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Should You Refinance Your Rental Property?

With interest rates lower than they’ve been in decades, is this a good time for you to refinance your rental property? That depends on your situation.

Here are the most common reasons to consider refinancing rental property and things to consider in each case.

The Property Is Underwater
If you owe more on the property than it’s worth, you won’t qualify for a conventional mortgage. You might be able to get a loan through a special program such as Home Affordable Refinance Program (HARP), a federal government program set up to help property owners in this situation. If Freddie Mac owns your loan, you should contact a HARP lender for more information.

You Want A Lower Monthly Payment
Unless your current rate is two points higher than the current rate, simply refinancing won’t accomplish the goal of lowering your monthly payment. Lenders have determined that rental properties are riskier investments, so mortgages are generally 1.5 to 2 points higher than the widely advertised rates. Those lower rates go to residential borrowers with excellent credit who are putting 20% down and are planning to live in the property.

Another way to get a lower payment is to refinance with a longer term. The longer the loan, the lower the monthly payments. However, the interest rate will be higher in that case. That means you’ll have more cash available each month, but you will pay more over the term of the loan. If you plan on selling before the mortgage term, it still could be a good deal for you.

You might also be able to lower your payment with an adjustable rate mortgage, where initial payments are low. One option is a  “5/1 Agreement” with a fixed rate for 5 years, and then a switch to a variable rate from that point onwards.

You Want To Take Cash Out For Other Purposes
You’ll be able to take cash out for non-rental property purposes only if you’ve built up equity in the property. Most lenders require 20%-30% equity (value of the property minus what you owe on it) before they will issue a new mortgage.

To determine your equity, you’ll have to pay for an official appraisal. Again, if you’re thinking of selling before the mortgage is paid off, then go for the longest term possible. That will maximize the amount of cash you’ll get out of the transaction. If you’re unable to refinance, you might be able to get a home equity loan, which could provide you with access to additional cash. Another point to keep in mind is that lenders generally won’t allow someone to have more than four mortgages on rental properties.

Regardless of your reason for refinancing, the deal you ultimately get will depend on the equity in the property, your credit score, the amount of cash you’re able to put in, and your overall debt to income ratio.

Finally, shop around. Each lender has its own set of criteria for granting loans. If your numbers are in line, there is a lender out there who will work with you.