Bank Loan Options for Investment Prop Refinance w/ Cash Out

6 Replies

Hello BiggerPockets community.

I'm looking to refinance a 2- Family (non-owner occupied) investment property with a cash out option to help finance another future investment property. Is 70% LTV a standard or are there banks willing to go higher, like 80%+ for example. Would it be better to find an online lender or will I have better luck with a local lender (I live in MA)? I got one quote back so far from Rocket with a rate of 4.99% and closing fees of $8.8k. This seemed quite high. Is this the average I should expect or should I keep looking for something better?

I appreciate everyone’s time a look forward to hearing people’s thoughts.

Originally posted by @Carlos Goulart :

Hello BiggerPockets community.

I'm looking to refinance a 2- Family (non-owner occupied) investment property with a cash out option to help finance another future investment property. Is 70% LTV a standard or are there banks willing to go higher, like 80%+ for example. Would it be better to find an online lender or will I have better luck with a local lender (I live in MA)? I got one quote back so far from Rocket with a rate of 4.99% and closing fees of $8.8k. This seemed quite high. Is this the average I should expect or should I keep looking for something better?

I appreciate everyone’s time a look forward to hearing people’s thoughts.

70% is the max CLTV particular to what you just described from both Fannie and Freddie. There are loan programs that will go higher, but without that Fannie/Freddie subsidy on the back end all profits must come from you the borrower directly, which will mean some combination of worse rates/fees/terms... no one lends money at 3.75% or 5.375% without some back-end or side source of revenue or revenue potential, just like you're not going to lend me money at 5% (your base CoC ROI = 5%) unless there's some other side hustle or back end thing in it for you, between inflation and opportunity cost you'd just be throwing money away to do so. No different here; if you want Fannie subsidizing your loan on the back end so that you get a good rate, you gotta play by her rules.

Big Red might be the right home for this loan, but if it is then it won't be by calling them directly through their retail 1-800 channel. In addition to the above, BR has one of the largest marketing budgets in the country, and this isn't free. That's what most of that $8k is paying for. You can cut out having to subsidize the marketing by going to an independent mortgage broker who will be pulling their wholesale rates. When someone with reasonable credit calls me for a 2nd opinion after calling BR, usually the rate ends up being very similar (a pinch lower today, a bit higher tomorrow, whatever), but all the thousands and thousands of dollars in (cleverly renamed) marketing fees go away (THIS is where the action is), holding all else constant.

Thanks for the quick response Chris!

What do you mean by “it won't be by calling them directly through their retail 1-800 channel?” Also, just to clarify for my understanding, I should expect to see the same rate, for the most part, from most lenders, but could save some money in the different loan fees by going to a smaller lender due to them not having the big marketing spending that the bigger guys have?

Originally posted by @Carlos Goulart :

Thanks for the quick response Chris!

What do you mean by “it won't be by calling them directly through their retail 1-800 channel?” Also, just to clarify for my understanding, I should expect to see the same rate, for the most part, from most lenders, but could save some money in the different loan fees by going to a smaller lender due to them not having the big marketing spending that the bigger guys have?

All lenders have all the exact same rates. I can pull 50 rate sheets from 50 lenders, all will have 3% and all will have 6%, and that's true today and will be true next month. What varies between them AND from day-to-day is the fees. 

Today, for your scenario, for example (not actual numbers):

Lender A @ 5%: 0.123 points plus $999 flat underwriting fee.

Lender B @ 5%: -0.03 points plus $995 flat underwriting fee (negative points = lender credit for 3rd party closing costs).

We would say that B is priced 15.3 basis points better.

So everyone sends business to B, who gets slammed, backed up, they are paying out a bunch of overtime to keep turn-times reasonable. 

By contrast A is now paying underwriters to sit around doing nothing, since everyone is going to B. 

A sharpens the pencil, B bumps what they charge to cover the overtime. 

As we can see, BOTH lenders now have an expense problem: A is paying people to sit around doing nothing, and B is paying out too much overtime!

