Should You Refinance Your Long-term Rental Property When Rates Drop?

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After multiple rate hikes over the past four years, the Federal Reserve (Fed) began dropping rates for the first time since March 2020 this past September.

The Fed’s Summary of Economic Projections (SEP) hopes to see median policy rates fall below 4.375% by the end of 2024–and below 3.375% by the end of 2025. However, the timing and pace at which rates decrease are subject to change based on multiple factors, including inflation and other future economic data.

For residential real estate investors, these predictions seem like an attractive reason to refinance their long-term rental loans. With interest rates nearly impossible to gauge week-to-week or month-to-month, anxious investors are glued to the Fed and its SEP projections.

But when–or should–you refinance your rental property?

Below, we’ll discuss when is a good time to refinance your rental property, the pros and cons of refinancing, and investor tips for refinancing:

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When to Refinance a Mortgage on a Rental Property

While several factors indicate a good long-term rental property, a favorable rental loan helps increase a property’s profitability and ROI. Regardless of your original loan agreement, refinancing options can help increase cash flow, grow your property portfolio, or simply lower your interest rates–saving you money in the long run.

Let’s look at the top reasons to refinance a rental property:

Lower loan interest rate and monthly payments

With the recent interest rates lowering, now may be an opportune time to refinance. Refinancing rental property calculators indicate that lowering your interest rate by just 0.25% can lower your annual payments by $240 on average. While we saw a refinancing boom in 2020 and 2021–with rates well below 3%–we likely won’t see the same increases over the last half of 2024.

Why?

For starters, many investors and homeowners alike took advantage of pandemic rates, either buying into or refinancing their loans at the time. While 4.99% is a great number, especially given the interest rate highs of the past year, many investors are still sitting comfortably with an interest rate below 5%.

However, the investment game never sleeps. For investors that have taken on projects with 8%, 7, or even 6% interest rates, refinancing and lowering your interest rates and annual payments may be the right choice moving into 2025.

Shorten loan terms

Most long-term rental loans offer 30-year terms. However, once rental income starts pouring in, and rental investments meet or exceed financial expectations, many investors look to shorten the length of their loan.

Why?

By refinancing and lowering the term length of a loan, investors can reduce interest rates–helping them save significantly. Refinancing rental property calculators show that shortening a loan term from 30 to 20 years, at a rate of 4.0%, could save an investor nearly $40,000–not exactly chump change.

Cash-out refinance rental property

Refinancing your rental property with a cash-out refinance option holds several advantages. Cash-out refinancing lets you convert your home’s equity into cash. You take out a larger loan on your rental property, use the proceeds to pay off the existing loan, and receive the remaining funds in a lump sum. A cash-out refinancing on a rental property can benefit investors looking to improve their business, expand their portfolio, or pay off debt.

Why? 

Refinancing loans backed by a home’s equity typically come with better interest rates. This is especially attractive while home appreciation values continue to grow. The additional lump sum you receive after paying off the original loan can be used to increase rental income by enhancing the property with new appliances, adding an ADU unit, or other house renovations to skyrocket property values.

Additionally, money from a cash-out refinance on rental properties can be used to pay down or eliminate personal debt on things like car loans, student debt, or business expenses. By lowering personal debt-to-income (DTI) ratio, investors open avenues to lower interest rates and higher rental property loan approval rates with lenders–leading many investors to refinance their rental property to buy another at better rates.

The Downsides of Refinancing Rental Property Loans

Although, in the right circumstances, rental property refinancing pros far outweigh the cons, there are some downsides to consider. The top potential downsides include: 

    • Stricter Requirements: Refinancing a rental property comes with stricter requirements, including proof of a good credit score, income history, and a lower loan-to-value (LTV) ratio.

    • Closing Costs: Refinancing means a new round of closing costs, typically at 2% of the loan amount. These costs are usually rolled into the loan principal and treated as an “out of sight, out of mind” expense for borrowers. In reality, closing costs during refinancing will cost several thousand additional dollars.

  • Amortization Schedule Reset: When you take out a loan, most payments go toward the interest on the principal early on. By refinancing, you reset the amortization schedule, meaning you must pay down the loan’s interest at the onset. Investors must consider the equity in their home and current interest rates to determine if refinancing a rental property is the right choice.

