Cash-Out Refi on - Lenders Asking 40% Equity and 4% Rate???

Question

Anyone else having trouble getting a decent deal on a refinance right now for rental properties?

I've got a 3 bed / 3.5 bath condo in a popular beach town in San Diego. Incredible long-term, cash-flowing performance as a long-term rental property (no vacancies ever!). Also, I've got near-perfect credit and really good W-2 income. On the down side, all 4 units in the building are now tenant-occupied, which I know lenders do not like. Also, this is one of four mortgages in my personal name (all four rentals are cash-flow positive).

The property is worth about $840k and I owe about $408k on the current mortage (7 years into a 4.25%, 30-year, fixed rate mortgage).

I'm looking to refinance for two reasons: (1) take advantage of historically low interest rates and eliminate the PMI that was built into my old rate; (2) take out $200k+ in equity so I can to be in a better position to buy more rentals in another area in case the market goes down. I'm looking to stick with a 30-year, fixed-rate mortgage, and believe I can do all this while leaving 25% equity in the property, which will allow me to break even every month on cashflow.

I've spoken to friends of mine who recently refinanced at 3% APR or lower. One of these was for a rental property in the same town as mine - they locked in their rate at 2.99%.

However, my mortgage broker is telling me banks will only go up to 60-65% LTV right now (I'd only be able to pull out about $100k, which would give me back my initial capital and is better than nothing), and the best he can do is a 3.99% rate (would not really help that much in reducing the interest rate).

I feel like I am getting into this late, and banks are averse to anything that might look like risk given the uncertain state of the housing market going forward, but this seems excessive to me, given the property's "A" location and perfect rental history.

Anyone else running into similar issues, and if so, any advice? I ran into this in late-2007 when purchasing my first property, and was still able to finance at favorable terms, although it was difficult, so I am optimistic.

Alex Bekeza · Answer

@Christopher Deitz I agree with @Nicholas Covington that I would take it and run. Condos always have loan level pricing adjustments (typically LTV reductions too) and I'd assume that the friends you talked to were refinancing single family homes, not condos. That asset class will always be perceived as higher risk.

It's not exactly the easiest time to sell but have you though about how you could deploy that $400k plus elsewhere and leave behind those Condo HOA fees eating up cash flow if you parted ways? Every time I do a DSCR based loan on a condo I just get so bummed out to see how much people are cutting the HOA every month and doing the math on what it compounds to over the life of the investment.

If not, I'd say @Lisa Eckman has a good point that you may find the best cash out option for this condo from a small/local depository institution as much as I'd like to support my fellow mortgage brokers. Right now mortgage brokers simply don't have the best pricing for certain scenarios like jumbo loans, condos, etc if they're using the most popular wholesale lenders who tend to have the best pricing on a normal day.

Best of luck!

Christopher D. · Answer

The article linked below kind of explains why lending standards have suddenly become more constrained, despite rates dropping.

I came across a quote recently, although I forget from where (BP podcast?) and who said it. Something along the lines of: Ask for money when nobody needs it; spend money when nobody has it.

Borrowers Will Find It Harder Than Ever to Get a Mortgage This Spring—Here's Why

By Clare Trapasso | May 4, 2020

https://www.realtor.com/news/t...

Luke Schrotberger · Answer

Hi @Christopher Deitz.

I'm a mortgage broker based in San Diego and I'll add a bit more info to what you're seeing and hearing. Last week Fannie announced they will not buy "cash-out" type loans that are in forbearance. Many lenders stopped doing cash out altogether and others increased rates to cover the risk. From your description of your situation, you are looking for the most "expensive" type of refi, which likely isn't apples to apples with your friend's recent refi on his rental property. Lenders typically increase the rates, in the industry we call them "hits", for investment properties, for multi-unit properties and for cash-out types of loans. You're getting hit with all those because they are cumulative.

Although I understand the advice "take what you can get", you would benefit from one more piece of info about the mortgage environment before making that choice. All the industry fundamentals point to lower mortgage rates on the horizon. Again, who knows what will actually happen, however based on the underlying interest rates and note rates, insiders would expect mortgage rates to be lower. Part of this is related to the "note" problem referenced by @Ken Calvin, which has interrupted the normal flow of mortgages through the process. Eventually the flow of the mortgage notes will regain some normalcy, but the timing and underlying fundamentals at that time are the big unknown. Which is why the advice, take what you can get, could be the best thing for you.

