Refi/Cash Out Question

6 Replies

Hi All,

I am looking to refi and cash out on an investment property. It has built equity over the years and I would like to use the cash to purchase another rental property. My mortgage broker informed me that since I am refinancing/cashing out on a rental property my interest rate will be higher (about 1%) compared to if I actually lived in the home. 

Is this correct? If so, it may not make sense to cash out if the monthly mortgage payment on my current rental will increase due to the higher interested rate. Is there any way around this?

As always any input is much appreciated.

Thanks!

Yup, rental properties have higher rates. You can see it from the source here:



https://www.fanniemae.com/content/pricing/llpa-matrix.pdf

Those numbers, the 2.125% and all that, are discount points. Discount points translate to rate at a ratio of approximately 1 point equals 0.25% to rate. And they are cumulative, so if you're going to 70% LTV then you've got the FICO>740 adjustment of 0.25% on table 1, the 2.125% on table 2, and the .625% cash out hit on the second part of table 2, and then the 3rd part of table 2 has the 2-4 unit hit of 1%. Like it or lump it, Fannie Mae has trillions of dollars of loan level data predicting that each one of those risk factors independently makes the loan more likely to go into default at some point in the next 30 years.

Total of 4. 4 hits of 0.25% to rate each = 1% to rate on the button.

Note that the 1 point to 0.25% is approximate. Some days it's 0.9 points to 0.25% to rate, other days it's 1.2 points.

We refinanced 2 rental properties last year with the hopes of pulling some of the equity out and were shocked at how much it would cost to get cash out. One scenario was $12k in order to pull out $40k. It just didn't make any sense to me. I was also told that I should consider refinancing again in the near future if I wanted to get cash out of them. So basically, refinance 2 or 3 times just to get the cash out is what I think a lot of people are doing although I don't understand that either. And yes we basically ended up about a point higher on the rentals than we did on our primary. 

Thank you at @Jon A. and @Chris Mason , this information is very helpful. It is hard to see the value in doing a refi/cash out for a rentl as it almost seems like a penalty. I also thought about doing a 1031 and selling, but I would like to keep the current rental as the cash flow is good. 

The thing that doesn't sit well is I have all this equity sitting there doing nothing. Any advice on how to proceed? I almost think its best to stay where I am and continue to pay down the current mortgage. Although it would be nice to do something with that equity. 

@Matthew Lessard we are in the exact same spot as you. It is difficult to remember that we don't have to do anything at all and are in a good position.  

On one hand, if we sell a property our debt would go down which would make our DTI look better and we could purchase another property but I don't know why I would sell one just to buy another unless it provides a better cash flow or return. But that is difficult to do in this market in my location.

 I am also sort of tired of being a landlord and I think it is showing in my interview process for tenants. We have been at this about 12 years and would really like to pull some equity for many reasons. One of them just being piece of mind that we have more reserves in the bank and another of them being just to enjoy some of the reward.

One option we are considering is selling one to maybe buy a vrbo that might provide better returns. Vrbo is not allowed in our area so we would probably look some where within a couple hours of our primary residence. We are also considering renting out our primary residence and finding another house to move into.  

I also think that we are at the top of the cycle and selling doesn't seem like a bad idea either. There is nothing wrong with cashing out while the getting is good. We bought for long term hold purposes and that has always been our basic plan, but that may change. I don't know if I have it in me to be a landlord for another cycle if prices drop and we have to wait for the cycle to bring them back up. That is just me being honest about being a landlord. It has taken its toll somewhat over the years. 

Originally posted by @Matthew Lessard :

Thank you at @Jon A. and @Chris Mason, this information is very helpful. It is hard to see the value in doing a refi/cash out for a rentl as it almost seems like a penalty. I also thought about doing a 1031 and selling, but I would like to keep the current rental as the cash flow is good. 

The thing that doesn't sit well is I have all this equity sitting there doing nothing. Any advice on how to proceed? I almost think its best to stay where I am and continue to pay down the current mortgage. Although it would be nice to do something with that equity. 

Recall that cashflow is about dollars, not about a percentage. If the cash out is going to increase the payment by $200/mo, add that number to your cashflow requirements for what you are looking to buy.