Taking Steps toward Refinancing a Rental Property

By Ilyce R. Glink and Samuel J. Tamkin
Saturday, July 31, 2010

I have a rental property that I bought five years ago for $170,000 but now is valued at $120,000. I have a mortgage at 6.75 percent with about $45,000 in equity on the property. I am not in financial difficulty, but I would like to take advantage of low interest rates. Is it possible to refinance my rental home? If so, any tips would be appreciated.

You should be able to refinance a single-family rental property as long as you have at least 25 percent equity in the house and have a credit score of at least 700.

Fannie Mae and Freddie Mac are both refinancing rental properties, and although Fannie Mae will allow you to own as many as 10 properties, most lenders will let you own only four, including the one you live in.

But don’t expect to get an interest rate in the 4 percent range. You might get something at 5 to 5.5 percent range — which is still a lot less than what you’re paying. And although Fannie and Freddie are buying residential rental property mortgages, not every lender is doing them. So you’ll have to start shopping around to find a lender who can help you.

I’m not particularly knowledgeable about many financial ventures, but I want to understand whether I can help a friend who has a house and owes more than the property is worth. He took out a second mortgage, ran up his credit cards and has several liens against the property.

His ex-wife was in bankruptcy before they got together. Now his home of 34 years might be pulled away from him. He has severe credit problems and is not old enough for a reverse mortgage. Are there any programs that might help him save his home? What would happen if I paid him for half of his house?

It’s clear that you are a thoughtful and generous person, and your friend is lucky to have you in his life. However, what you’re proposing could easily destroy your financial stability, so you’ll want to take every precaution to protect yourself.

Start by speaking with a knowledgeable real estate attorney who can help you look much further into your friend’s investments, debts, homeownership problems and so forth. It’s great that you want to help, but you don’t know what kind of financial quicksand you might be stepping into, and you need to make sure you help in a way that doesn’t wind up hurting you. I can’t recommend that you extend any help until you have a very clear picture of what your friend is facing financially.

Before putting one dime toward this problem, invite your friend to review the situation with you and your attorney. Try to figure out why he is in so much debt, how far underwater the house is and what options and opportunities exist to help him out.

See if he has any other assets, and discuss when and how he might pay back a loan from you. Focus on what kind of deal you can make for your dollars — one that ensures you will get back every cent you invest if you decide to do that. Whether you choose to give your friend a gift to help him out of his problems is your choice. But if you expect repayment, you need to know more, and you need to have a discussion about your expectations for repayment in the future.

If your friend can’t — or won’t — share every detail about his finances, including who owns what and who charged up the liabilities he and his ex-wife now owe, then you should offer moral support, point him in the direction of the nearest HUD housing counselor (888-995-HOPE) and keep your dollars in your pocket.

There are programs out there to assist homeowners struggling to make their mortgage payments. The federal Home Affordable Modification Plan (HAMP) is an effort to assist homeowners, but it has fallen short of expectations, and few homeowners are actually benefiting long-term. Some mortgage lenders have their own plans to help borrowers, and your friend should call his lender first. In addition, if your friend has the stomach for it, he can call his credit card lenders and work out a payment plan with them, but he’d have to stop charging more items on his credit cards.

Your friend might want to talk to a counselor at Credability.com (formerly Consumer Credit Counseling Center of Greater Atlanta) or another reputable credit counseling center officer to work through the various options that might be available to him.

I have a 30-year fixed-rate mortgage that I took out in 2003. Until recently, I was paying a few hundred dollars extra each month toward the principal balance. I think I have about 16.5 years left on it, and my balance now is about $106,000.

I’d love to take advantage of historically low rates, but I think I waited too long to make a move. If I refinanced to a 15-year loan now, I guess I’d only cut off a year or so, and I think my payment would be about the same. Any thoughts?

If you cut a year or two from your mortgage, you’ll still save thousands in interest. You might also give yourself more of a tax deduction in the next few years. I think it might be worth doing, but you have to do the numbers.

You should be able to refinance a 15-year loan at about 4 percent (as of late July). That is probably quite a bit lower than what you’re paying now.

In 2003, your interest rate was probably in the high 5 percent range. If the payments are the same, you’re still saving 18 months’ worth of payments, so the trick will be to keep your closing costs as low as possible. If the payments are less than what you’re paying now, you can add them in and shave even more time from the loan term.

But you’re right: If you save, it might not be by all that much. But you won’t know for sure until you run the numbers. Note also that if you refinance, you’ll have the pressure to make at least the same payment, so if times get a bit tougher for you, that could be a problem as well. Pull out the pad and paper or go to the computer and work out the numbers.

You might also want to sit down with a good mortgage lender or mortgage broker and see what your savings might be and what it would cost you to refinance.