Refinancing a Rental Property
Owning a rental property is a great way to generate supplemental (or even primary) income, but it also comes with its fair share of costs and responsibilities. One way to reduce costs and maximize profit with a rental company is through refinancing! It mostly comes down to interest rate. By refinancing your existing loan, you can get a better interest rate - which reduces your monthly payments OR allows you to pay the same amount with more going toward the principal balance of the mortgage. You either reduce your monthly expenses, or accelerate the rate at which you're able to pay down the loan. But what are the requirements? The process of refinancing is fairly similar to applying for a mortgage, even when you are already paying for the property. You can think of a refinance as a "new loan" - and that means much of the documentation and financial requirements will be the same as those needed to get the home loan in the first place! Every case is a little bit different, but here are some of things you should assume you need when seeking refinancing for your rental property: • Homeowner's Insurance - Simply put, you have to prove that the home is insured, whether that's with a recent bill, certified information from the insurer, or some other form of proof. • Title Insurance - Like your homeowner's insurance, you'll need to prove that you have title insurance on the property - which shows that you are the actual owner of the property, verifies the good standing of your existing loan, and provides the lender with important legal information.
• Proof of Income - Like any other loan, you have to provide proof of income. Depending on the type of loan and the lender's refinancing options, that might be W2s, bank statements, tax returns, etc.
The main difference between refinancing and an initial home loan, however, is that refinancing (especially for rental properties) come with steeper requirements on equity, loan-to-value ratios (LTV), and fees, among other things. Investment property loans are among the first to default in a financial emergency, which means that such loans carry more risk for the lender. Some of these steeper requirements help protect the institutions and ensure that people refinancing have the means to continue paying the mortgages on their rental properties. It's important to understand that refinancing does not guarantee a lower interest rate - though that is generally the goal of going through this process. Those with low credit scores face a harder time getting an improved interest rate, and there are many factors involved in the refinancing process. Still, it could be an opportunity to increase the profitability of your investment. If you own rental properties, refinancing is definitely worth looking into!