How to Refinance an Investment Property
4 things to know before refinancing an investment property
In today's low-interest-rate environment, owners of investment properties have probably thought about refinancing. But refinancing an investment property is a little different than refinancing a primary residence, so it's important that investment property owners understand what they're up against. Here's what you need to know.
1. Expect to pay a higher interest rate than on a primary residence
Lenders consider loans for investment properties to be riskier than loans for primary residences, partially because people in financial distress are likely to make payments on their primary residence before their investment property so they don't lose their home. This means that investment property loans often come with higher interest rates -- 0.5 percent more is typical, though this varies from lender to lender -- than loans for a primary residence.
This higher interest rate may mean that it doesn't make sense to refinance your investment property. Use Zillow's refinance calculator to determine this, making sure that you consider closing costs, fees and how long you hope to own the property.
2. Prepare for stricter LTV requirements than with primary residences
Your loan-to-value ratio -- this is the mortgage amount divided by the appraised value of the property -- shows lenders how much equity you have in the home. So if your investment property was appraised at $200,000 and you had a mortgage for $100,000, your LTV would be 50% ($100,000/$200,000). The higher your LTV ratio, the more of a risk you seem to the lender (since you don't have that much equity built up in your property) and thus the higher interest rate you can expect to pay.
For investment properties, most lenders will only let borrowers who have a LTV of 75% or lower refinance. This is stricter than with refis of primary residences. Note, however, that LTV requirements for investment properties vary from lender to lender.
3. Know what lenders are looking for
Just as with a refinance of a primary residence, your credit score (most of the time, you will need 660 or higher to obtain a conventional refi, and above 760 to get the best rates), debt-to-income ratio (the amount of debt you have relative to your income) and income matter to getting a refinance on an investment property. But because lenders think investment property loans are riskier than primary residence loans, they will often evaluate you slightly differently.
First, in addition to the typical financial documents required by lenders like tax returns and statements detailing assets and debts, investment property owners may be required to have six months or more of monthly mortgage payments in the bank. Though investment property owners get rental income from their tenants, they may not be able to include this as part of their income if they haven't had tenants paying rent for two consecutive years or more; if they've had tenants for two or more years, they will need to prove -- with checks, bank statements and other documentation -- that the tenants have paid. Investment property owners can also expect to pay $150+ more for an appraisal than would the owner of a primary residence, and they will likely face higher LTV requirements (see above).
4. Shop around
Different lenders have different requirements and terms for investment property refis, which makes it important to shop around. Get at least three quotes from different lenders. Don't forget to consider programs from Fannie Mae and Freddie Mac : Through the Home Affordable Refinance Program (HARP), you may be able to refinance an investment property of up to four units.