Related to this discussion, I think...
I've got a rental that's financed on an interest-only ARM. We bought it in 2006 when we lived there, the interest rate is now under 3%, so it costs us under $200 per month in interest payments. (Rent is $1000). In the fall of 2016 the loan balance ($80K) will come due. At that point we will need to sell or refinance. The tenants are great and there's no need to kick them out, we do want to sell but there's no real hurry except for this loan coming due. I've thought about a HELOC or 2nd mortgage on another property rather than a refinance on this one. We have plenty of equity in our other two rentals, as well as our primary residence. This would save closing costs. Any opinions?
Why do you want to sell? Because the loan will be due? Or it's not the best you can do with that money?
If you've got enough equity in your primary residence AND you are OK with the lender having that(instead of the rental) as collateral, you should at least see what kind of rates/terms they will give you. Note: I don't have the link handy but I think IRS Pub 535 is the one that discusses this. That publication is referenced in the instructions for filling out the Schedule E.
I'm not sure your terms/rates will be any better using the other 2 rentals as collateral instead of the property in question. But I guess it doesn't hurt to get a quote from the lender and see what they'll do. I'm guessing you'll have to put up your home to get the rates/terms that are best.
What are the terms of the HELOC? As opposed to the 2nd mortgage? If you go with HELOC, make sure you plan ahead enough to know that this property will provide adequate cash flow/return even if the interest rate goes up quickly. I'd be looking for something with more certain terms to make sure I didn't get stuck needing/wanting to refinance again.
Would the proceeds from the sale of the property that needs refi'd be enough to pay off the mortgage on your residence? If it's a questionable investment anyway, you could take this strategy to the MAX and pay off your current pri residence mortgage with the proceeds of that sale. Then borrow as much as you can(need to) against it with another long term fixed rate mortgage against your home, but put the proceeds towards one or both of the rentals.
Thanks, JH. To answer your question why sell? Both of the reasons you suggest, in fact.
Yes, the timing is because the loan will be due. The rental is a 3 hours' drive away, and we could be doing better with putting that money in our local properties. It's not terrible by the numbers, but it's really not that good either. It's not a house we ever intended to keep for a very long time (hence our choice to go with this interest-only ARM back in 2006). If we wait a little longer to sell, the property values will recover a little more as they've been doing.
If I were starting out, I wouldn't buy this house as an investment, it's quite a ways under 1% (value is about $140K, we're hoping for $150K if we wait a bit longer, and rent is $1000). We bought it for $130K as a primary residence, then the value dipped, now it's back up again. We like these tenants, so if they want to live there several more years we can make it work and still make some money, but our decision will depend in part on how we deal with the financing deadline.
We don't know terms of any HELOC or 2nd mortgage yet. We really haven't started shopping yet. Just starting to think about what kinds of options we should be weighing, and I hadn't thought much about this approach until you mentioned it. The same bank holds all of our mortgages, I'll talk to Margaret my mortgage person about this and all our other options. I agree, I'm not sure the rates would be any better if we use any of our other properties as collateral. Our primary residence and one of our rentals have roughly $300K equity combined, so there's plenty of collateral available.
I really want to try and talk our tenants into buying it, but I think if they were actually interested they'd have responded to our gentle prods by now.
We have until October 2016 to come up with the best solution.
on edit:
Oh, you had another question. No, the proceeds from the sale would be something like $60K (or less), and we owe $130K on our primary (it's a 2.8% rate 15 year loan). If we were to pay down anything with the proceeds, we'd put the cash toward one of our rentals with a 5%, 30 year loan (balance $120K).