Refinance Question from 7 yea ARM to 30 yr DSCR

Rental Property Investor · Wichita Falls, TX · Member since 2018 · 353 posts · 80 votes

Hi, I am open to advice here. I have a 7 year ARM at like 8.8% interest rate. I am in the process of refinancing it which could lower my payment $200 per month but hopefully $300. At won't point is the refinance not worth it? It will raise my balance on my mortgage about 12-13k which I think is a lot for not taking any cash out. However, if I save $2k a year from lower payments I would break even in 6 years.

Is it better to keep the low balance with 8.8% rate or refinance to a 30 year loan and get the lower payments and more cash flow?

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Greg ScottPro Member

Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes

8mo

To me, cashflow is basically like having insurance for your investment. If you lose your job or have some other financial hit, your investments carry on. I always want to have positive cashflow. On the other hand, there are some things you didn't mention though that make your "this or that" choice curious.

First, how many years until your loan adjusts? If you are getting close to year 7, it might make sense just to wait.

Why are the closing costs $12-13K? That is a lot. If it is because you are buying your rate down, that is effectively pre-paid interest. You could approximate the same thing by taking $6K and putting it in a savings account you don't touch. If it is because that is what your lender charges, I would seek alternatives.

I'm also wondering why you went the DSCR route. You can usually get more favorable loans with agency debt, lower interest and longer terms.

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Greg ScottPro Member
Rental Property Investor · SE Michigan · Member since 2014 · 4k+ posts · 6k+ votes
8mo
To me, cashflow is basically like having insurance for your investment. If you lose your job or have some other financial hit, your investments carry on. I always want to have positive cashflow. On the other hand, there are some things you didn't mention though that make your "this or that" choice curious.
First, how many years until your loan adjusts? If you are getting close to year 7, it might make sense just to wait.
Why are the closing costs $12-13K? That is a lot. If it is because you are buying your rate down, that is effectively pre-paid interest. You could approximate the same thing by taking $6K and putting it in a savings account you don't touch. If it is because that is what your lender charges, I would seek alternatives.
I'm also wondering why you went the DSCR route. You can usually get more favorable loans with agency debt, lower interest and longer terms.
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- Nathan Frost
  OP
  Rental Property Investor · Wichita Falls, TX · Member since 2018 · 353 posts · 80 votes
  8mo
  Quote from @Greg Scott:
  
  To me, cashflow is basically like having insurance for your investment. If you lose your job or have some other financial hit, your investments carry on. I always want to have positive cashflow. On the other hand, there are some things you didn't mention though that make your "this or that" choice curious.
  First, how many years until your loan adjusts? If you are getting close to year 7, it might make sense just to wait.
  Why are the closing costs $12-13K? That is a lot. If it is because you are buying your rate down, that is effectively pre-paid interest. You could approximate the same thing by taking $6K and putting it in a savings account you don't touch. If it is because that is what your lender charges, I would seek alternatives.
  I'm also wondering why you went the DSCR route. You can usually get more favorable loans with agency debt, lower interest and longer terms.
  
  My understanding is the loan amount is too low? I will look into these with the lender. 183k doesn't seem low. I think DSCR is because of the debt to income ratio.
  The ARM is only on year 2.
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Ed O.
Investor · Statewide, MO · Member since 2011 · 819 posts · 427 votes
8mo
@Nathan Frost
I'm not ant i dscr loans, but in the present market, I don't think they make sense.
The majority of people expect rates to fall more. Additionally, 13k in fees on a 180k loan is outrageous. That amount is not low and I don't think is so low that you take a big hit on rates. I would expect that brokers of dscr loans have a lot of pricing control and that yours is trying to make a lot of money on your deal.
Have you looked into smaller local and small regional banks. I have worked with them exclusively for 20+ years and they have absolutely crushed every other means of borrowing.
The downside is many will max out at 5 years fixed on a 5 or 10 year balloon. Call 5 or 10 local banks.... just because one bank may not want to lend doesn't mean the others won't. Banks are fickle and a deal one bank will fight for, another will run from - I've seen it a bunch of times. Let us know how it works out.
Unless your credit is in rough shape, I would absolutely be shocked if a local bank doesn't destroy this offer.
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Devin PetersonBusiness Member
Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 667 votes
8mo
Quote from @Nathan Frost:

Hi, I am open to advice here. I have a 7 year ARM at like 8.8% interest rate. I am in the process of refinancing it which could lower my payment $200 per month but hopefully $300. At won't point is the refinance not worth it? It will raise my balance on my mortgage about 12-13k which I think is a lot for not taking any cash out. However, if I save $2k a year from lower payments I would break even in 6 years.