Same scenario a week hence, after they adjust to fix their expense problems:

Lender A @ 5%: -0.411 points plus $999 flat.

Lender B @ 5%: -0.103 points plus $995 flat

Overall market obviously shifted, everyone is now priced better (maybe Trump tweeted or something), but now A is in the lead because they REALLY need to stop spending money on underwriters sitting around doing nothing. A is now in the lead by like 30 bps, and A might actually be really close to 0 point for the next rate down, perhaps 4.875% is now 0.133 points with A and B is at 0.421.

This is fairly standard par for the course for a mortgage broker.

Quick note. You call me today, Oakland escrow, and need it to close fast since your contract specifies 21 days to close or you lose the property. I might send the deal to A who has worse pricing. Why? Well, we can probably expect A to turn around files fast as hell this week, can't we? 15.3 basis points = $153 more in closing costs per $100k borrowed for the exact same rate (plus their flat fee is $4 higher) = not an unreasonable price to pay if you're Tom Cruise and have the need, the need for speed.

In this scenario we're imagining a small marketplace with only 2 lenders, none of which have giant marketing budgets or unusually high overhead, leading them to be neck and neck. In the real world, you aren't looking at 15.3 bps difference, you're looking at like 200 bps since my model is wholesale v wholesale (what I actually look at), and you're calling the 1-800 number directly (what you are actually doing) as a retail customer.

Originally posted by @Carlos Goulart :

Hello BiggerPockets community.

I'm looking to refinance a 2- Family (non-owner occupied) investment property with a cash out option to help finance another future investment property. Is 70% LTV a standard or are there banks willing to go higher, like 80%+ for example. Would it be better to find an online lender or will I have better luck with a local lender (I live in MA)? I got one quote back so far from Rocket with a rate of 4.99% and closing fees of $8.8k. This seemed quite high. Is this the average I should expect or should I keep looking for something better?

I appreciate everyone’s time a look forward to hearing people’s thoughts.

I'm getting a HELOC against my rental at HSBC. Getting prime + 1.5ish. No fees. They also have a promo rate for the first year. Check it out or let me know and I can refer you. Borrow up to 200K I believe.

Decided against a refi because my conventional rate is killer.  Can't touch that.  

 

@Carlos Goulart Hi Carlos,

Chris already spoke to a lot of good points on what you asked about, but if I can elaborate a little further...

To your question about whether to use an online lender or local lender, if you take away anything at the end of this, take away this - you get what you pay for.

Like anything else, sometimes the cheapest isn’t always the best. At a certain point, you start to lose out on quality and service. If you’re up to terrible communication and poor customer service, there are some dirt cheap online lenders you could probably find. Then at the opposite side of the spectrum, there are also lenders who probably overcharge for things, whether it’s because of a large marketing budget to run all the commercials and ads in your face 24/7 or because they’re a large nationwide lender with actual bank branches and have more overhead to pay for to be physically present in such markets.

I won’t try to sway you one way or the other. I work for the next largest lender behind Quicken and every lender has their own strategy to attract new clients.

Look into the differences between what is a broker and what is a lender, understand why and how they are different, then you will understand why the prices/rates are different. I don’t think one is any better than the other, but if you have to pick between a local lender or local broker versus an online Costco lender- you should pick the local lender or broker everytime.

That’s my $0.02 though! Good luck to you!

Thanks for all the responses.

After some further research I'm thinking a Home Equity Loan would be better for my situation...if possible.

My 2-family investment property is already sitting on a pretty good rate...at least compared to today's rates, so I would rather not refinance if possible. Are there banks that would do a home equity loan on a multi family investment property?

Some more info on the house. I owe about 175k on a 15 year (about 12 years left) at 4.5%. The house is worth about 400k give or take a bit. I'm trying to get at about 80-95K of the equity to use for a down payment for another investment property. Does this sound like something that is possible or do I need to keep looking for another way?

Thanks again for all the help and responses.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here