*Update: As of April 18,2016, clients can refinance up to 85% of the home.
With long-term interest rates still at or near historic lows, now could be a good time to refinance your investment property. However, before you do this, you should be aware of some special requirements that apply to refinancing investment properties.
Things to Know
Before getting ready to refinance your investment property, there are some things you should know.
Odds are if you own an investment property, the concept of equity is old hat to you. Let’s do a quick refresher just in case.
Equity can be thought of as the amount of ownership you have in your home. With each payment you make, more equity is built, and you’re that much closer to paying off your home loan.
Equity is extremely important in a refinance. Often, you must have a certain amount of equity built up. Equity also helps determine how much cash you can take out and reinvest in something else.
On an investment property, the problem of equity is particularly acute. You should be aware that the minimum equity required to refinance an investment property is often higher than it would be if you were dealing with a primary residence or second home.
Beyond the equity issue, there are all the traditional things that come with buying a rental property. These still apply on a refinance.
If you’re using rental income in order to qualify, that income should be shown on your tax returns. If you’re instead using signed lease agreements to substantiate future rental income, only 75% of that rental income can be used to qualify. The remaining 25% is subtracted to make up for any time when the property is vacant due to looking for new renters or periods of maintenance.
Another important factor to consider is the fact that you won’t get the lowest rate available on the market that you might get if this was your primary residence.
An investment property represents a higher level of risk for lenders and investors. If you only have the money to make one mortgage payment in any particular month, you’re going to make the payment on your primary residence first. The higher rate on your investment property compensates for that.
Reasons to Refinance
Although there are a few hurdles to refinancing an investment property, there are just as many good reasons to refinance.
Increase Your Cash Flow
You can drastically increase your cash flow by refinancing the mortgage on your investment property. If you’ve built up considerable equity in the property, you could turn that equity into cash by doing a cash-out refinance. If you refinance to a lower rate and/or increase the term of your loan, that could also lower your monthly mortgage payment and increase your cash flow even more. Using the Quicken Loans Refinance Calculator can help you find out how much equity you have to borrow against and give you suggestions on which loan may work best for you.
Upgrade Your Property and Raise the Rent
The home equity in your investment property can be used to fund improvements to your property and boost your cash flow. The great benefit of refinancing and making home improvements to your investment property is that it increases its market value, thereby allowing you to increase the amount of rent you charge to your tenants. With a cash-out refinance, you could:
- Build an addition to increase living space
- Upgrade the floors, doors, kitchen appliances and cabinetry
- Remodel the bathroom(s) with nicer fixtures
- Upgrade the furnace or central air
- Replace the roof
- Paint or re-side the house to enhance the exterior appearance
Buy an Additional Investment Property
You can use a cash-out refinance out of your investment property to invest further in real estate. Equity in your property increases each year as the mortgage loan is paid down. Any increase in the value of the property will increase your equity in addition to the principal paid. To capitalize on that return, you can tap into that added equity, turn it into cash by refinancing and then apply it toward funding further investment properties. A Quicken Loans Home Loan Expert can help you determine how to use a home equity loan to finance other properties.
Spend Your Money in Other Ways
The opportunity to use equity you’ve earned in your investment property is a major benefit of homeownership. The beauty is that you can refinance and convert the home equity into cash and then use it for whatever you choose. Making improvements to your property or purchasing additional investment properties are good examples of how refinancing can work to your advantage. The cash from your home equity can also be used to:
- Boost your retirement savings
- Invest in stocks or other markets
- Help fund your children’s college tuition
- Consolidate debt
- Take the vacation of your dreams
- Buy a new car or boat
Cash-out refinances provide an easy source of cash and can be a valuable tool for those who invest in real estate. Using the equity in your investment property can help you increase your investment power and increase your long-term wealth. A Quicken Loans Home Loan Expert can help you determine which refinancing options are best for you. Call us at (800) 251-9080 or fill out our short application online, and a Home Loan Expert will contact you.
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