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If you own an investment property that earns you rental income, odds are you might be able to refinance into a lower interest rate, especially if you’ve been paying a mortgage on the property for several years.
With mortgage rates still at affordable levels, you might be able to lower your monthly payments. Given this is not your primary residence, refinancing an investment property will not work in the exact same manner. Your lender might have a more stringent set of requirements for you to meet, and additional documentation might be needed.
Here’s how to refinance an investment property in three steps.
1. Consider If Refinancing Is Right For You
As the owner of an investment property, your reasons for refinancing will be very different from the average homeowner. Here are some good reasons for refinancing an investment property.
- You can change the loan terms so that the repayment period is longer, thereby slashing your monthly payments. Or you can shorten the repayment window to pay off the debt faster.
- If you’ve accumulated equity in the property over several years, you can refinance for a higher amount than you owe on the original mortgage. This cash-out refinancing frees up funds to cover other large debts or personal expenses.
- The money from the refinancing could be used to pay for home improvement projects in your investment property. This would increase its value and boost its appeal to potential tenants.
- You can also use the cash from the refinancing as a downpayment to buy another investment property.
Questions to Ask Yourself
Before applying for a refinance, here are some things you should ask:
- Will refinancing help achieve your financial objectives?
- Does your current lender have a prepayment penalty?
- Have you built up enough equity in your home to make refinancing worthwhile?
- Do investment property refinance rates offer savings over your current rate?
- Do you plan to own the property for a long time?
2. Do the Math Before Applying for a Refinance
Before you make the decision to refinance any property, you should run the numbers on the length of time it will take to break even on the transaction. Start by researching refinancing rates from various lenders (at least three) to confirm you can secure a lower rate than what you are currently being charged on the original mortgage loan.
You can then calculate the refinance break-even point by factoring in all the upfront costs of refinancing the loan—the lender’s fees plus the other closing costs—against how much you would save each month. Comparing these numbers will help determine approximately how long it will take to break even and begin saving money.
If you have no intention of owning the…