Author Topic: Refinancing my rental property ... worth it ?  (Read 5999 times)

frugalcoconut

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Refinancing my rental property ... worth it ?
« on: January 29, 2013, 08:33:41 PM »
My rental property is significantly underwater (~200% LTV) and the loan is owned by Freddie Mac; therefore, I have very limited options for refinancing under HARP2.  Unfortunately my current lender Wells Fargo won't allow me to refinance directly with them because of the servicing company that I'm with (not that I had a choice in that regard, but whatever ... I've already inquired twice--at separate intervals--and I've been told the same thing both times ... I think it's a stupid rule but I don't want to deal with fighting against it). 

I started the refinancing process through a different company but now I'm wondering if it really even makes sense.  I don't know if any calculators exist for scenarios like this ... so I'd like to know what my fellow Mustachians think.

Background:
Age 32.  Single with no dependents.  South Florida.  Primary residence is owned outright (mortgage paid off last year).  Approximately $140k in retirement accounts consisting of HSA, Roth IRA, and 401k (combination of both Roth & Traditional).  Recently started to max out all three which doesn't leave much wiggle room on $50k-$55k gross annual salary (depending on overtime, bonuses, etc.).  Goal retirement date is 2020.

Investment Property (condo):
$602.55 Mortgage (6%) ... current balance ~$90,000 ... original amount $100,500 for 30 years (already 5 years in)
$236.57 HOA (includes water/sewer, trash, etc.)
$100.00 Electric (variable but capped per lease, conservatively budgeted although typically less)
$100.00 Property Tax (flexible reserves/escrow/sinking fund)
$  3.00 Electronic Rent Collection Service
$800.00 Gross Rental Income

I try to infuse about $200 per month into the designated bank account that I use for the rental property.  This covers the excess monthly expenses but doesn't put anything aside for maintenance/upkeep/repairs/upgrades/vacancy.  My goal with the refinance would be to become approximately breakeven (to neutralize my currently negative cash flow).  Right now I've locked 3.75% with 2 points ... so it will cost me at least $6k-$7k to get my mortgage payment down to $416.80 ... and then on top of that they're requiring me to escrow taxes through them along with getting insurance of $18k on the property (which I haven't felt overly compelled to get because the main structure is covered under the master policy meaning that I'm only responsible for the interior walls and contents so I've been self-insuring up to this point).  If I do the refinance, I would let the mortgage run its course for the full 30-year term but I wouldn't have as much of a loss to write off on my taxes so I might have to change my federal withholding from S/4 to S/3 on my bi-weekly paycheck.  If I don't do the refinance, I would probably end up attempting an early payoff in one form or another ... either by gradually infusing money from my own pocket or from eventually buying another rental property (cash flow positive) and applying those profits against the mortgage balance on the loser property. 

Should I move forward with the refinance?  I feel like it's basically now or never.  Would I get more of a benefit by plopping that extra $6k-$7k down as extra principal payment instead, and then focus on exterminating this final debt? 

Another Reader

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Re: Refinancing my rental property ... worth it ?
« Reply #1 on: January 29, 2013, 09:20:49 PM »
If I understand what you are saying, you borrowed from Wells Fargo, they sold the loan to Freddie, who then assigned the servicing to another party.  Who is the servicer?  Are they a lender?  If so, that's where you start on a HARP for a rental property.  For example, I purchased a rental house with broker arranged financing, putting 20 percent down.  Fannie Mae bought the loan and sold the servicing tights to Suntrust.  The value dropped several years later and I had less than 20 percent equity.  Because HARP favors the existing servicing company, I was able to refinance to a much lower rate under HARP last year through Suntrust.

The current servicer does not have to meet the same requirements to buy back the loan if there is a default as does a new lender.  So your current servicer is much happier to refinance you and usually at a better rate and terms.

frugalcoconut

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Re: Refinancing my rental property ... worth it ?
« Reply #2 on: January 30, 2013, 04:46:07 AM »
Sorry that I wasn't clear ... the current servicer is America's Servicing Company (ASC) and they've also told me several times that they won't do the refinance.  They keep referring me back to the lender, Wells Fargo.

My only option to refinance is an outside lender.

Another Reader

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Re: Refinancing my rental property ... worth it ?
« Reply #3 on: January 30, 2013, 07:14:55 AM »
You have a nice big alligator and not a lot to feed it with.  If the value really is $45k, even after the recent improvement in the Florida market, I would think long and hard about a short sale or just giving this one back to the lender.  How long will it take to get back to the point you have equity?  With what money will you make a down payment on another property?  How will you pay for the repairs that eventually will be needed on this property?  I think you are in a weak position here and in your shoes I would be looking for a way out.

tooqk4u22

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Re: Refinancing my rental property ... worth it ?
« Reply #4 on: January 30, 2013, 08:23:49 AM »
Sorry that I wasn't clear ... the current servicer is America's Servicing Company (ASC) and they've also told me several times that they won't do the refinance.  They keep referring me back to the lender, Wells Fargo.

My only option to refinance is an outside lender.

