Investment properties—real estate properties that are not used as residences—may be challenging to refinance because different rules apply to these holdings. The current low interest rates make refinancing seem like an attractive option, but some property owners are told that the action isn’t financially feasible or that they won’t be able to get a refinance for a rental or investment property. This type of blanket statement is not accurate to every situation, however, and it is possible in many cases to refinance. As a matter of fact, there are even government programs that can be leveraged to accomplish an investment property refinance.
Refinancing an Investment vs. a Residence
The status of property as an investment rather than a primary residence will affect a lender’s decisions regarding a refinance of that property.
- Lenders will generally require a larger amount of equity when refinancing an investment property. For a residence, banks often require 20% equity, but an investment property often requires as much as 50% equity.
- Interest rates and loan points are often higher for investment properties than for a residence.
- If the borrower has taken out a home equity line of credit against the investment property, that loan must usually be paid off entirely before the homeowner can begin a refinance. This, too, is different from the rules for a residence, which often allow the refinance to incorporate the second mortgage along with the first in calculating a refinance loan.
- There may be different tax consequences tied to the refinancing of an investment property, compared to refinancing a residence. With this possibility in mind, the homeowner is advised to consult with a certified public accountant (CPA) or a tax attorney before undertaking a refinance.
Requirements for Refinancing
Some of the parameters for refinancing an investment property are no different from a residential refinance. The homeowner need only look through the requirements, provide the necessary documentation, and make decisions about the available options.
When the property owner first approaches the bank about a refinance, they may be able to lock in the interest rate for the duration of the application process. This ensures that the rate will not be subjected to market increases between the time of initial application and the eventual approval of the loan.
The borrower may be required to pay for private mortgage insurance (PMI) as a protective measure for the bank in case the borrower should default. However, if the borrower can offer a twenty percent down payment, or an equivalent amount in the form of equity in the property, the requirement for PMI may be waived.
The borrower will be required to provide documentation of income and credit score that offer assurance that the financial burden of the loan payments are within their means to meet. Common requests for documentation include bank statements, W-2 forms, copies of tax returns, and documentation of investments.
If the borrower has paperwork in order the application process for an investment refinance should go smoothly and quickly.