How Do I Refinance Investment Property?
When looking to refinance investment property, many factors must typically be taken into consideration. Banks usually require larger equity on investment properties with some banks looking for as much as 50 percent. This usually indicates that the property must be the primary concern of the investor. In addition, when trying to refinance investment property, rates usually are slightly higher and the points for the loan are higher, as well. In the US, when using the Federal Housing Administration (FHA) for refinancing, the required equity is typically much lower when investment property is being refinanced, and the guidelines usually are less stringent.
Home equity lines of credit typically must be paid in-full before beginning to refinance investment property. In some cases, the financial corporation holding the home equity loan on the property may consider becoming the new first mortgage. Normally, the borrower must pay the equity line of credit prior to refinancing the investment property. There may be tax consequences associated with refinancing as well, so it's generally recommended that investors check with an attorney or certified public accountant (CPA) before beginning the refinancing process.
The investment property rate may be locked in for a 0.25-percent raise in the rate until the loan is approved. Most banks will agree to lock in a rate, and this usually is advisable if the rates are regularly adjusted. There are many types of loans available for investors including fixed, variable, and 5/1 which is fixed for 5 years, and then changes to a variable rate. Many banks offer 95-percent financing on refinancing with private mortgage insurance (PMI). PMI is protection for the bank in case the borrower defaults on the loan, and a 20-percent down payment typically will allow for a buyer to not have to purchase PMI.
In most cases, it is only advisable to refinance if the borrower plans to be in the property for ten or more years. This is usually due to the equity requirements, closing costs, and the need to pay off other credit lines. Many banks advise that borrowers obtain a property appraisal before beginning the loan, thereby allowing the borrower to lock in the rate. Borrowers typically must pay up-front for the appraisal, but the borrower usually then is assured of what the bank will loan on the property. All borrowers usually will have to pay for an appraisal at some time during the course of the loan.
The bank typically will seek documentation that proves that an individual qualifies for the loan. The FICO® (Fair Isaac and Company) score usually must be at least 720, so obtaining a free credit report online can be helpful in this regard. With this report, any irregularities such as delinquencies and collections can be remedied. Banks also will seek proof of income, two monthly checking-account statements, two years of W-2 forms, and a net sheet documenting investments. For the self-employed, the bank typically will want to see tax returns from the previous two years.
Refinancing investment property can be fairly simple. The process typically takes a fairly short period of time to complete, providing all the paperwork is in order and the property appraisal value is sufficient. It usually is recommended that an investor always check with several banks before locking in a rate and avoid loans with a pre-payment penalty.
Written by Barbi Trejo
