Owning rental property has historically been a smart way to earn residual income. It can often be a profitable long-term investment. If you’ve already built a significant amount of equity in your investment property, you may want to consider refinancing your mortgage.
Refinancing your rental property carries numerous benefits, such as the ability to reduce your interest rate, shorten the loan’s term and pull cash out of the home to potentially finance additional investments or any other endeavors you may want to fund. If a mortgage refinance is completed properly, you should reduce your overall costs while increasing your profits.
The process of refinancing rental property is similar to that of your primary residence. However, refinancing an investment property generally comes with stricter requirements.
For example, the interest rate for an investment property is typically at least 0.5% to 0.75% higher than what you may pay for your primary mortgage.
If you believe refinancing your investment property is the best option based on your current financial situation, keep reading to find out how the process works and what you may need to complete a successful mortgage refinance.
Assemble Proper Documentation
Before you can begin the mortgage refinancing process, you’ll need to gather a few documents. Some of the documents the lender may need include:
- Proof of income: The lender may ask you to show your original pay stubs for the last 30 days. If you’re self-employed, the lender may ask to see a bank statement or form to validate your income.
- Copies of your W-2 or 1099 forms: To verify your employment history and income, the lender may require you to provide copies of your W-2 or 1099 form. For self-employed individuals, the lender may need your completed tax return. These documents will need to be provided to the lender for each listed person on the loan.
- Copy of your title insurance: A copy of your title insurance will need to be provided to the lender so they can verify that the property is yours to refinance. Moreover, the title insurance outlines a legal description of the property and contains tax information.
- Proof of homeowners insurance: The document shows the lender you have protection on your investment property.
- Copies of asset information: The lender may want to know what assets are in your name. This may include bank statements, retirement savings accounts (IRA or 401(k) plan) and investment account information.
If you assemble the proper documents before starting the application, there may not be a need to keep going back and forth, ultimately speeding up the process.
We recommend creating multiple copies of the documents listed above if you need to resend one or more documents.
Apply For A Mortgage Refinance
After you’ve gathered all the pertinent documents and shopped around for your ideal lender, the next step is to apply for a mortgage refinance.
Fortunately, the refinancing process is generally less intricate than the homebuying process. If you have the proper documents handy, the application process may take up to an hour.
Additionally, the lender may pull your credit report. It may be beneficial to check your credit before starting the application.
Lock-In The New Refinanced Rate
Interest rates are volatile and adjust daily. You may want to consider locking down your rate once your application has been processed and approved.
A mortgage rate lock allows you to secure the interest rate provided to you during the application process. If the interest rate increases by the time you close on the new mortgage, you’ll receive the locked rate.
Mortgage rate locks give you ample time to review the refinancing terms without the need to feel rushed by increasing interest rates.
Generally speaking, rate locks can last between 15 and 60 days, depending on the lender. Moreover, the location and loan type may influence the rate lock duration.
If you go past the expiration period for your rate lock, you may be able to extend it, but a fee may be assessed.
The Lender Will Initiate The Underwriting Process
No matter if you choose to lock in your interest rate or not, the lender will start the underwriting process after the application has been approved.
During the underwriting phase of your mortgage refinance, the lender will review your financial information to verify that you meet the loan’s requirements. Additionally, the lender will order an appraisal to determine the property’s condition.
It’s important to alert the tenets of your rental property that an appraiser will show up at the house. The appraiser will take pictures of every room in the house to determine a fair market value and prove to the lender that the price paid for the home is reasonable.
Finish Out With The Closing Process
Once the lender completes the underwriting process, the final step is to close out the loan. The closing process for refinances is generally faster than buying a home.
The lender will give you a Closing Disclosure at least three business days before the closing meeting. The Closing Disclosure will outline the details of your new loan, including the closing costs or any fees associated with the closing process.
During the closing meeting, you’ll sign all of the documents. If you’re doing a cash-out refinance, you should see the funds in your bank account within a few days after the meeting.
Refinance With Arizona Central Credit Union
The refinance process for your rental property is similar to your primary residence. However, stricter requirements like increasing interest is a big difference.
Are you ready to refinance your investment property? Arizona Central Credit Union can help you secure a lower interest and shorten your term. Contact a mortgage specialist for more information.
Want help? Check out Arizona Central Credit Union’s handy mortgage refinance calculator.
