Refi Owner-Occupied as Primary or Investment Mortgage?

Question

Hi all, I could use some help understanding the options and implications for my conventional refinance choices.

For the last six years I have owned and occupied a two unit house in Massachusetts and rent out the other unit to cover a big chunk of the mortgage. I purchased at 10% down with an FHA loan w/PMI but now surpass the 78% LTV to refinance as a conventional loan. It is definitely in my interest to do so as I will drop PMI and about 0.75% off my rate. I have saved the 20% down payment for my own SFH and plan to buy & move sometime in 2016 then rent both my current units (they will cash flow, better than $100/door). I will probably continue to occupy the two-unit for another six months this year before finding a new house and moving out.

If I refinance the two-unit mortgage in the next month or so should I just go straight to an investment property loan or should I keep it as a primary residence loan?

Obviously there are a number of factors, such as being able to deduct mortgage interest on my primary residence which I assume I can't do if the loan is for an investment property, regardless of if I live there. I have also found through reading on BP that if I get a primary residence mortgage on it then I probably won't be able to get a new one for my next personal home within 6 or 12 months. I'd like to avoid having to refinance (fees!) the investment property again when I buy my SFH residence.

I'm looking for any advice the BP crowd may have on the best choices in this situation. I also know enough to realize I probably am missing some important consideration(s) so please let me know if that is the case. Or if I'm making a bad assumption then I'm happy to be corrected.

Thanks for your time everyone,

J in MA

Upen Patel · Answer

@Russell BrazilIts the usual reasons that pass the BS test - Work relocation/new job, change in family size. And the reason needs to lineup with the new property.

A good BS reason would be "I want to move closer to my job". Hummm... I suppose they did not know 6 months back that the job was a bit far away.

Chris Mason · Answer

The alternative is "it depends."

The 12 months isn't a hard-and-fast rule, it's a BS test & common sense thing.

Here's a real life example. I had a gal that was living in and fixing up an investment property.

Being conservative and trying to follow the rules, I postured as if I wanted to go with investment property. Kind of knowing the answer, I asked our compliance people, in writing, if using investment property financing for someone that we know for a fact is presently living at the subject property would expose us to discrimination liability.

Wouldn't you know it, the compliance people confirmed (again, in writing) that it might be construed as discrimination if we use investment financing on a place we know for a fact she lives! Discrimination on what basis, you may ask? TBD, of course. Maybe she could claim it was because she's a single woman, maybe she'd claim it was because she's Asian American, who knows.

So in her case, what's her valid reason? Simple, "Chris, citing his compliance department, FORCED me to use primary residence financing on that refi. I wanted to use investment property financing, as I fully planned to sell that house as soon as I was done living there and fixing it, which I fully disclosed to Chris, but he FORCED me to have this lower primary residence interest rate. Oh, woe unto me, this predatory lower interest rate! Signed, borrower."

I included that letter and the email and the correspondence with the compliance people in the loan file for her next mortgage. Did the compliance guy get yelled at by our secondary marketing people? Who knows, who cares, compliance people are demons anyways.

Russell Brazil · Answer

@Upen Patel What are some of the valid reasons you are seeing for a new mortgage in under 12 months?

Upen Patel · Answer

@Jason SlaterIf you refi as a primary residence then you will need to have a good valid reason to get an another primary residence loan within 12 months. Not saying it can't happen, just that you want to be ready for the push back. Fannie/Freddie and secondary investors are pushing back big time on lenders, so now lenders like me have to push back on borrowers and verify that its a valid reason.

Russell Brazil · Answer

You should refinance with an owner occupant loan. The rate will be much better and you are actually occupying the property. While you would like to move...circumstances do change, and there is no way to predict that you actually will.  Now it is true that you will sign an affidavit saying you intend to live in the property X amount of time, typically 6 or 12 months...but again...you do not have another property picked out..you are merely planning for the future in that you would like to move, but you may not actually be able to. One thing to consider though, is that an owner occupied loan can only be issued every 6 months...so you will have to wait 6 months before another can be originated. (I think)

Heather Nelson · Answer

I've recently found myself in a similarly tricky situation and have been scouring the internet for answers, which only further terrified me until I stumbled on this post on BP. I thought I would share my situation in case it is helpful for others.

Right around the time that I started a refinance my job situation changed and required a relocation. I had not decided if I would actually move at the time the relocation thing came about, so when I inquired about my options, my mortgage broker assured me that all that mattered is that the place is currently my primary residence and that there would be no issues with keeping it and renting it out, even soon after the refi.

Well as the refi is proceeding, I decide to go along with the job relocation. So then I start getting nervous about the refi and whether my "intent" has now changed. Basically, even though I currently reside here and have no intention of buying any other properties, I know now that I will move and rent it out.

So he calls the Bank directly and tells me that since I CURRENTLY live here as the primary owner, I actually CANNOT even attempt to get an investment refi or a second home refi. I can only refi as a primary owner. The Bank tells my broker, directly, that my situation is not a problem and that they've had many other owners in this situation. The Bank literally told my broker that there is no other option for me since I CURRENTLY live there, and that since I am well qualified for this loan, that I am clear to close. As long as I make my payments on time they don't care whatsoever.

Now how's that?

Jason Slater · Answer

This is all great feedback.

@John PrunierThanks for the real-world example in my neck of the woods. With upgrades and appreciation I should be over the 25% equity in the two family so doing a rental refi with SFH purchase may be a good backup option. I suppose I need to compare the cost/savings on losing the mortgage interest tax deduction vs paying PMI over the next 6 months or so. Right now even an investment loan would be under my current rate.

@Upen Patel& @Russell BrazilExcellent points,  I will be sure to have my story straight. My family will have arguably outgrown this unit by then, kids do grow fast!

Would the alternative be that the lender asks you to refi the first loan before taking a new primary residence loan? Or would they just deny financing outright until the 12 months is up?

Thank you!

John Prunier · Answer

Hi @Jason Slater

I would refinance the two family as your primary residence. It will give you a lower rate that you can keep even when you move out and it may take time to find a SFH to purchase. I'm not a mortgage expert so I would see if there are any reasons why you could not get a primary residence mortgage for a SFH within 6 to 12 months. My brother-in-law has a three family that he purchased as owner occupied. He pays PMI but his rate was very low. Now that he no longer lives there it doesn't make sense for him to refinance as his rate would be higher even with the PMI that he currently pays.

I recently refinanced my two family while purchasing a three family. Since I was cashing out some of the money due to the increased value I had to have 25% equity instead of the typical 20% conventional loan. If there are stipulations that would prevent you from purchasing a SFH then I would refinance the two family as you purchase the SFH. Depending on the appraised value of the two family you may even be able to cash out some of the money to invest in the SFH.

Refi Owner-Occupied as Primary or Investment Mortgage?

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