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Learning, Sharing, and Teaching => Real Estate and Landlording => Topic started by: racherinh on January 31, 2013, 12:43:54 PM

Title: Complicated Refinancing Question
Post by: racherinh on January 31, 2013, 12:43:54 PM
Hello everyone, I have a bit of house/rental/mortgage situation I would like advice on. Part of what makes it complicated is that there is a family factor involved, and I'm trying to figure out how hard to try to change the situation.

In 2005 my MIL sold some land to give my then fiance his part of his inheritance for a down payment on a house. They basically picked the house, bought it at 197,000 with 20% down, on a 5 year ARM. The plan was for us to finish the basement as an apartment, and rent out the top floor to cover the mortgage. My by-then husband was in graduate school at the time, so his mother co-signed the loan - it is really in her name. The renovations and rentals went well (thanks to my dad), and we lived rent free for three years - although not building any equity. We were only going to be there as long as the program, so we planned to sell it before the interest rate went adjustable.

Except that three years later, my husband switched programs, the value of the house had plummeted and we couldn't sell it without a great loss. We continued to rent it (which was super stressful, until we found a good management company). Fortunately the low interest rate cut our mortgage payment in half - it's about 350 dollars, 25% of the rent. We have been waiting vaguely hoping the property values will go up again so that we can sell it and still have a down payment for whatever city we get a job in next year (oh the joys of being married to an academic!)

About a year ago my MIL mentioned that we should try to refinance it, but we're still in graduate school (living abroad, too, just to be really difficult), and she's mostly retired so neither of us has the income and we no longer have the equity to refinance.

The information on MMM got me inspired to be a little more proactive about the situation. The house rents for 1450 (it should go up again after this year), in an area that is generally good to renters - large state university, and several corporate headquarters. I think it could potentially be profitable if we could sort out the mortgage situtation.

Options that I can see:
1. Wait for a few more years and then sell. The housing market is not going back up to 2005 levels anytime soon, so probably most of our down payment is just lost, and we would be better off investing the rest long term, or paying off some of our student loans (they are not accumulating interest right now, for what it's worth)

2. Don't refinance, just start paying double mortgage payments now, and triple in a few years, to pay the house off. Refinance once there is a real job. Keep as a rental property, that would make at least 8,500 a year after expenses (using the 50% rule). This option would make it harder for us to pay off whatever house we are actually living in for about 10 years. But, we may move a lot in the next 5 years and not buy for awhile (see former comment about a professor's life). We could get lucky and finish this right as we are ready to actually settle.

3. Try to refinance, possibly with cash-in, pay off the mortgage really fast (5-10 years), keep as rental property.

I don't really know how hard it is to refinance as it is a rental property - a lot of the articles I saw made it sound impossible for us as we don't have 75% equity, we don't have a large income, and we would only get the investor's rate anyway - not the super low rates. I also don't know how risky it is start building equity on the house - I think the housing market there has stabilized, which means it shouldn't go anywhere very fast. (It's Ann Arbor, MI, for what it's worth - crazy high property taxes).

The interest-only loan has always bothered me, but after reading more here, and starting to really think about it, it's starting to drive me CRAZY. It's like we're pouring all that money away, on top of what we've already lost. The tricky part, however, is that it's not really my money or my mortgage - it's money from an investment of my in-laws, and what we're losing is more in terms of opportunity cost. I have no idea how to really go about changing things, even something like mentioning that we throw 50% of the rent at the mortgage.

I look forward to thoughts from more mustachioed rental owners!
Title: Re: Complicated Refinancing Question
Post by: decon50 on January 31, 2013, 05:24:15 PM
what's the rush to sell/refinance/pay off?  it sounds like the house has a positive cash flow, why not keep it as a rental indefinitely and keep stashing that cash.  if you save the profits from renting you could have enough for a down payment in a couple of years when you are ready to settle down. 
Title: Re: Complicated Refinancing Question
Post by: racherinh on February 01, 2013, 03:28:38 AM
I guess my rush is from the fact that the current loan is interest only, so we are not building equity and I feel like we are wasting the income on interest. It's emotionally hard, however, to put more money into a house that one has already lost money on - so I'm trying to figure out the most rational thing to do.

I also just got a little more information from my MIL. Our current interest rate is 3.5%, so we definitely don't need to change that. It sounds like we can just pay bigger payments towards the principal for now, increase the payments after our student debt is payed off, and then in ten years or so start collecting real income from it.

Like I said, the biggest barrier for me is emotional - if we sold now we would lose 25-30k, and so it's hard to not see the property as a money suck. I'm trying to wipe that slate clean, start from where we are to move forward, but I'm not very experienced with these matters, so I don't feel comfortable trusting my gut. If two or three others look at this and say - why worry? good interest, good income, pay off the mortgage and get on with it - it gives me the bigger perspective.

The other thing is just one of income. My husband is defending his dissertation this year, and we have at least one more transitional (low income) year. We (there are five of us) been living well on around 20-25k, the extra 5k mostly because we've been moving a lot to follow grants and research opportunities, and we've been living in more expensive Italy instead of America. It's hard to embrace a debt that might be optional when you don't know next year's income - although once he gets a job our income will nearly triple, and we'll still be happy living on 25k a year =). It's just hard for me to plan 10 years ahead - I've never lived somewhere more than 5 years, and my wonderful parents are not very good role models in this regard (although I could learn a lot from their work ethic).

Thanks for your response!