How to Refinance a Mortgage on a Rental Property

13 July 2025

Refinancing a mortgage on a rental property may sound complicated, but with the right strategy, it can be a smart move. Whether you're looking to lower your interest rate, reduce monthly payments, or tap into equity for another investment, refinancing can help strengthen your real estate portfolio.

But how does it work? And is it the right time to refinance your rental property? Let’s break it all down.

What Does It Mean to Refinance a Mortgage on a Rental Property?

Refinancing a mortgage simply means replacing your existing loan with a new one. The goal? To secure better terms, lower interest rates, or tap into equity built up in your property.

For rental properties, refinancing works similarly to a primary residence refinance—except lenders tend to have stricter requirements since investment properties carry more risk.

Why Refinance a Rental Property?

Before diving into the process, let’s talk about why you might consider refinancing your rental property. Here are some of the main benefits:

1. Lower Interest Rates

Mortgage rates fluctuate over time. If interest rates have dropped since you took out your loan, refinancing could lower your rate and save you a significant amount of money over the life of the loan.

2. Reduced Monthly Payments

Lower interest rates often translate to lower monthly mortgage payments. A reduced payment can improve your cash flow, making it easier to manage other expenses or reinvest in new properties.

3. Cash-Out Refinancing for Equity Access

If your rental property has appreciated in value, a cash-out refinance allows you to pull equity out of the home. You can use this extra cash for renovations, buying additional properties, or even paying off other debts.

4. Shorten Your Loan Term

Want to pay off your mortgage faster? Refinancing into a shorter-term loan (like switching from a 30-year to a 15-year mortgage) can help you own the property free and clear much sooner.

5. Switching from an Adjustable-Rate Mortgage (ARM) to Fixed-Rate

If your current mortgage has an adjustable rate, refinancing into a fixed-rate loan can provide stability and predictability in your monthly payments.

How to Refinance a Mortgage on a Rental Property

Now that we know the benefits, let’s go step by step through the refinancing process.

1. Check Your Credit Score

Lenders are more cautious with investment properties. A strong credit score (typically 680 or higher) improves your chances of getting approved for a good interest rate.

💡 Tip: If your credit score is lower, consider improving it by paying down debts, making timely payments, and avoiding new credit inquiries.

2. Review Your Loan-to-Value Ratio (LTV)

LTV is a critical factor in rental property refinancing. Most lenders require an LTV of 75% or lower, meaning you need at least 25% equity in the property.

To calculate your LTV:

📌 Loan Balance ÷ Property Value = LTV (%)

For example, if your rental property is worth $300,000 and your current loan balance is $200,000:

✅ $200,000 ÷ $300,000 = 67% LTV (which is within refinance approval range)

3. Verify Debt-to-Income Ratio (DTI)

Lenders also assess your DTI to see if you can manage additional debt. A lower DTI (typically below 43%) indicates financial stability and improves your approval chances.

To calculate your DTI:

📌 Total Monthly Debt Payments ÷ Gross Monthly Income = DTI (%)

4. Shop Around for Lenders

Not all lenders offer the same rates or terms, so it’s wise to compare multiple lenders. Consider banks, credit unions, and online mortgage lenders to find the best deal.

🛑 Pro Tip: Look beyond the interest rate—review closing costs, lender fees, and loan terms before making a decision.

5. Gather Required Documents

Lenders will request financial documents, including:
✔ Recent tax returns
✔ Pay stubs or proof of rental income
✔ Bank statements
✔ Current mortgage statement
✔ Property appraisal report

6. Get a Rental Property Appraisal

Just like when you first bought the property, lenders require an appraisal to determine its current market value. This step is crucial, as it impacts your LTV ratio and loan approval.

7. Assess Refinancing Costs

Refinancing isn’t free—there are closing costs involved, usually ranging from 2% to 5% of your loan amount. These may include:
💰 Loan origination fees
💰 Appraisal costs
💰 Title insurance
💰 Underwriting fees

If refinancing costs outweigh the benefits, it may not be the right financial move. Calculate your break-even point by dividing total refinance costs by monthly savings to see how long it’ll take to recover expenses.

8. Lock in Your Interest Rate & Close the Loan

Once approved, lock in your interest rate to prevent fluctuations before closing. At closing, you’ll sign final loan documents and officially replace your old mortgage with the new one.

Boom! You’ve successfully refinanced your rental property.

When Is the Best Time to Refinance Your Rental Property?

Timing is everything in real estate, and refinancing is no exception. Consider refinancing when:

✔ Interest rates are significantly lower than your current rate
✔ Your property value has increased, allowing you to access equity
✔ Your credit score has improved since getting your original mortgage
✔ You need better cash flow and lower monthly payments

Avoid refinancing if:

❌ Interest rates are high or rising
❌ You plan to sell the property soon (refinance fees may not be worth it)
❌ Your credit score is low, making it harder to secure a good loan

Common Mistakes to Avoid When Refinancing

🚨 1. Ignoring Closing Costs: If the refinance costs are too high, you might not save as much as expected.

🚨 2. Choosing the Wrong Loan Term: A shorter loan may save money long-term but can increase monthly payments beyond affordability.

🚨 3. Not Checking Your Credit First: A low score can lead to higher interest rates. Work on improving your credit before applying.

🚨 4. Not Shopping Around for Lenders: Sticking with your current lender without comparing options can cost you better rates elsewhere.

🚨 5. Refinancing Too Frequently: Every refinance comes with costs. Doing it too often can eat away at your savings.

Final Thoughts

Refinancing a mortgage on a rental property can be a game-changer for investors—reducing costs, increasing cash flow, and even unlocking equity for further investments. But, like any financial move, timing and preparation are key.

Make sure to evaluate your credit, compare lenders, and assess costs before deciding if refinancing is the right move for your rental property. If done strategically, it can help you build long-term wealth and expand your real estate portfolio successfully.

Happy investing!