How to refinance a rental property — rate-and-term, cash-out, and DSCR options

The three reasons to refinance

Refi exists for three core jobs. Be honest about which one applies to your situation — they have different math.

Reason 1: Rate-and-term refi to lower the payment

If a current written quote is meaningfully better than the existing note, a rate-and-term refinance may lower the payment. The result depends on balance, rate, amortization, fees, and term.

The math: complete quoted closing costs divided by modeled monthly savings = simple break-even months. Include points, lender and third-party fees, any existing prepayment cost, changed amortization, and omitted tax effects before deciding.

Illustration only: $300k loan. Current rate 7.5%, payment $2,098. Refi to 6.5%, payment $1,896. Savings $202/mo. Closing costs $5,500. Simple break-even = 27 months. Actual quotes, payments, costs, and the appropriate decision may differ.

See our interest rate and loan term glossary entries for more on how rate + term interact. Before requesting quotes, run the entered balance, rate, and term through the mortgage payment calculator to see the PITI breakdown to compare against the lender's written payment estimate.

Reason 2: Cash-out refi to recycle capital

If the lender accepts a higher appraised value and approves a cash-out loan, some eligible equity may become net proceeds after the existing payoff, fees, reserves, and closing costs.

Illustrative math: assume the selected program permits a new loan at 75% of lender-accepted value. Existing debt gets paid off; the remainder after all costs is modeled cash to the borrower. Actual pricing and leverage are quote-specific. For reference, Freddie Mac's maximum LTV for a cash-out refinance of an investment property is 75% for one unit and 70% for two to four units, lower than its limits for a home you live in.

Example: bought property for $300k with a $225k loan. Assume the lender accepts a $400k appraisal and approves 75% LTV: $300k modeled gross principal. After a $225k payoff and $6k assumed closing costs, the illustration produces $69k; neither the value, approval, nor net proceeds are guaranteed.

Cash-out refinancing is one possible capital-recycling step in a BRRRR strategy, subject to appraisal, proceeds, and approval. Seasoning and the eligible value basis vary by program. Under Fannie Mae's cash-out refinance rules, for example, at least one borrower must have been on title for six months before the loan disburses, and a first mortgage being paid off generally must be at least 12 months old; a separate delayed-financing exception covers some recent cash purchases.

Reason 3: Restructure terms

Sometimes the goal isn't saving money or pulling equity — it's changing the structure. Common cases:

• ARM to fixed — locking in a fixed rate before your ARM resets
• Interest-only to amortizing — your IO period is ending and you want to refi rather than face the payment shock
• Removing a co-borrower — partnership dissolution, divorce, family arrangement changes
• Changing borrower or entity — some products permit entity borrowing, but title, existing-loan, insurance, tax, guaranty, and legal consequences require lender and professional review

The loan types available

Conventional (Fannie Mae / Freddie Mac)

Eligible conventional agency programs may offer competitive pricing, but DTI, documentation, reserves, appraisal, occupancy, financed-property, and lender-overlay rules apply. Fannie Mae's minimum reserve requirements, for example, call for six months of reserves on an investment-property transaction underwritten through Desktop Underwriter, plus 2%, 4%, or 6% of the mortgage balances on your other financed properties (not counting the property being refinanced or your own home), depending on how many financed properties you have. Pricing, leverage, and eligibility are file-specific; verify the current program guide and written quote.

DSCR (non-QM)

See our DSCR loans deep dive for the full picture. These programs primarily underwrite the property's coverage rather than using personal DTI as the main ratio, while still reviewing borrower and property risks. They can be useful when conventional income rules or financed-property limits constrain a file. Pricing, leverage, documentation, recourse, and prepayment terms vary, so compare current written quotes. See the DSCR glossary entry for the math.

Commercial / portfolio loans

Commercial and portfolio structures may address properties or borrower situations outside a selected conventional program, but rate, term, amortization, leverage, documentation, recourse, and timing vary widely. Obtain current written proposals and compare total cost and exit risk.

The refi process — stages to plan for

This is a process outline, not a promised timeline. Lender workload, appraisal availability, property complexity, title, insurance, borrower responsiveness, and underwriting conditions can materially change timing and cost. An application or appraisal does not guarantee clear-to-close.

1. Compare: request same-day written quotes using the same lock period, loan purpose, value, and assumptions.
2. Apply: submit the documents required for the chosen borrower, property, and program.
3. Validate collateral: complete appraisal, title, insurance, payoff, and any lease or rent review.
4. Clear underwriting: answer conditions and review final rate, points, fees, cash to close, recourse, and prepayment terms.
5. Close only after approval: sign final documents; funding, payoff, and any proceeds follow the lender's closing process.

Ask the lender and settlement provider for a file-specific schedule and preserve contingency time; do not tie a purchase or bridge-loan maturity to an advertised turnaround.

Five refinance mistakes to avoid

1. Refi-ing too early (before break-even works)

If you'll sell or refinance again before the modeled break-even, quoted costs may exceed the projected savings. Run the complete break-even comparison before committing.

2. Not shopping 3+ lenders

The CFPB's mortgage-shopping guide suggests comparing at least three loan offers from different lenders. Shop multiple same-day quotes using identical assumptions and compare rate, points, lender credits, fees, prepayment terms, recourse, and cash to close. As an illustration, if otherwise comparable $300k, 30-year quotes at 6.5% and 6.8% differ by 30bp, the modeled difference is about $60/month or $21k over the full term; actual quote spreads and realized savings vary.

3. Pulling too much cash out at the top of the market

In a simplified illustration that ignores principal paydown, a loan initially at 75% LTV would be about 88% LTV after a 15% value decline. Actual value and future refinance options may differ. Stress-test a lower appraisal and leave a liquidity buffer. How much cushion to build in depends on the market: appraised values swing further in appreciation-driven metros like Phoenix than in cash-flow markets where price moves less year to year. The FHFA house price index for the Phoenix metro fell about 51% from the fourth quarter of 2006 to the second quarter of 2011, while the index for the Memphis metro fell about 15% from the second quarter of 2007 to the second quarter of 2012.

4. Ignoring DSCR options when conventional won't fit

When a file does not fit a selected conventional program, a DSCR or portfolio program may be another option. Eligibility, pricing, leverage, appraisal, reserves, property rules, documentation, and approval remain lender- and file-specific.

5. Refusing to refi for "just" 50bp

In this stated illustration, a $400k, 30-year loan held 10 years at 6.5% versus 7.0% changes the modeled payment by about $133/month and interest by about $20k over those 10 years. With $6k of assumed costs, the simple break-even is about 45 months before omitted costs or tax effects. Use the actual quote and expected hold period rather than treating 50bp as an automatic refinance signal.

Run the math before you commit

Refi decisions hinge on rate, term, closing costs, and hold period. For the simple break-even, enter the quoted closing costs, set the down payment and rehab to $0, and enter the modeled monthly savings as the monthly net cash flow in the break-even calculator. Then run the property in TrueCap once with the existing loan terms and once with the quoted new terms to compare modeled cash flow and interest. TrueCap is not a lender quote, appraisal, underwriting decision, or approval; replace every assumption with the current written terms for your file.

Related reading: cap rate vs CoC vs DSCR for how refi changes each metric, and DSCR loans explained for when DSCR refi is the right choice.

Verify current written pricing, leverage, seasoning, value basis, appraisal, DSCR or DTI treatment, credit, reserves, documentation, recourse, prepayment terms, costs, and timing with the lender.