How to refinance a multifamily property

By ,
Ask a Lender
September 27, 2017


Key Points

Refinancing a multifamily property

  • If your mortgage has a prepayment penalty, consider a second-mortgage cash-out instead of a refinance.
  • Weigh the costs of taking out a new loan against the potential interest savings.
  • Be prepared to submit documentation to the lender, such as rent-collection records, operating statements and photos of the property.

If you own a multifamily investment property, there’s a good chance you’re always on the lookout for ways to maximize your return on investment. Refinancing your multifamily property is one way to do so.

If you can refinance into a mortgage with a lower interest rate, you can likely lower your monthly payment. This means more of the money you receive each month from your tenants can be retained for other uses.

How do you go about refinancing a multifamily property — and how do you make sure it’s a good idea?

Weigh your options

First, keep in mind that lenders tend to find mortgages on investment properties riskier than those on residential properties. This caution applies to multifamily refinances as well. As a result, you will likely pay around 1 percent more in interest on a multifamily refinance than you would if you were refinancing a residential property.

As is the case with any kind of refinance, the savings that come with a lower interest rate must be weighed against the cost and fees associated with taking out a new loan. Lenders typically charge an origination fee on the new mortgage, usually between 1 percent and 2 percent of the loan amount, and might charge other fees — such as appraisals, or application and attorney fees.

Multifamily mortgages also may come with prepayment penalties if you pay off the mortgage early, making refinancing costlier. If your property’s mortgage has a prepayment penalty, a second-mortgage cash-out, which allows you to tap the equity in the property, may be a more viable option.

Of course, there are other reasons to refinance besides seeking a lower interest rate. You may wish to refinance into a shorter loan term to save money in interest over the life of the loan, for example.

Balloon payments are another reason you may wish to refinance a multifamily loan. Many commercial real estate loans, including loans for multifamily properties, come with a balloon payment due at the end of the loan term.

A balloon payment is a large lump-sum payment, typically much higher than the monthly payments the borrower had previously been making. Borrowers may be unable to pay off the balloon at the end of the loan term. Refinancing the loan can give the borrower time to pay back the remaining balance by spreading it over a new loan term.

Refi litmus test

There are some qualifications borrowers should make sure they meet when attempting to refinance their multifamily mortgage.

Lenders typically require borrowers to have a certain amount of equity in their property before they can refinance. If your property has not been appraised in several years, the lender may also require your property to be appraised before you can refinance. Whether your property’s value has increased or decreased since you first bought the property can affect whether refinancing is a good idea.

In addition, just as with a multifamily purchase loan, lenders will require more documentation on a multifamily refinance than they would with a refinance of a residential mortgage. Required documentation may include current rent-rolls, rent-collection records, operating statements, property descriptions and photos of the property.

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