have a better sense of your mortgage options, you can make the decision of whether or not to move forward with refinancing the loan on your investment property.

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