Refinance an Investment Property: What to Know

By Bill Lyons | Published on January 11, 2024

In this article, we’ll discuss the key benefits and considerations associated with refinancing an investment property. From evaluating your options to the loan process, we’ll provide you with the knowledge and insights you need to make strategic decisions that align with your investment goals.

8 Reasons to Refinance an Investment Property

When you first start investing in real estate, the goal might not always be to eventually refinance. However, refinancing an investment property is a strategic financial move that can provide investors with various benefits and opportunities. Whether you’re driven by changes in the market, a desire to optimize cash flow, or a need for increased flexibility, understanding the key reasons behind refinancing an investment property is crucial. Here are a few compelling reasons why individuals might choose to refinance: 

Interest rate reduction

A common reason for refinancing an investment property is to take advantage of lower interest rates. Investors can significantly decrease their borrowing costs by securing a new loan with a lower interest rate. 

Refinancing an investment property to achieve an interest rate reduction can bring about several benefits for property investors, such as: 

• Cost savings over time: The primary and most immediate benefit of refinancing for a lower interest rate is the reduction in monthly mortgage payments. With a decreased interest rate, investors can enjoy lower installment amounts, freeing up cash flow that can be directed toward other investments, property improvements, and personal financial goals. 
• Profitability: As the borrowing costs decrease, the property’s profitability increases. The difference in interest payments between the original and refinanced loan can contribute to the property’s net income, enhancing the inventor’s return on investment (ROI).

Improved cash flow

Refinancing allows you to restructure your mortgage, potentially resulting in lower monthly payments. This improved cash flow can be invaluable for investors, providing greater financial flexibility for property-related expenses, unforeseen circumstances, or additional investments. 

Investors can allocate more resources to property maintenance and upgrades with enhanced cash flow. This can be critical for keeping the property competitive in the market, attracting higher-quality tenants, and potentially increasing rental income. 

Access to equity

Refinancing can unlock an investment property’s accumulated equity. This liquidity can be used for various purposes, including property renovations, acquiring additional real estate assets, or diversifying investments across different sectors. 

Again, this access to equity enables investors to fund property renovations and improvements to enhance the property’s market value and increase rental income. The ability to upgrade and modernize the property can contribute to its long-term competitiveness in the real estate market. 

Beyond real estate, accessing equity allows investors to diversify their investment portfolios. This may include investments in stocks, bonds, or other sectors, reducing reliance on the real estate market and creating a more balanced and resilient investment strategy. 

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Debt consolidation

Refinancing an investment property allows investors to consolidate multiple debts into a single loan. This simplifies financial management, reduces the number of creditors and payments, and can result in a lower overall interest rate, saving money in the long run. 

Additionally, by consolidating debts into a single loan, investors reduce the number of creditors they must interact with. This minimizes the administrative burden of managing multiple accounts, tracking different due dates, and dealing with various lenders. 

Term adjustment

Adjusting the loan term is a strategic approach to refinancing. Investors can choose to shorten the term for quicker equity building or lengthen it for reduced monthly payments, depending on their financial goals and market conditions. 

Shortening the loan term can accelerate equity building, but it typically comes with higher monthly payments. This results in faster debt reduction and an accelerated accumulation of equity in the property. 

Conversely, investors may lengthen the loan term through refinancing to reduce their monthly payments. This provides short-term relief and enhances cash flow, making it easier to manage property-related expenses. 

Property value appreciation

In a market where property values have appreciated, refinancing allows investors to capitalize on this increase. 

Refinancing in a market with property value appreciation allows investors to achieve more favorable LTV ratios. As property values increase, the loan amount can represent a smaller percentage of the property’s current value, potentially leading to improved financing terms and reduced overall risk. 

Property appreciation also provides enhanced borrowing capacity. With higher property values, investors can access a greater amount of capital through refinancing. This liquidity can be redirected towards property improvements, new investments, or other ventures, providing a valuable resource to capitalize on the increased market value. 

