If you haven’t refinanced your property in the past several years, it’s worth checking the latest rates today. The 10-year yield is back below 2.5% as Wall Street economists scurry to revise down their interest rate assumptions once again. I swear they have the best jobs on Earth because they never, ever have to be right.
I am a firm believer that interest rates will stay at these levels +/- 1% for years. Information transfer is instant nowadays thanks to the internet, and policy makers are much more adept at managing inflation and unemployment in America. As a result, go with an ARM rather than a 30-year fixed mortgage to save yourself money.
The general rule is that any time you can lower your interest rate by 50 basis points (0.5%) and break even within two years, you should refinance. Nothing is more beautiful than locking in a low rate and paying down the loan with ever-weakening dollars thanks to inflation.
Unfortunately for landlords, refinancing a primary mortgage is simple compared to refinancing a rental property. The reason being that refinancing a rental not only requires various Home Owners Association board members to cooperate with the process if you own a condo, the bank does much more due diligence.
From the banks point of view, lending money for a rental is riskier because the default assumption is that you require rental income in order to pay back the mortgage. Therefore, the bank needs to add an added margin of safety in the form of a higher mortgage rate to compensate for their risk. Rental mortgages are usually 25-50 bps higher than a primary residence mortgage.
I just rented out my primary residence this summer at a rent that’s almost double all my costs because I’ve lived there for 10 years. But banks still quoted me for mortgage rates at least 25 basis points higher than the primary mortgage I took out for my new home. As a result, I kept my 2.625% 5/1 ARM mortgage with three years left on the fixed term.
DOCUMENTS NEEDED TO REFINANCE YOUR PROPERTY
Refinancing a rental property is kind of like having an upset stomach in the middle of a 10-hour bus ride to nowhere. The more you can prepare yourself for hell, the better. Once you get through the process, you can sit back and enjoy taking advantage of cheap money for years. The following are documents specific to a rental property refinance, but they can overlap with a primary residence refinance as well.
* Rental lease. The bank wants to see that you have a tenant, and what the rental income number is to assume in their underwriting calculations.
* Proof of rent deposit. One can easily forge a rental lease agreement, so the bank wants to see a record of the rental deposit that verifies with the rental lease.
* HOA meeting notes, and financial reserves. To get this info, you’ve got to ping your HOA President, Secretary, and Treasurer. It is painful to bother other people, so make sure you are on good terms.
* Homeowners Association insurance. The bank needs to know the HOA entity, and all the property outside your walls are insured.
* Homeowners insurance. You must also have insurance that protects the inside of your walls, otherwise a bank won’t lend.
* Bank statements to show your cash balances. The more cash you have the better obviously. Banks will generally ask for the last two months.
* Brokerage statements to see your semi-liquid assets. These statements aren’t as vital, but will often be asked.
* 401k/IRA statements. These statements aren’t asked often, but they are good to have if your income or credit score is a little light, and you need some extra firepower to get you over the hump.
* K1 forms if you invest in private companies. Even though my private equity investments have nothing to do with my cash flow, the bank still requests the statements every single time. These statements are usually a drag on your finances since you’re investing in speculative companies that are often loss making.
* Credit report(s). The banks should pull your credit as part of your refinance fee. Although you should seriously consider checking your credit score for free before applying to save you any hassle or embarrassment.
* W2 form. Probably the most crucial of all documents. If you don’t have one, you’ve got to emphasize your other income streams and assets. Most entrepreneurs and freelancers with less than two years of self-employment income will have a brutal time getting a mortgage. The other alternative is getting an asset based loan.
* A personal letter. It’s always a good idea to humanize yourself and explain why you would like to refinance your rental property. Talk about how your rental property is something you cherish for your retirement. Tell them how you first lived in the home and plan to keep it forever. It’s all about creating a personal connection to help get you over the hump.
One thing I advise is to never give the bank more than they ask. You want to provide just enough so that you qualify and no more. Your mortgage officer will likely say the same thing after asking for your initial statements. You will be dealing with the mortgage officer, who acts as a liaison with the mortgage underwriter. Your mortgage officer is on your side, but the underwriter decides your fate.
BE PREPARED FOR A LONG REFINANCE
Depending on your income situation, getting a mortgage or refinancing now can get very tricky, especially for rental properties. Lending standards are still tight, despite the government promoting first time home buying programs that allows for only 3% down. It’s always curious to see how the government says one thing and does another. Here’s a very candid perspective of why it’s so hard to get a mortgage from a loan officer’s perspective. You might not like what he has to say, but it’s worth hearing his perspective.
It’s important to always refinance your property before you quit your job and no longer earn W2 income. Another logical thing to do is to always refinance your primary residence before you make it a rental.
Refinancing a rental property will test your patience and your sanity. But if you can get through the multi-month long process, you will save a ton of money in the end.
Recommendation for homeowners and homebuyers:
* Shop Around For A Mortgage: LendingTree Mortgage offers some of the lowest refinance rates today because they have a huge network of lenders to pull from. If you’re looking to buy a new home, get a HELOC, or refinance your existing mortgage, consider using LendingTree to get multiple offer comparisons in a matter of minutes. Interest rates are back down to ALL-TIME lows in 2015 due to tremendous volatility and uncertainty in the markets. The Fed is signaling interest rate hikes by 2016 due to inflationary pressures now. When banks compete, you win.
* Check Your Experience Credit Score Today: For only $1 you can check what your latest Experian credit score is straight from their website. It’s a good idea to see what your credit score is before applying for a loan. If it’s below 720, you won’t get the best rate, but at least you can spend time to improve your score. Furthermore, 1 out of 4 credit reports have errors, negatively affecting one’s credit score. I had a $7 late electric bill that crushed my credit score by 100 points and almost derailed my mortgage refinance. The scary thing is, I had no idea for years! Check your credit score today.
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Updated for 2016 and beyond.