A Refinance Opportunity Has Emerged Now That Mortgage Rates Have Declined

5 Year History Of The Treasury Yields

The last time I refinanced my oldest rental property was in the Fall of 2011 (see red oval). I locked in a 3.375% rate for a 5/1 conforming ARM, which means I have until 2016 before my interest rate adjusts upwards or downwards. With a payment of $1,300 a month – $550 of which goes to principal -I’m not too worried about rising rates because the property generates $3,800 a month in rent.

I had the opportunity to refinance again in May 2012, but felt it was too much of a hassle to save $1,070 in interest a year so I didn’t. In retrospect, I should have just gone through the estimated three month long refinance process because the savings would be $1,070 X 5 years = $5,350 and I would have a year longer fixed interest period. Every dollar counts when you are no longer working.

WHY INTEREST RATES ARE MOVING

The Refinance Window Is Closing: Historical Charts Of The 10-Year Yield

10 Year Yield Chart Over 1 Year

Those who’ve been waiting to refinance for the past 12 months have missed the boat with the US 10-year treasury yield surging to 2.15% as of 5/31/2013 vs. a low of 1.4% in July, 2012. Everything from 5/1 adjustable rate mortgages to 30-year fixed rate mortgages have all moved higher by similar, but not exact magnitudes due to durational differences.

I recommend refinancing as many times as possible if existing rates are at least 0.5% lower and you can break even on the refinance costs within 24 months. Not refinancing due to laziness or fear is quite stupid. It’s interesting to note that the larger your mortgage to refinance, the lower your explicit refinance costs. Given I believe the ideal mortgage amount is $1 million dollars (if you can afford it) for tax purposes, my refinance costs are often “no cost” with fees simply embedded in the new lower rate. There is no free lunch, but it sure feels that way when a bank says do you want a 0.5% lower rate that will cost you nothing out of pocket!

SO WHAT IS A HOMEOWNER SUPPOSED TO DO?

Should I Do A Cash-IN Refinance? The Benefits And Risks Of Paying Down A Mortgage For A Lower Rate

Cash-In Refi A San Francisco MansionA number of you have asked me whether you should do a cash-in refinance so I’d like to share my thoughts on this interesting scenario. A cash-in refinance is basically when you pay down your existing mortgage to under a certain loan-to-value ratio in order to qualify for a mortgage refinance.

Loan-to-value is calculated by taking your mortgage divided by the value of your property. A LTV of 80% or lower is generally what is required by most big banks nowadays in order to refinance e.g. $400,000 mortgage, $500,000 house. For rental property buyers, banks usually require a 30% downpayment or more, which equates to a LTV of 70% or lower.

Mortgage rates have come down significantly over the past 10 years thanks to the Federal Reserve’s loose monetary policy, more efficient policy, lower inflation rates, increased demand for fixed income instruments, and difficult economic cycles. I was personally stuck with a 30-year mortgage of 5.875% on my vacation property because the condotel secondary mortgage market shutdown after the collapse. For years, I longed to refinance down to 4.25% or lower, but I didn’t want to throw more cash into an illiquid asset. Instead, I was able to get a loan modification for free from Bank of America.

But let’s say you can’t get a loan modification and desperately want to lower your mortgage interest rate. The only other option is to do a cash-in refinance.

HOW TO DECIDE WHETHER TO DO A CASH-IN REFINANCE

Refinancing A Mortgage Without A Job Is Almost Impossible: Three Potential Solutions

Nice Mansion In Presidio HeightsThere are many benefits of being unemployed. Getting the respect of mortgage bankers is not one of them. I’ve been fortunate over the past 10 years to refinance multiple properties, multiple times. Economic Armageddon and easy monetary policy by the Fed is literally saving me hundreds of thousands of dollars in interest expense. To experience a recovery in stocks and real estate while not having to give up lower payments is rewarding. This disconnect will eventually lead to another asset class implosion, but we’re still a long ways away.

I’ve been sitting on a refinance high after finishing my loan modification with Bank of America this past January. They contacted me out of the blue asking if I wanted to lower my 30-year fixed rate for my vacation property down to 4.25% from 5.875% for no charge. 4.25% is not the best rate, but beggars can’t be choosers given the secondary market for condotel mortgages is still closed. The process took a total of 2.5 weeks and closed without a hitch, unlike my epic primary home mortgage refinance in the Spring of 2012.

With the 10-year yield inching back over 2%, I was not expecting to refinance my primary home mortgage rate of 2.625% so soon. So it was with great surprise that a Citimortgage officer cold called me asking whether I’d like to refinance my 5/1 jumbo ARM down to 2.375%! Banks are now giving up more margins to win business as competition heats up.

The move from 2.625% down to 2.375% is only a 0.25% decrease. Normally I wouldn’t waste my time for anything less than a 0.5% reduction. However, Citibank was offering to pay for all closing costs so I figured why not. I’ve been through this song and dance so many times I’m willing to bear potentially 100 days of frustration to save some money. Refi as many times as possible. As an unemployed person, every dollar counts!