Risk mitigation

Adjusting the loan structure can help investors manage interest rate risk. This strategic move ensures a level of predictability in mortgage payments, providing stability in uncertain economic environments. 

Moving from a variable to a fixed-rate mortgage provides investors with stability in interest rates. Fixed-rate mortgages lock in a consistent interest rate for the entire loan term, shielding investors from fluctuations in the broader interest rate environment. This predictability ensures a level of certainty in mortgage payments. 

Refinancing can also protect against interest rate increases. If interest rates are expected to rise, transitioning to a fixed-rate mortgage protects investors from potential future rate increases. 

Increased rental income

Refinancing provides the necessary capital to invest in renovations and upgrades that can enhance the overall value of the investment property. This added value positions the property as a more attractive rental option for prospective tenants. 

The improvements made also allow investors to justify higher rental rates. Tenants are often willing to pay more for a property with upgraded features, improved aesthetics, or enhanced functionality. 

Refinance Options for Rental Properties

Refinancing rental properties can improve cash flow, allow you to access equity, and optimize loan terms. Ultimately, you have two primary options for refinancing rental properties — cash-out refinance and rate-and-term refinance. Each option presents unique advantages and considerations, providing property owners with tailored solutions to meet their investment goals. 

Cash-out refinance for an investment property

Cash-out refinancing allows property owners to tap into the equity accumulated in their rental property. In this scenario, a new mortgage is taken out for an amount greater than the existing mortgage balance, and the difference is received as cash. This option allows investors to use the extracted funds for various purposes, such as property improvements, debt consolidation, or additional real estate investments. The benefits of a cash-out refinance for a rental include: 

• Access to liquidity: Unlocking equity provides immediate access to cash. 
• Potential tax advantages: Interest on the cash-out portion may be tax-deductible. 
• Portfolio expansion: Funds can be used to diversify your investment portfolio. 

While a cash-out refinance offers many benefits, investors should weigh the pros and cons. When you refinance, the overall monthly mortgage amount increases, potentially leading to higher monthly payments. Additionally, property values can fluctuate, affecting your overall return on investment. 

Rate-and-term refinance for an investment property

A rate-and-term refinance focuses on adjusting the interest rate, loan term, or both without extracting additional funds. This option best suits investors who want to optimize their mortgage terms, potentially lowering monthly payments or shortening the loan duration. Rate-and-term investment property refinancing can help you secure a more favorable interest rate, improving the property’s overall financial outlook. A few benefits of this type of refinance for a rental property include the following:

• Interest savings: Locking in a lower interest rate can help reduce overall borrowing costs. 
• Improved cash flow: Lower monthly payments can enhance the property’s cash flow. 
• Debt management: Borrowers can restructure loan terms for better debt management. 

The main difference between a rate-and-term refinance and a cash-out refinance for a rental property is that a rate-and-term doesn’t provide liquidity. Therefore, these two options are best suited for different types of real estate investments and goals. 

How to Refinance an Investment Property

It’s crucial to follow a systematic approach to navigate the process of refinancing an investment property. Here are the crucial steps to refinance your investment property to ensure a well-informed and successful experience: 

Build equity in your investment property

Before applying for a new loan, it’s crucial to build equity in your investment property. Lenders often look for a healthy loan-to-value (LTV) ratio, which is a proportion of the property’s value compared to the outstanding mortgage balance. Higher equity levels improve your chances of securing favorable refinancing terms. 

To build equity, investors can monitor local real estate trends to capitalize on property appreciation over time. They can also renovate or upgrade the property to enhance its overall value or begin paying off more of their mortgage every month. 

By proactively building equity, you position yourself for a more favorable refinancing experience, providing flexibility and potential cost savings. 

Ensure you meet lender requirements

Meeting lender requirements is crucial for a successful refinancing application. Lenders assess various factors, including creditworthiness, property value, and debt-to-income ratio. Understanding and addressing these requirements upfront can streamline the process: 

• Credit score: Maintain a strong credit score to qualify for competitive interest rates. 
• Loan-to-value ratio: Aim for a lower LTV ratio by building equity in the property. 
• Debt-to-income ratio: Manage existing debts to ensure a favorable DTI ratio. 
• Property appraisal: Confirm the property’s current value aligns with lender expectations. 

