Home prices are up — way up.
According to the Federal Housing Finance Agency, home values have increased by about $100,000 since 2012. Depending on your area, appreciation in homes is even greater!
This makes it a great time for real estate investors to utilize the equity in their rental properties. The cash can be used to:
- Buy another rental property
- Make home improvements to drive higher rents
- Payoff other real estate debt. Ensure you are running on the lowest possible cost.
- Prepare cash reserves for the wave of homes that will inevitably come on the market.
With mortgage rates near record lows, it could be time for rental property owners to put their equity to work.
So How Do You Refinance Rental Properties?
Because investment properties are “non-owner-occupied,” there are special rules about refinancing and taking cash out.
For instance, your credit score needs to be quite good, usually at least 680.
Plus, your cash-out refinance must leave you with at least 25% equity in the rental property and decent cash reserves in your bank account.
In addition, you can only use a conventional loan to complete a cash-out refinance on a rental property.
Instead, you’ll need a loan backed by Fannie Mae or Freddie Mac — the two major agencies that set rules for most mortgages. Don’t necessarily stress about how. Your mortgage professional will sort that for you!
Conventional refinance rules are in place making it possible for many landlords with investment equity to cash out on their rental properties.
What About Rates?
As a property owner/investor you are in a unique position. You are concerned about cost, terms, and cash flows, for profit, which is different from the average homeowner.
Rates for a cash-out investment property loan tend to be on the high end for mortgage rates.
Why? Because investment property rates are higher to begin with — about 0.5% to 0.75% above primary residence rates on average.
Then, if you take cash out when refinancing, rates are usually a little higher still. This is because lenders take on more risk when a homeowner pulls equity out of their property. To be blunt, if something goes wrong with a property owner, they will ensure their primary mortgage is covered, not a rental property.
In the end, if you have been on the fence as a property investor, the rates today as you read this article are setting up to be the cheapest of your lifetime. In turn, it is opening the door for real estate opportunities. When money is cheap, the same line of thinking is in place when a property is under-valued. You take action!