A Property Manager’s Guide to Refinancing Rental Properties

Many real estate investors proudly take advantage of financial leverage, borrowing as much money as possible to finance their investment properties. This is typically an advantageous move, giving them access to more purchasing power without much effort or sacrifice required – at the cost of making monthly mortgage payments for the next 15 to 30 years.

Mortgages come in many varieties. Interest rates fluctuate from month to month. Providers have different policies. Terms vary. And the differences between a fixed and variable interest rate mortgage can lead two otherwise similar homeowners to very different financial outcomes.

Sometimes, you get stuck with a “bad” mortgage on a rental property. But there’s good news: with a rental property refinance, you may be able to secure a much higher rental income and better financial position.

What Is Refinancing in Real Estate?

Mortgage refinancing is the process of closing out your old mortgage on an investment property and starting a new mortgage with new variables, often from a new lender.

For example, let’s say you have a mortgage with an interest rate of 6 percent and an outstanding principal of $300,000. Interest rates have dropped since you took out this mortgage, so you take out a new mortgage from a new lender at an interest rate of 4 percent; you pay off the $300,000 principal associated with the old mortgage using funds from the new lender, and you start making monthly payments to the new mortgage lender.

This financial move can be incredibly powerful, if you know how to use it in your favor.

Why Refinance a Rental Property?

Why should you consider refinancing a rental property?

Most real estate investors consider refinancing for one or more of the following motivations:

•       Cash out refinance. When refinancing, you’ll have a cash out option. Essentially, this means increasing the principal you owe on the house in exchange for taking out a lump sum of cash. It’s a way of cashing in on the equity you’ve built in this house, which is ideal if you’re planning major renovations or if you’re interested in securing a new property. This motivation will not apply to you if you don’t have ample equity in your existing property.
•       A lower interest rate. The year 2023 was plagued with consistent interest rate hikes, but there’s reason to believe we’ll see lower interest rates in 2024 and beyond. Getting a lower interest rate typically lowers your monthly mortgage payment, and could conceivably save you thousands, or up to hundreds of thousands of dollars over the course of your mortgage. The bigger the interest rate drop is, and the more time you have to pay off your mortgage, the bigger this advantage becomes.
•       A fixed interest rate. Variable interest rates on mortgages aren’t common anymore, but they’re still potentially financially devastating to people who secure them. Rental property refinancing could be your way of getting rid of a variable interest rate in favor of a fixed interest rate.
•       A new term. Some real estate investors choose to refinance a rental property when they want a new term for the mortgage. For example, if you’re 2 years into a 30-year mortgage and want to pay off the property in 15 years, you can take out a new loan for a shorter term.
•       Adding/removing people. Refinancing is also a good way to add or remove people from the mortgage itself. If you go into a real estate partnership with someone, you can add them to the mortgage. If you go through a separation, you can remove someone from the mortgage and take a new one in your name alone.

Do keep in mind that refinancing a rental property isn’t always worth it. Refinancing is associated with a variety of fees, including loan origination fees, so it’s on you to crunch the numbers and determine if your savings are going to be worth the upfront costs.

Also, there’s a chance you won’t qualify for a new mortgage. Some banks will not refinance a loan under a certain principal threshold – and some may reject you on the basis of your credit score, income, or other variables.

The Refinancing Process

If you’re interested in refinancing, the process usually goes like this:

•       Shopping. Before you even apply, you should shop around. See what kinds of interest rates are available and what types of investment property loans you might qualify for. Crunch the numbers to see if the move makes financial sense.
•       Application. Next, you’ll fill out the main application. You’ll need to provide several details about your existing mortgage and personal finances; be honest during this process.
•       Locking, floating, or float-down. Depending on your lender, you may have the option of locking in the current rate, allowing the rate to float, or utilizing a float-down option to give you the best of both worlds. Inquire about the details of these options with your lender to find out more.
•       Underwriting and review. At this point, underwriters will review your application and determine whether you qualify for the loan. This process may take a few days to a few weeks.
•       Appraisal. Before the funds are granted, your lender may want a formal appraisal of your house to confirm its value.
•       Closing. On closing day, the transfers and new loans will be finalized and you’ll owe any closing costs or fees due.

Is It Worth It?

So is refinancing a rental property worth it?

That entirely depends on your unique circumstances. If your current mortgage isn’t favorable, if you owe a lot of money, or if current mortgage rates and dynamics are favorable, you should definitely consider refinancing. However, you’ll need to analyze all the numbers to figure out, objectively, whether this move is worth the expense and hassle.

Managing rental properties is difficult work. In addition to taking care of tenants, handling maintenance, and dealing with urgent repair requests, you’ll be facing challenging financial decisions – like whether or not refinancing is worth it. 

With the help of a dedicated Houston property management company, everything becomes much easier – so if you’re looking for a partner to assist you and guide you in your rental property management journey, contact Green Residential today!

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Tiffany Ferdus

Director of Operations at Green Residential

Tiffany is the Director of Operations at Green Residential.She has been in the multifamily property management industry for 7 years, serving most recently as an Area Manager in Nashville, TN. Tiffany specializes in all aspects of the property management process.

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