Tips to Simplify Refinancing Your Rental Property

To help streamline the refinancing rental property process and better your chances at securing lower rates, look to have:

  • A credit score of at least 660
  • Fully occupied units
  • Tenants with existing long-term (6+ months) leases
  • The property in good condition and within regulatory requirement standards
  • Copies of the last two years of tax returns, tenant leases, rent roll, income statements, and capital expenses

The first step you’ll want to take is to consider whether you can refinance your rental property with lower rates and better terms. Work closely with reliable and knowledgeable lenders to learn more about your eligibility and options.

Finance of America Commercial: Your Long-Term Rental Property Capital Partner

Finance of America Commercial (FACo) provides the most reliable and flexible long-term rental financing available. With several term, rate, refinancing, and cash-out loan options, our experts can mix, match, and tailor financing to your unique needs.

Finance of America Commercial’s Rental Portfolio and Single Rental loan options offer:

  • Competitive 30-year term loan options
  • DSCR with no W2s, paystubs, or tax returns required
  • SFR, warrantable cons, townhomes, PUD, and 2-4 units eligibility

Whether you’re looking to embark on a new rental investment project or looking to refinance your rental property, our team has the knowledge, skills, and capital to help you succeed. CLICK HERE to schedule a FREE consultation with a FACo expert today!

Frequently Asked Questions

1. When should you refinance a rental property?

The best time to refinance a rental property depends on current interest rates, your existing loan terms, property equity, and investment goals. Refinancing may make sense when a lower rate reduces monthly payments or when improved loan terms support better cash flow. Investors should also consider closing costs, prepayment penalties, and how long they plan to hold the property before making a decision.

2. Is it worth refinancing an investment property when interest rates drop?

Refinancing an investment property when interest rates drop can be worthwhile if the potential savings outweigh the costs of obtaining a new loan. Even a modest rate reduction may improve monthly cash flow, depending on the outstanding loan balance and repayment term. However, investors should compare total borrowing costs, refinancing fees, and expected savings rather than focusing solely on the new interest rate.

3. How much does it cost to refinance a rental property?

Rental property refinancing costs vary by lender, loan amount, property type, and location. Common expenses include appraisal fees, loan origination charges, title services, and closing costs. Some loans may also have prepayment penalties. Investors should request a detailed breakdown of all refinancing expenses and compare them with projected interest savings to determine whether replacing an existing mortgage is financially beneficial.

4. How do you calculate the break-even point when refinancing a rental property?

To calculate the refinancing break-even point, divide your total refinancing costs by the estimated monthly payment savings. For example, if refinancing costs $4,000 and reduces your monthly payment by $200, the simple break-even period is 20 months. Investors should also compare loan terms, remaining principal balances, and total interest expenses, since monthly payment savings alone do not capture the full financial impact.

5. Can you use a cash-out refinance to buy another rental property?

Yes, qualifying real estate investors may use a cash-out refinance to access equity in an existing rental property and help fund another investment purchase. This strategy replaces the current mortgage with a larger loan and provides eligible cash proceeds after paying off the existing balance and associated costs. However, cash-out refinancing increases debt and depends on property value, available equity, and lender requirements.

6. Is it better to refinance a rental property into a shorter loan term?

Refinancing into a shorter loan term can help investors pay off mortgage debt faster and potentially reduce total interest expenses. However, shorter repayment periods often result in higher monthly payments, which may reduce rental property cash flow. Investors should compare amortization schedules, interest rates, and projected rental income to determine whether faster debt repayment aligns with their long-term investment strategy.

7. What are the requirements to refinance a rental property with a DSCR loan?

DSCR rental property refinance requirements typically include an evaluation of the property's rental income, debt obligations, appraised value, and overall condition. Lenders may also review credit history, cash reserves, existing leases, and loan-to-value (LTV) ratios. Debt Service Coverage Ratio (DSCR) loans focus on qualifying property cash flow rather than relying primarily on traditional personal income documentation.

8. Can you refinance multiple rental properties with a portfolio loan?

Yes, qualifying investors may refinance multiple rental properties through a rental portfolio loan, sometimes called a blanket loan. This financing structure can consolidate several properties under one mortgage, potentially simplifying loan management and supporting portfolio growth. Finance of America Commercial (FACo) offers Single Rental and Rental Portfolio refinancing solutions for eligible investors, subject to property qualifications, underwriting requirements, and available loan programs.

Authored by Bianca Montalvo

SEO copywriter and strategist

This content is for informational purposes only and should not be construed as investment or legal advice. Neither the author of this content nor Roc360 assumes any liability for actions taken or not taken based on information contained herein. Investments involve risk, including potential loss of principal. You should consult a qualified professional before making financial decisions.

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