Refinancing your mortgage can save you money – that’s no secret. However, refinancing an investment property can be a little different than a primary residence. What should you know before refinancing your investment property? Here are four things:
Expect Higher Interest Rates
Lenders find investment property loans riskier than primary residence loans. As a lender, the thought process here is borrowers are more likely to default on their investment property loan than a loan on their primary residence. With this in mind, investment property loans usually have higher interest rates – around 0.5 percent greater than primary residence loans. With a higher interest rate, does it make sense to refinance? It may not…use this refinance calculator to determine whether it does or doesn’t make sense to refinance.
Stricter Loan-to-Value (LTV) Requirements
Your loan-to-value ratio is crucial to mortgage lenders – even when you are refinancing. What is a loan-to-value ratio? It is your mortgage amount divided by the appraised value of your investment property. Let’s take an example: say your investment property’s assessed value is $250,000 and you have a mortgage for $100,000, your loan-to-value ratio is 40%. The higher this value, the riskier you appear to a lender; and the riskier you appear, the higher the interest rate. Be sure to calculate your loan-to-value ratio before talking to lenders – or speak the lender about their loan-to-ratio requirements before beginning the refinance process.
As an investment property owner, when you refinance you have the same requirements as primary residence owners. Lenders will require your credit score (660 or higher to qualify for a conventional refinance, and above 760 to get the best rates), debt-to-income ratio (your debt level compared to your income level), your income, and tax returns and statements detailing assets and debts. However, because your loan is riskier than that of a primary residence owner, more is required by lenders. In addition to the above requirements, most lenders will also require that you have six months or more of monthly mortgage payments in the bank. You can also expect to pay at least $150 more for an appraisal, and will likely face higher loan-to-value requirements.
Shop for Lenders
Different lenders have different requirements, shop around until you find the right lender for your situation.
While refinancing is harder for investment properties, it may be worth it. However, do keep the following in mind when beginning the process of refinancing your mortgage.
Do you have any questions about refinancing your investment property mortgage? Give TALK Property Management a call; we would be happy to provide you with a list of lenders we trust in the Austin area.