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Rental property refinancing is an opportunity available to all property investors, yet it gets brushed under the rug, and many people continue to be unaware of the benefits associated. The strategy of rental property refinancing can bring about such perks as decreased interest rates, monthly payments, better loan terms, and additional cash flow.

It’s no secret that tools such as accounting software will give you long-term financial benefits, but to refinance your rental property, that may lead to an enormous return on your rental investment. This article will navigate through the benefits of refinancing while also indicating the best times to make your move.

When Should You Refinance A Rental Property

As a rule of thumb, the ideal time to refinance your rental property is when the property’s value is extremely high and the interest rates are low allowing you to reduce your loan interest rate and increase your rentals overall profitability.

Let’s examine a scenario with some numbers:

Bill purchased property before the recession and took out a $200,000 loan at a 5% annual interest rate over 30 years. Bill would be paying $1,073 every month in principal and interest payments. In 30 years, Bill will have paid $186,511 in interest.

Conversely, if Bill took a look at today’s interest rates and saw them sitting at 3%, he would be very tempted to refinance his investment property. So, let’s do the math.

Bill would now be paying $843.21 every month, and he could be looking at spending, at minimum, only $103,554 in interest. Obviously, we don’t know how much of the mortgage Bill had paid on the initial interest rate, but the refinancing could save Bill up to $82,957. But, again, the numbers speak for themselves.

What are the Advantages of Refinancing a Rental Property

The decision to refinance your investment property will have several benefits that would otherwise be seen as a pipe dream. Here are three of the main advantages of rental property financing:

  1. Increasing Rental Income

The cash you make in refinancing may can then be put back into the rental property to increase the value of the property, the overall satisfaction of your tenants, and the amount of rent you can charge. For example, improving the kitchen appliances, re-shingling the room, upgrading the air conditioning/heating, or so much more.

  1. Altering the Mortgage Term

With a lower interest rate, you can opt to reduce the loan term and pay off the mortgage sooner. Doing this will save you money in the long run and help you more quickly build equity in the property.

  1. Divert Funds to Other Properties

The ability to reinvest equity that you take out when refinancing your investment property can help reduce costs, increase payments on other properties, or even finance a down-payment on a new investment, and scale your portfolio.

How to Refinance Rental Property

Step 1: Understand Your Financial Situation

The very first step in refinancing your rental property is to determine if you even qualify for refinancing. Although each lender will have its own criteria for approving refinancing, the following prerequisites are a general guideline of what you will need.

  • Credit score equal to or greater than 660
  • 12-month clean record of payment history on current mortgage
  • The loan-to-value (LTV) must be 75% or lower

Finally, eligible income is just as important as it indicates to the lender you’re capable of paying the loan regardless of your rental income. It’s recommended to have at least six months’ worth of pay in the bank at the time of refinancing to give your lender reassurance that payment will still occur in the event of vacant properties. Although these all necessities need to be met, they’ll need to be accompanied by documentation to support your case for refinancing.

Step 2: Gather Essential Documents

After confirming you meet the above requirements, preparing documentation will be the next step. It would be best to have the following at the ready when preparing an application for refinancing a rental property:

  • Proof of Income – a pay stub will be sufficient in providing an employer-verified document of your taxable income.
  • Proof of Title’s Insurance – this will be used to prove that you are indeed the owner of the property.
  • Proof of Homeowner’s Insurance – to prove that your property is adequately covered, you’ll need to provide a recent statement from your insurance company.
  • W-2 or 1099 Forms – it’s not uncommon for lenders to require these forms or a complete tax return to verify your employment history as well as income. In addition, if other people are named on the loan, they will also need to supply these forms.
  • Asset Information – you’ll need to provide any accompanying documentation related to your other assets, such as savings account statements and other investments.

The documents required are not restricted to the above – you may be asked to provide more information depending on the lender.

Step 3: Compare Lender Rates

Before submitting your application for refinancing your rental property, you should research which lender is offering the best rates. It’s integral to pay specific attention to the interest rate and fee schedule. Furthermore, there are more than just interest rates that you should be concerned about. For example, the APRs are an integral factor of the refinancing – additional costs may be lurking in the agreement that isn’t included in the interest rate.

For example, closing costs – these are fees that are charged when refinancing your property. You may be charged for the extensive paperwork required, processing your loan, and obtaining a credit report. Some can end up paying 2-5% of their outstanding mortgage in closing costs. This bill won’t appear as one large sum but instead the accumulation of small expenses due to the enormous processing.

For more information on avoiding these barriers, have a read of 5 Best Mortgage Lenders with No Origination Fee.

Step 4: Start The Application

Once you have familiarized and educated yourself on the lending landscape, you can begin applying to refinance your rental property. Most applications can be made online, which saves a lot of time, but it also means you’ll need to keep a sharp eye out for their response as to the next steps.

For the most part, refinancing your home is a more straightforward process than buying a home. Regardless of applying physically or digitally, your lender will be able to assist you if you have any queries regarding processes or necessary information.

Step 5: Lockdown Your Refinanced Rate

Upon approval of your application, you’ll be nearing the end of your journey to refinancing your rental property. The lender will typically come back with the option to lock down your interest rate. The offered rate will remain as is for the next 15 to 90 days (depending on the lender), so you won’t have to worry about any crises occurring to change the rate.

Your loan and location are typically the determining factors on how long the rate lock period lasts. However, if you chose to wait longer than the lockdown period, you may be entitled to “float”, whereby the offered rate can change depending on the activity of the market rate.

For example, you were initially offered a refinance on your rental property in March of 2020 at an interest rate of 2.1%. However, the COVID-19 worldwide shut down occurs during your offer period and causes interest rates to plummet to spur economic growth. Therefore, your “float” period may allow you to refinance at the tiny rate of 0.9%.

Obviously, this would be a fortunate scenario; however, interest rates have been known to hover both up and down during a refinance application period.

Step 6: Underwriting Your Loan

When you have accepted the agreed-to interest rate, the lender will then begin the underwriting. Upon going through the multiple steps, the lender will need to verify all of the documentation and information you have provided to them.

This process can take anywhere from several days to many weeks. The underwriting also includes analysis of the property in its current state, so keeping the property in excellent condition throughout this process is a benefit.

Also included in this step is an appraisal. This will gauge the fair market value of your rental property to the lender. In addition, this third party will provide a document indicating whether the price for the unit is reasonable.

For example, Jim’s currently being underwritten for a refinancing application and submits an appraisal to the lender to verify his property is worth $600,000 and thus needs to refinance that amount. However, the assessment comes back valuing the property at $550,000. As a result, Jim’s lender will not loan more than the valuer places on the house. In this case, you may dispute or try to find a new lender.

Step 7: Closing Your Loan

To refinance a property, the closure of a loan is quicker than that of a new home. Approximately three business days is required for the lender to send you the ‘closing document’.

This disclosure will outline the new loan details on your rental property and may also contain the closing costs and supplementary fees you’re obliged to pay.

For more information on the process of refinancing your investment property, visit US News.

Final Words

There is a comprehensive process that will allow you to reap the benefits of rental property refinancing. You are required to have both attention to detail and extensive admin to collect the relevant documents. While remaining aware of the current trends in the market rates, you’ll need to have excellent bookkeeping to provide a comprehensive application to your lender.

Landlord Studio provides multiple tools to make your life a breeze in the property management game. With accounting software and accurate generation of tenancy reports and expenses – you’ll find preparing legal documents a lot easier when all the data you need is in the palm of your hand and you can run professional reports at the tap of a button.

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