Something else you may consider is the path I'm encouraging for many of my clients, which is refi the original loan and get a HELOC. I've use a HELOC company that has a 30 year loan. The first 10 years you can utilize the Line of Credit and during that time you pay interest only. The next 20 years you pay off the balance. This tool allows you to only pay interest on the money once you've found another deal you want to invest in. You also get rid of the Cash Out "hit" on the loan, which should get you a better rate for the 30 year fixed.

Luke Schrotberger · Answer

Hi @Michael Lewis

When I built my rental portfolio out of state (I live in CA and bought in TN), I had the most success with building a relationship with a local/regional bank. Simmons has been a great partner for me and has funded me to all me to grow the portfolio to 30 doors. I walked into 9 banks in town and they were the only one who was willing to work with "an out of towner", so it took some work to find the right partner.

Financing on 5 unit buildings are definitely more limited. You need to find a lender that does commercial loans and many of the national commercial lenders have a minimum loan size closer to $500k. I encourage to spend a few days in Buffalo looking for local spots. I can also refer you to a couple lenders who may have an option that works for your situation.

Luke

Lisa Eckman · Answer

Per the podcast I just watched, Matt says go to a small community bank who loan their own $. Not a larger bank that will resell the loan. I forget the term, but you may want to do a search for it. Good luck and nice job!!

Alex Bekeza · Answer

@Christopher Deitz I agree with @Shaun Weekes. I wouldn't advise anyone to attempt to "time" the mortgage market when they could significantly benefit right now. At the end of the day, if rates dropped even further 6-12 months from now then you'd likely be able to make sense of another rate/term refi at that time. A lot of people are already kicking themselves from not pulling the trigger several weeks ago thinking things would get even better.

Shaun Weekes · Answer

In today's market and lending environment I think a bird in the hand is worth more than 2 in the bush. Refinance now.

Shaun Weekes · Answer

You might have missed the first class flight last month when rates where crazy low but at 3.99% you're still getting a massive deal. Not to mention MI will be gone and you're getting out 200k plus. Don't wait, execute this deal and look for another deal with the same great rates. You'll have the cash!

Michael Lewis · Answer

I live in Boston and own two mixed use buildings in Buffalo, NY. Each building has 5 units (one commercial unit and four apartments in each building). Currently no mortgage on either (I own them free and clear) and both in great shape (we were fortunate to be the beneficiaries to substantial grants that allowed for new roofs, furnaces, upgrades, etc, in 2017). They cash flow very well with one property taking in $2,425 a month ($29,100 annually) and the other $2,245 a month ($26,940).

I’m actually surprised at the hurdles I’m encountering trying to get someone to loan against these properties, even at a 50% LTV (conservative estimates are each building is worth $225k - $250k).

Some of the more common objections I’ve heard are:

“We don’t loan to out-of-state owners.”

“We only loan on owner occupied properties.”

“We don’t loan against properties over 4 units.”

“We don’t loan on mixed use buildings.”

I would think in this absurdly low interest rate environment that it would be easier than in the past to secure reasonable loan terms if I wanted to borrow against the properties.

Curious to hear if anyone can offer feedback and/or possible lending solutions. I don’t have a particular property or project that I’m looking to buy right now so there’s no rush, per se, but I’m always looking and would love to have access to capital should an attractive deal present itself.

Thank you in advance to the Bigger Pockets community – this is the best real estate investing resource I’ve come across. –Mike

Daniel B. · Answer

@Christopher Deitz

Confused on your “condo” but 4 units with tenants comment? 4 condo units or a multi family with 4 units? Condos would have 4 conventional mortgages?

Keep checking on lenders. Some are still doing more than 60% LTV. You will have the same closing costs and they will eat up a larger percent of the loan if you borrow less funds (not encouraging you to over leverage). If you dint have to have the funds now I’d wait a couple months, not just because rates could go down but borrowing 60 vs 75% is a big difference on the value. No chance you would move back in for a year to save on rate?

You need to really look at your current loan amortization table. Lower interest rates don’t always save you money, 7 years into a loan is a good chunk of those early payments that are mainly interest. Do your current P&I payment * 23 years (time left remaining). Then figure even if you just refinanced to a lower rate for same balance what would that P&I payment be? Multiple that times 30 years. Back the principal balance out of both the above answers and see how much if any you actually save in interest...

Cash-Out Refi on - Lenders Asking >40% Equity and 4% Rate???

Cash-Out Refi on - Lenders Asking >40% Equity and 4% Rate???

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