Refinancing the mortgage of your primary residence is a known financial move. But refinancing an investment property is new to some people. If you’re looking into your chances of getting one, then here’s your quick guide on how to refinance an investment property.
Here are some of the reasons why one might want/need to refinance an investment property:
Much like refinancing a home, refinancing an investment property to lower the interest rate is also possible. But you might be surprised by the big difference between the two’s interest rates. Since investment properties offer higher risks for lenders, they charge more in interest here. That’s because if you run into a financial bump and can only choose one mortgage payment, you’ll decide to cover your personal home. Maintaining two mortgage payments can be unsustainable. Make sure to take extra care about picking a lower rate by refinancing.
Wanting to own your investment property sooner is a thought that many other people have. That’s why many property owners want to refinance to change the mortgage term. Yes, you’ll be paying more each month, but you’ll have less interest over time.If you want to lengthen your loan term so you can have more power in keeping up your monthly premiums, then that’s also possible. You’ll pay less each month but note that this means you’ll have to take care of more interest. There are times when changing the length of your loan may or may not change your interest rate.You may also switch from an adjustable-rate mortgage to a fixed-rate mortgage when you refinance. Many investment property owners often turn to the fixed rate because it’s more consistent.
Until your mortgage balance is down to zero, you don’t own your home. Your lender may seize the property if you don’t pay back the amount you’ve borrowed. This system is the same as an investment property. While you pay off your principal and continue to make monthly payments, more of that property becomes yours. Home equity is the amount of ownership you have in that property. It includes the downpayment and the principal you’ve covered. But paying off the interest doesn’t help in building equity.For example, say you have a mortgage amounting $300,000 with a 20% down payment of $60,000. Over the years, you’ve paid another $60,000 down on your principal, and you have $180,000 left on your mortgage loan. In this example, you have $120,000 worth of equity in your home that you can tap into.You may choose to borrow against the equity in your property and access the cash immediately though a cash-out refinance or a home equity loan. You can use the money to pay off debt credit, fund repairs, or pay anything else.
A few upgrades and repairs might allow you to rent the property out for money. Some of the most common upgrades include the following:
Increase the living space of the home
Finish the basement and make it a separate apartment for rent
Replace missing tiles or the roof
Upgrade the cooling system
Process Of Refinancing An Investment Property
You need to submit the following documents to your lender:
Proof of income
You need to show original pay stubs from the last 30 days. The lender would also ask for a bank statement or another way to validate your income if you’re self-employed.
Copies of your W-2 forms
Your W-2 forms are necessary for the lenders to verify your employment history and your income. The lender may also want to see your full income tax return if you’re self-employed.
Proof of homeowners insurance
It shows that you have enough coverage on the property to protect the investment.
Copy of your title insurance
The title insurance verifies that the property you’re refinancing is yours. This document also offers your lender a legal description of the property and information on taxes.
Copies of your asset information
Prepare copies of your bank statements, retirement savings, and investment account information.
Make sure to gather all these documents before applying for refinancing. You should also keep more than one copy in case you need it. Preparing these papers ahead of time will help speed up the refinancing process.
Contact your lender and start with the application process. Buying a home is more complicated than refinancing it. So just make sure to complete the lender’s application, submit all the documents, and respond to all their inquires quickly.
Once the lender approves your application, you might have the option to lock down your interest rate. You can have the time to read the refinancing terms without worrying about the interest rate changing.
The rates may be locked for about 15 to 60 days. It all depends on your lender. Note that your location and loan type will also be factors on how long your rate locks last.
After you lock in your rate, your lender will start with the underwriting process. During this step, the lender will verify your income and assets. The condition of the property will also be taken into consideration.
Just like when you bought your home, your lender will also order an appraisal. This process will determine the fair market value of your home and will show that the price you’ve agreed on is reasonable.
So make sure that your home looks excellent during the appraisal. You might need to do upgrades since the house isn’t the same since you moved in.
At closing, you need to sign all of the documents and ask any questions you have about your new loan. If your lender owes you cash (happens during a cash-out refinance), you’ll receive it in your bank account after a few days.
The steps on how to refinance an investment property are easier than when you were buying your home. But it doesn’t mean you need to be complacent about the process. So prepare all the necessary documents and dedicate the same energy you did when you were purchasing a home. If you’re unsure about refinancing your investment property, you can contact your financial adviser more a more detailed and personalized discussion.