refinance

Refinancing investment property is thorny

Don TaylorQuestionDear Dr. Don,
My credit union is offering a fixed-rate home equity loan for 120 months at 3.99 percent (annual percentage rate). Currently, I have a 30-year fixed-rate mortgage at 6.5 percent on a home I own as an investment. Is it a good idea to pay off my investment home mortgage with home equity loan?
-- Bhudeep Bankroll

AnswerDear Bhudeep,
It's an easy yes for a primary residence, given that your household budget can afford the increased monthly payments and that you plan on being in the house for a while.

But using a home equity loan to refinance an investment property is a more complicated scenario. First, the credit union may be looking to make home equity loans over a 10-year term to homeowners living in a property as their primary residence and unwilling to lend for an investment property.

If the investment property is a multifamily unit and you live in the unit, that's a different situation for refinancing with a home equity loan than refinancing an investment property that isn't your primary residence. Interest rates are typically higher on investment properties, and the lender is more likely to limit the amount of the loan as a percentage of the total appraised value of the property. It's common for a lender to require the owner to maintain 20 percent to 25 percent equity in an investment property.

If you own a primary residence plus investment property, the lender's underwriting standards for the investment property will look at your overall financial position in deciding whether to approve a home equity loan to refinance an investment property. The lender may require third-party validation of rental income if you are renting the property.

Consider how moving from a 30-year fixed mortgage to a 10-year home equity loan changes the cash flow on the investment property. Real estate investors typically aren't looking to ramp up their equity investment in a property, preferring to keep funds available for other investments.

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