By ensuring you meet lender requirements before applying, you increase the likelihood of approval and secure more advantageous refinancing terms. 

Find out if you meet lender requirements with the Griffin Gold app. Assess your rental property finances, compare loan types, and discuss your options with a mortgage professional. Download the app today. 

Organize your documentation

Gathering and organizing the necessary documentation is a critical step in the refinancing process. Lenders require comprehensive information to assess your financial stability and property value accurately. The exact documentation you’ll need will depend on the type of refinance loan. In any case, being proactive in preparing this documentation can expedite the approval process. Essential documentation includes the following: 

• Income verification: Provide recent pay stubs, tax returns, and rental income history documentation. If you’re applying for a DSCR loan, the lender won’t take into account your personal income and will instead focus on the rental income of the property to determine your loan eligibility. 
• Property documents: Include current property tax assessments, insurance information, and recent utility bills. 
• Credit report: Obtain a current credit report to showcase your creditworthiness. 
• Proof of assets: Document savings, investments, and other assets to strengthen your financial profile. 
• Loan information: Gather details on your existing mortgage, including the current loan terms and outstanding balance. 

Compare investment property refinance rates

An important step in refinancing is to compare investment property refinance rates offered by different lenders. This step is pivotal since the interest rate on your loan significantly impacts your overall borrowing costs and, consequently, the financial viability of your investment. Key considerations when comparing interest rates include: 

• Market research: Stay informed about current market trends and interest rates. Understanding the broader economic landscape can help you anticipate potential fluctuations in refinance rates. 
• Lender reputation: Research and consider lenders with a solid reputation for reliability, transparency, and favorable customer experiences. Online reviews, recommendations, and testimonials can provide valuable insights. 
• Loan terms: Don’t just compare interest rates; consider the overall terms of the loan, including closing costs, loan duration, and any fees associated with financing. 
• Consultation: Seek advice from financial advisors or mortgage professionals to better understand the nuances of different loan offers. They can help you understand the complexities of the market and find a loan that aligns with your financial goals. 

Fill out an application and lock in your rate

Once you’ve identified a favorable refinance rate and lender, the next step is to fill out a comprehensive application. This application gathers essential information about your financial standing, the property in question, and the purpose of the refinance. Here are a few tips to help you complete the application:

• Be accurate: Provide accurate and up-to-date information on your application. Any discrepancies may delay the approval process. 
• Be prepared: Organize and make all necessary documentation readily available. This includes proof of income, property details, and any additional documents requested by the lender. 
• Be responsive: Respond promptly to ensure a smooth application process if the lender requires additional information or clarification. 

Once the application is submitted, some lenders offer the option to lock in the refinance rate. This can be advantageous, especially if you anticipate potential rate increases in the market. Rate locks typically have an expiration date, so it’s essential to complete the steps quickly. 

Complete an appraisal and underwriting

After submitting your application and locking in your rate, the lender will initiate the appraisal and underwriting processes. These steps are crucial in assessing the property’s current value and determining your eligibility for the refinance. 

A professional appraiser will assess the property’s condition, features, and overall market value. They’ll compare your property to similar properties in the area to establish a fair market value. 

This information is then passed to underwriters, who analyze your financial history, credit score, and overall financial stability to assess your ability to repay the loan. The underwriting process thoroughly evaluates the property’s value, condition, and potential income generation. 

During this process, the lender may request additional documentation. Being proactive and responsive is essential to keeping the refinancing process on track. 

Close on your loan

Once the appraisal and underwriting processes are successfully completed, the final step is closing on your loan. This involves signing the necessary documents, paying any closing costs, and officially transitioning to the new loan terms. 