Is it better to keep the low balance with 8.8% rate or refinance to a 30 year loan and get the lower payments and more cash flow?

Just depends what your ultimate goal is. 6 years is a reasonable break-even point. How much longer do you plan on holding the property? If its north of 10 years - 100%. What rate are you being quoted with new DSCR loan?
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- Nathan Frost
  OP
  Rental Property Investor · Wichita Falls, TX · Member since 2018 · 353 posts · 80 votes
  8mo
  Quote from @Devin Peterson:
  
  Quote from @Nathan Frost:
  
  Hi, I am open to advice here. I have a 7 year ARM at like 8.8% interest rate. I am in the process of refinancing it which could lower my payment $200 per month but hopefully $300. At won't point is the refinance not worth it? It will raise my balance on my mortgage about 12-13k which I think is a lot for not taking any cash out. However, if I save $2k a year from lower payments I would break even in 6 years.
  
  Is it better to keep the low balance with 8.8% rate or refinance to a 30 year loan and get the lower payments and more cash flow?
  
  Just depends what your ultimate goal is. 6 years is a reasonable break-even point. How much longer do you plan on holding the property? If its north of 10 years - 100%. What rate are you being quoted with new DSCR loan?
  
  It's a DSCR - 7.5%
  
  5 years prepay
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- Devin PetersonBusiness Member
  Lender · Sarasota, FL · Member since 2022 · 2k+ posts · 667 votes
  8mo
  Quote from @Nathan Frost:
  
  Quote from @Devin Peterson:
  
  Quote from @Nathan Frost:
  
  Hi, I am open to advice here. I have a 7 year ARM at like 8.8% interest rate. I am in the process of refinancing it which could lower my payment $200 per month but hopefully $300. At won't point is the refinance not worth it? It will raise my balance on my mortgage about 12-13k which I think is a lot for not taking any cash out. However, if I save $2k a year from lower payments I would break even in 6 years.
  
  Is it better to keep the low balance with 8.8% rate or refinance to a 30 year loan and get the lower payments and more cash flow?
  
  Just depends what your ultimate goal is. 6 years is a reasonable break-even point. How much longer do you plan on holding the property? If its north of 10 years - 100%. What rate are you being quoted with new DSCR loan?
  
  It's a DSCR - 7.5%
  
  5 years prepay
  
  Id reshop this 100% DSCR rates with 5yr PPP are in the 6's
  [email protected]860-538-3672
  ProAlpha Capital56 Reviews
  Website View Page
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Zach Edelman
Lender · New York, NY · Member since 2022 · 1k+ posts · 1k+ votes
8mo
I am seeing DSCRs right now in the 6's - which should add savings/lower the breakeven period.
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Elias HalvorsonBusiness Member
HI · Member since 2024 · 225 posts · 130 votes
8mo
I would definitely shop, that is extremely high. Further, I think 6 year year recoup is crap. Obviously, if you really need the $200 cash flow then do it. I always try to keep my refinances to a 3 year recoup time or less. 6 years is way too long.
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Janice Carter
Real Estate Broker · Atlanta · Member since 2024 · 1k+ posts · 606 votes
8mo
Nathan, I completely agree with those who are encouraging you to shop around. It is always wise to compare at least 3 offers before making a decision.

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Ernie Rodriguez
Real Estate Agent · Miami FL, USA · Member since 2024 · 19 posts · 10 votes
8mo
What's the loan amount?
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Stacy RaskinBusiness Member
Lender · Member since 2022 · 1k+ posts · 508 votes
8mo
Depending on borrower credit and the LTV for the property that is being refinanced, there are rates in the 6s as of the date of this post. I think getting the rate lower makes sense if you are planning on holding the property long term.
Loans aren't considered low at $183K. There are rate adjustments where if the loan falls below certain amounts such as $100K the rate will be adjusted upward as the lender is trying to make more money on the loan as the lender's logic is that it's the same work to do a $75K loan as it is to do a $750K loan so they want to get more money out of the work they are doing which can be accomplished by raising the rate. Also depending on if the lender sells off the loans at closing to an investor pool for new cash for more loans (common in the DSCR space), then the investor pool is asking for higher rates to buy these lower balance loans. Haven't seen a pricing adjustment based on loan amount for $183K. Happy to connect to discuss further.
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