MORTGAGE HEAD FAKE

How To Get A Mortgage Loan Modification: In Search For Lower Rates

SF Victorian Rate ModificationYou know what’s better than successfully refinancing your mortgage at a lower rate? Getting a free loan modification at a lower rate without all the paperwork, hassle and fees. A loan modification is when the bank contacts you and basically says, “Hey good looking! Do you want some free money? If so, you’re in luck!

My loan modification opportunity came out of the blue right around Christmas time. Bank of America sent me a FedEX envelope with a single sheet of paper that read, “This offer is exclusively available to you through Bank of America, for a limited time only.” I honestly thought the letter was junk mail until I looked a little closer to see all my account details included.

For the past two years, I’ve been pinging Bank of America to see if they would lower my vacation property mortgage from what’s now considered a sky high 5.875% 30-year fixed rate to something lower. I’ve refinanced my other mortgages multiple times, but this was the stubborn one. The condotel mortgage secondary market dried up after the crisis, therefore refinancing at a lower rate became impossible. We should all refinance as many times as it takes to save money.

If you are not aware, most banks sell their loans to the secondary market (mortgage backed securities) as a way to hedge out risk and capitalize on profits. The secondary mortgage market actually helps the end consumer by allowing banks to lend more at lower rates. Unfortunately, once a bank run comes, it takes a while for the secondary market to thaw.

Since Bank of America wasn’t able to sell my loan in the secondary market, they figured why do anything to lower my rate given that’s what we agreed upon. I hadn’t missed a payment, so as far as they were concerned I was a good customer. BoA had the capability to lower my rate, but they didn’t have the willingness. Fair enough.

So how did I successfully manage to reduce my 30-year fixed mortgage from 5.875% down to 4.25% for free and within two weeks to boot? What’s more, this is my second free loan modification. The first one happened five years ago with Citibank when they decided to lower my then 5/1 ARM 3.625% rate down to 3.125%. Let me explain how to win the mortgage lottery.

HOW TO GET A LOAN MODIFICATION

Why Are Rental Property Mortgages More Expensive Than Primary Home Mortgages?

Rental Properties In Stockholm, Sweden

Rental properties in Stockholm, Sweden

In a previous article, I discuss why it’s important to refinance your mortgage before leaving your job. No job = no recurring income = high risk = no mortgage refinance for you! You won’t even have the ability to compromise and pay a higher lower rate than if you did have a job. When you lose your W2 income, you turn invisible to the banks. Think, “You are dead to me.”

The other important refinancing situation to consider is when you are planning to turn your primary property into a rental or vacation property. You might have outgrown your existing property, but don’t want to sell given you believe real estate is a great long term wealth builder. Perhaps your company is relocating you for a better opportunity and you plan to return one day. Finally, maybe you’ve been forced to downsize and have no choice but to become an accidental landlord.

Whatever the case may be, always, always, always refinance your rental property before it becomes a rental property! If you don’t, you may miss an opportunity to save thousands of dollars in interest costs. This article will explain to you why rental property mortgages are higher than primary property mortgages by a common spread of 0.5% up to 1.5%.

The Difference Between Primary And Rental Mortgages By The Bank

Primary Mortgage: The primary mortgage is underwritten based on the assumption that your day job income + other alternative incomes will be around so that you can comfortably pay every month. Your W2 income viability is the ANCHOR that propels a bank to move forward and give you a new mortgage. After assessing your W2 income will the bank then account for your alternative income streams if needed.

The most important ratio your bank will look at is your debt to income ratio. They ratio they are generally looking for is roughly 33% or lower. That said, my recent loan modification required just a D/E ratio of 42% or less. Each bank is different. The number one goal for the bank is to earn a consistent spread over the life of the loan.

Rental Mortgage: Your rental property mortgage is underwritten based on the assumption of the feasibility in collecting rental income. The bank then looks at your W2 income to arrive at your total income. W2 income is preferred, however underwriters try to match income sources with the types of mortgages they are lending. The main issue is the viability of your income streams.

If you are refinancing an existing rental property, you’ve got to come up with a lease and rental history. No lease and a sketchy rental history full of missed payments will probably end your rental property mortgage refinance. Rental property mortgages often require a 30% or more downpayment compared with your typical 20% downpayment for a primary residence.

Risk Reward: It’s all about risk assessment for a bank. From the bank’s point of view, they are making a default assumption that you as the landlord require rental income to pay the mortgage. Even if you have a huge salary and lots of money saved in the bank with the existing institution, the mortgage underwriter does not put as much weight as the rental history of the property. For rental mortgages, they are essentially making a derivative bet.

Last Property Standing: In a housing downturn, the first properties to go are vacation homes followed by rental properties. A primary residence is the last mortgage a multi-property owner will default on since s/he has to live somewhere. The primary home mortgage is presumably more affordable once the multi-property homeowner gets rid of other debt. Banks know this and are more stringent in their rental mortgage lending practices. The last thing a bank wants is to repossess a property. Banks are not in the business of buying and selling properties!

THINK LIKE A BANKER WHEN YOU BORROW MONEY