If you own a rental property, you can use a refinance loan to lower the current interest rate, alter the repayment term or get some money out with a cash-back refinance. Refinancing a rental property loan is similar to refinancing a loan for your primary home, but the interest rates typically aren't as low as the market average.
Refinance loans are a commonly used loan service. The refinance loan is actually a new loan that's funded and serviced by a mortgage lender or bank. The proceeds of the new loan are used to pay off the existing mortgage loan, thus satisfying the terms and conditions and closing the account. Once the transaction is complete, you begin making payments against the new refinance loan according to the new set of terms and conditions.
If you own more than one property, the home where you live for most of the year is considered your primary residence. If you own other properties, they are classified based on usage. Properties that you rent out to paying tenants are considered investment properties. On the standard residential uniform loan application for the refinance loan, you will need to disclose how the property is used.
Getting approved for a refinance loan on a rental property is similar to getting approved for a refinance on your primary residence. The lender reviews your income, credit history and debt-to-income ratio to determine if you're eligible for the loan. In general, lenders have slightly higher standards for loans on investment properties. Your credit score needs to be at least 620, and your payment history for the current loans must be excellent.
The lender will likely require an appraisal of the property as an approval condition. A licensed appraiser visits the home to determine its fair market value. If your loan-to-value ratio is too high, the lender might decline your loan application. For investment properties, lenders like to keep the loan balance below 80 percent of the home's value to minimize risk. Some lenders won't approve your refinance if your interest rate is already low compared to the rates currently offered.
- Zillow: How to Get Financing for Rental Properties
- Total Mortgage Services: Refinancing Your Investment Property
- Federal Reserve Board: A Consumer's Guide to Mortgage Refinancings
- MyFICO: Get the Score Lenders Use to Evaluate Your Home Refinance Loan
- The Truth About Mortgage: Debt-to-Income Ratio
- Fannie Mae: Uniform Residential Loan Application