Investment Property Refinancing

Owners of investment properties may have considered refinancing in today's low interest-rate environment. Refinancing investment properties is different from refinancing your primary residence. It's therefore important for investment property owners to understand their responsibilities. Let's first look at the top reasons to refinance an investment property.

Why Refinance Your Investment Property?

• Reduce your monthly mortgage payment

• Maximize your return

• Rent income can be increased

• You can use the equity from your investment property for additional properties

• You can use the equity to finance other investment opportunities

Let's now take a look at the things you should know before refinancing your investment property.

Expect To Pay A Higher Interest Rate Than For A Primary Residence

Lenders view loans for investment properties as riskier than loans for primary residences. This is partly because people in financial trouble are more likely to pay their primary residence first to not lose it. This means that loans for investment properties often have higher interest rates, typically 0.5 percent. However, this can vary from lender to lender.

Expect Stricter LTV Requirements Than For Primary Residences

The loan to value ratio (which is the mortgage amount divided with the appraised property's value) shows lenders how much equity your home has. If your investment property were valued at $200,000, and you had $100,000 in a mortgage, your LTV ratio would be 50% ($100,000./$200,000). Your LTV ratio is a measure of how risky you are to lenders. This is because you don't have as much equity in your property. Therefore, you will pay a higher interest rate. Most lenders won't lend to borrowers with lower LTVs than 75% for investment properties. This is a stricter requirement than for primary residence refinances. However, LTV requirements for investment property properties can vary from lender to lender.

Know What Lenders Are Looking For

Refinances on investment properties are subject to the same criteria as primary residence refinances. Therefore, your credit score (usually 660 or more) is important. In addition, because investment property loans are considered riskier than primary residence loans by lenders, they may evaluate you differently.

First, lenders may require additional financial documentation, such as tax returns or statements detailing assets and liabilities, and investment property owners may need to have at least six months of monthly mortgage payments in the bank.

Although investment property owners receive rental income from tenants, this may not allow them to include it in their income. In addition, if they don't have tenants who have been paying rent for at least two years consecutively, they will need to prove that they are tenants.

Compared to primary residence owners, investor property owners may also pay up to $150+ for an appraisal. As a result, they will also likely have higher LTV requirements (see below).

Take A Look Around

Different lenders may have different terms and requirements for investment property refis. Therefore, it is important to shop around. At least three quotes should be obtained from different lenders. You should also consider programs from Fannie Mae or Freddie Mac. In addition, through the Affordable Refinance Program (HARP), you might be able to refinance up to four investment properties.