ASC is owned by Wells Fargo.  In Florida you have the homestead which protects your primary residence from creditors (this is why all the rich people have $20mil homes down there) and if you have limited other assets I would just turn it over, of course you'll have to stop making payments and your credit will take a beating.

frugalcoconut

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Re: Refinancing my rental property ... worth it ?
« Reply #5 on: January 30, 2013, 08:38:59 PM »
Not going to turn it over via short sale or foreclosure or deed in lieu or any of those options that could potentially ruin my credit ... plus, to my knowledge, Florida is one of those states in which the creditors can come after you for the difference anyway so I don't see the point ... even though most of my assets are tied up in retirement accounts and primary residence, I don't want that kind of liability hanging over my head.

Since I'll be keeping the property for the foreseeable future ... does it make sense for me to put in another $6-$7k to complete the refinance or should I leave it alone but keep throwing money at the mortgage with the goal of an early payoff?

tooqk4u22

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Re: Refinancing my rental property ... worth it ?
« Reply #6 on: January 31, 2013, 08:36:52 AM »
Can you clarify what the $6-7k is for.  The payment and rate you referenced equate to a $90k loan so it is not going to principal reduction and the 2 pts equals $1800.  There will title insurance and some other fees but you shouldn't include escrows in the "cost" analysis as it is still your money you are just prepaying future expenses essentially.

Anyway, short answer is that dropping your rate from 6% to 3.75% will save you $1800 in the first year alone so you will recoup your closing costs (pts, other fees, not escrows) in 2-3 years.  So if you are planning on keeping it then yes it is worth it to do the refi. 

Curious though as to how you are getting a 200% LTV loan refi - sounds suspect, can't imagine any lender will do this and the agencies and banks wouldn't unless it was under HARP.

DoubleDown

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Re: Refinancing my rental property ... worth it ?
« Reply #7 on: January 31, 2013, 02:32:27 PM »
Not going to turn it over via short sale or foreclosure or deed in lieu or any of those options that could potentially ruin my credit ... plus, to my knowledge, Florida is one of those states in which the creditors can come after you for the difference anyway so I don't see the point ... even though most of my assets are tied up in retirement accounts and primary residence, I don't want that kind of liability hanging over my head.


I understand your point about not wanting to turn it over via short sale, et al, and the sentiment behind it. I'm right with you on that.

If you'll bear with me, I'd just like to add that you might be able to turn it back over without any liability hanging over you. It is possible to sell it short and have the bank release you from any future liability. One way to do this is to bring them a signed offer (say, someone writes up a contract to buy your condo for $45k), and tell the bank you would like to accept that offer and have the balance on your loan forgiven with no future liability, rather than have it foreclosed, which is your likely next step if the bank refuses to accept your terms. Odds are quite good they will accept this arrangement rather than having to foreclose on your property and get nothing for their trouble except a condo they have to try to sell for $45k.

Just be sure to get everything in writing that you are released from any future liability; a local real estate attorney can help you with this if you want/need guidance. You might have to pay income tax on the part of your loan that is forgiven, but that's probably a pretty small price to pay overall at your income tax level. And you'll be rid of this downer property forever with nothing hanging over your head and probably only a small, very temporary blip on your credit ("forgiven loan", not foreclosure), if at all.

frugalcoconut

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Re: Refinancing my rental property ... worth it ?
« Reply #8 on: January 31, 2013, 09:14:13 PM »
There are only a couple of lenders that I found who will do a HARP2 refinance with that high of a LTV on a loan owned by Freddie Mac. 

Here is the breakdown of estimated closing costs that was sent to me when I locked in my rate:
$1,995.00  Origination Fee
$1,800.00  2 Points on $90,000.00 Loan
$  495.00  Appraisal <-- partially/fully refunded at closing due to property inspection waiver
$   16.75  Credit Report
$   61.00  Tax Service
$    5.50  Flood Certification
$  810.00  Title Services / Title Insurance
$  173.00  Government Recording Charges
$  495.00  Transfer Taxes
$  178.66  Initial Deposit for Tax Escrow
$  140.63  Estimated Prepaid Interest (assuming 15 days at $9.375 per day)

Another Reader

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Re: Refinancing my rental property ... worth it ?
« Reply #9 on: February 01, 2013, 05:24:09 AM »
That's not a "2 points" loan, that's a "4 points" loan.  Two discount points and two points in origination.  The risk to the originator is that Freddie will make them buy back the loan, and some of the folks out there are making a killing off the consumer to compensate.

SunshineGirl

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Re: Refinancing my rental property ... worth it ?
« Reply #10 on: February 03, 2013, 09:39:54 AM »
Is this in the same city you're in? If so, could you move into it for a period of time and make it your primary residence?

Not sure what your income is, but if you are refusing to let it go, that may be the easiest way to get in a situation where you can refinance to a lower interest rate. $80K in principle isn't much monthly when financed to 30 years with a sub-4% interest rate.

But honestly, what do you need such good credit for, when you already have a paid-off house? What do you plan to borrow money for in the near future?

frugalcoconut

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Re: Refinancing my rental property ... worth it ?
« Reply #11 on: April 21, 2013, 08:14:20 PM »
Just to post an update on this ... nixed the rate lock with the first lender and completed the refinance a couple of weeks ago with a different company at 4.25% for a 15-year term with waived escrows and between $5-6K in closing costs as estimated.  Not bad for a HARP2 refinance on a rental property that also happens to be a condo.  New monthly mortgage payment will be $677.05 (about $75 higher) but over half of the monthly payment will actually go toward principal.  Glad all that is finally over with!  Now I can focus on other things...