During the closing process, you’ll carefully review all documents, ensuring accuracy and comprehension. Be prepared to pay closing costs, which may include appraisal fees, title insurance, and other associated expenses. 

You’ll sign the closing documents in the presence of a notary before the lender funds the new loan and pays off the existing mortgage. 

The closing process is the final step in the investment property refinance process. Attention to detail helps ensure a smooth transition to your new loan terms. 

Is Refinancing an Investment Property Worth It?

Determining whether refinancing an investment property is worth it involves careful evaluation of various factors, as the decision is highly contingent on individual circumstances, financial goals, and market conditions. Here’s a breakdown of key considerations to help you assess if refinancing your rental property is the right move: 

Equity position

Refinancing may be appealing if your investment property has appreciated in value or you’ve made significant mortgage payments resulting in substantial equity. Higher equity often opens doors to better loan terms and increased financial flexibility. 

Conversely, if your property has lost value or you have minimal equity, refinancing can be challenging, and the potential benefits might not outweigh the associated costs. In fact, you often will be unable to refinance your loan until you’ve reached a certain amount of equity in the property. 

Current interest rates

One of the primary motivations for refinancing a rental property is to secure a lower interest rate. If current market rates are notably lower than your existing rate, refinancing could lead to significant savings over the life of the loan. 

Always keep an eye on broader economic trends. If interest rates are anticipated to rise, locking in a lower rate through refinancing sooner rather than later could be advantageous. 

Loan terms and monthly payments

Refinancing allows you to adjust the terms of your loan, such as duration. Refinancing offers this flexibility if you want to shorten the loan term to build equity faster or lengthen it to reduce monthly payments. 

Assess how the new loan terms would impact your monthly cash flow. Lower monthly payments can enhance your property’s cash flow, providing financial flexibility. 

Financial goals

If your goal is to access equity for other investments, renovations, or debt consolidation, a cash-out refinance might align with your objectives. Refinancing can also be a strategic move to mitigate risks, such as transitioning from a variable to a fixed-rate mortgage to secure a stable repayment structure. 

Closing costs and fees

Consider the closing costs and fees associated with refinancing your investment property. These may include appraisal fees, origination fees, and other transaction costs. Evaluate whether the potential savings justify these additional expenses. 

You can perform a break-even analysis to calculate the time it will take for the savings from refinancing to offset the upfront costs. If you plan to sell the property before reaching this break-even point, refinancing might not be worthwhile. 

Market conditions and property value

Assess the current market conditions and the potential for further appreciation in property values. Higher property values improve your LTV ratio, including the terms you can secure through refinancing. You should also consider local real estate trends, as they can impact the overall return on investment and the potential for future appreciation. 

Personal circumstances

Evaluate your long-term plans for the investment property. If you intend to hold the property for a long time, the benefits of favorable refinancing terms may have a more substantial impact. Consider your risk tolerance and financial stability. If your circumstances are subject to change, a more conservative approach to refinancing might be more beneficial. 

Access Competitive Investment Property Refinance Rates

Accessing competitive investment property refinance rates is crucial for optimizing your real estate investment strategy. Specializing in commercial loans, Griffin Funding offers rental property refinancing loans to enhance your financial position. By leveraging our expertise, you can explore a range of loan types tailored to your unique goals, whether it’s reducing borrowing costs, increasing rental income, or accessing equity. 

Contact Griffin Funding or apply for a loan online today. 

Bill Lyons

Bill Lyons is the Founder, CEO & President of Griffin Funding. Founded in 2013, Griffin Funding is a national boutique mortgage lender focusing on delivering 5-star service to its clients. Mr. Lyons has 22 years of experience in the mortgage business. Lyons is seen as an industry leader and expert in real estate finance. Lyons has been featured in Forbes, Inc., Wall Street Journal, HousingWire, and more. As a member of the Mortgage Bankers Association, Lyons is able to keep up with important changes in the industry to deliver the most value to Griffin's clients. Under Lyons' leadership, Griffin Funding has made the Inc. 5000 fastest-growing companies list five times in its 10 years in business.