How to Refinance a Rental Property (And When It Makes Sense)
How to Refinance a Rental Property (And When It Makes Sense)
If you acquired a rental property when rates were at their 2023 peak — or if you have older financing from a different rate environment — refinancing may be worth evaluating. The math isn’t always straightforward, but when it works, a refinance can meaningfully improve monthly cash flow and long-term returns.
The Break-Even Calculation
The primary question in any refinance is: how long until the monthly savings recover the closing costs? Refinancing typically costs 1-3% of the loan amount in closing costs. Divide those costs by your monthly payment reduction to find your break-even point in months. If you plan to hold the property longer than the break-even period, the refinance makes financial sense.
Example: $200,000 loan refinanced from 7.5% to 6.0%. Monthly payment reduction: approximately $190/month. Closing costs at 2%: $4,000. Break-even: $4,000/$190 = 21 months. If you plan to hold for 5+ years, the refinance generates significant cumulative savings.
Cash-Out Refinance: Accessing Equity
Beyond rate improvement, a cash-out refinance allows you to access built equity for additional investment. If your property has appreciated since purchase, refinancing at 75-80% LTV at a lower rate can provide capital for a down payment on a second property — while potentially still improving or maintaining your monthly cash flow on the original property.
When Refinancing Doesn’t Make Sense
If you plan to sell in the near term, closing costs may not be recovered. If your current rate is already competitive, the savings may be minimal. If the property’s value has declined, you may not qualify for the LTV needed for favorable terms. And if you’re close to paying off the loan, refinancing restarts the amortization clock and front-loads interest payments again.
The Bottom Line
Run the break-even calculation on any refinance before proceeding. For investors who locked in at 7%+ rates in 2022-2023 and plan to hold properties long-term, 2025 may be the right time to revisit the numbers.
Talk to us at Equity on Repeat about whether refinancing makes sense for your existing properties.