Worth it to refinance?

[odieoh]

A question for anyone knowledgeable about mortgages and refinancing. I bought a townhouse when I started residency. It was a 208,000 5/1 ARM with the rate at 6.50%. It is now in the 4th year of the loan. I have since moved from there, having finished residency and I have it rented out.

My question is, would it be worth it to refinance it? Interest rates are much better now, however I will probably try to sell it next year. I will definitely keep it until next June, I've told the renter he can stay another year. However, who knows if it will sell or not.

The other detail is that I did it as a "physician's loan" which the local bank offered at the time, basically I had nothing down. The loan is now paid down to about 198k, and with the changes in the market, I would be lucky to get that much for it as a sale price. The market hasn't dropped tremendously in that area, but I definitely bought at the peak of the bubble. It would probably be realistic to get 185-190k for it. It is in a nice area and I had some nicer upgrades put in while it was built (hardwood floors, granite tops, etc). So I may be lowballing myself. But regardless, just wondering if anyone has had experience or advice regarding refinancing a property you know you are going to sell within a year or two. Also, is there usually much cost associated with refinancing?

At this point the rent covers most of the mortgage payment, which includes insurance and property taxes, but I still end up paying a couple hundred bucks out of pocket each month.

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[sam1999]

A question for anyone knowledgeable about mortgages and refinancing. I bought a townhouse when I started residency. It was a 208,000 5/1 ARM with the rate at 6.50%. It is now in the 4th year of the loan. I have since moved from there, having finished residency and I have it rented out.

My question is, would it be worth it to refinance it? Interest rates are much better now, however I will probably try to sell it next year. I will definitely keep it until next June, I've told the renter he can stay another year. However, who knows if it will sell or not.

The other detail is that I did it as a "physician's loan" which the local bank offered at the time, basically I had nothing down. The loan is now paid down to about 198k, and with the changes in the market, I would be lucky to get that much for it as a sale price. The market hasn't dropped tremendously in that area, but I definitely bought at the peak of the bubble. It would probably be realistic to get 185-190k for it. It is in a nice area and I had some nicer upgrades put in while it was built (hardwood floors, granite tops, etc). So I may be lowballing myself. But regardless, just wondering if anyone has had experience or advice regarding refinancing a property you know you are going to sell within a year or two. Also, is there usually much cost associated with refinancing?

At this point the rent covers most of the mortgage payment, which includes insurance and property taxes, but I still end up paying a couple hundred bucks out of pocket each month.

If you decide to sell, you still have to cover the difference between amount received after paying realtor and closing cost and what you owe to the bank.

Are you planning a short sale or jingle mail?

Not sure if you can manage rental from a distance. In a year or so you still either have to take other mortgage as refinance or take the arm. Interest rates are super low but odds are at some point (not sure when) interest rate will go up.

 

[odieoh]

If you decide to sell, you still have to cover the difference between amount received after paying realtor and closing cost and what you owe to the bank.

Are you planning a short sale or jingle mail?

Not sure if you can manage rental from a distance. In a year or so you still either have to take other mortgage as refinance or take the arm. Interest rates are super low but odds are at some point (not sure when) interest rate will go up.

I'm aware I will have to cover the balance. Thats partly why I'm waiting to sell, letting the renter pay down the mortgage a bit so I won't be left with quite so much to pay, and hopefully the market turns up a bit. I would be more than happy to sell it for exactly what I owe on it.

Definitely not planning on Jingle mail, not having any problems making payments or anything like that, I just want to be rid of it. I think Jingle mail would be a last option, I'm not wanting to trash my credit, which is quite good. Also not planning a short sale, if what you mean by short sale is selling it for whatever I can get and hoping the bank will let me off the hook for the rest. If I sell it for less than I owe I will pay the difference. At this point the couple hundred bucks a month it costs me isn't a problem at all--but I can think of a lot of other uses I could put that $$ to, and If I could decrease the monthly payment by refinancing, the rent check would come a lot closer to covering it.

My main question I guess is whether or not paying the costs of refi would be worth it for ~2 years of lower payments. I've done a little research actually and of course the answer depends on how low a rate I can get and how long I will have the house, along with exactly how much the refi will cost in fees/points/etc. Just wondering if anyone has done this in a similar situation.

 

[sam1999]

I'm aware I will have to cover the balance. Thats partly why I'm waiting to sell, letting the renter pay down the mortgage a bit so I won't be left with quite so much to pay, and hopefully the market turns up a bit. I would be more than happy to sell it for exactly what I owe on it.

Definitely not planning on Jingle mail, not having any problems making payments or anything like that, I just want to be rid of it. I think Jingle mail would be a last option, I'm not wanting to trash my credit, which is quite good. Also not planning a short sale, if what you mean by short sale is selling it for whatever I can get and hoping the bank will let me off the hook for the rest. If I sell it for less than I owe I will pay the difference. At this point the couple hundred bucks a month it costs me isn't a problem at all--but I can think of a lot of other uses I could put that $$ to, and If I could decrease the monthly payment by refinancing, the rent check would come a lot closer to covering it.

My main question I guess is whether or not paying the costs of refi would be worth it for ~2 years of lower payments. I've done a little research actually and of course the answer depends on how low a rate I can get and how long I will have the house, along with exactly how much the refi will cost in fees/points/etc. Just wondering if anyone has done this in a similar situation.

Let me ask from a different point of view.

Where ever you are, are you planning on staying there? Not sure or may move if there is better opportunity?

Can you handle rental from your current location? If yes then can you handle rental for next 15 years also?

There are 2 costs for refinance.
One is actual cost of refinance. Bank fees etc. How long will it take to recover these cost in terms of lower mortgage payment? I assume it is 2 years that's what you have written?
Other is you might have to pay the difference right now as your home is worth less than current mortgage. How much is the difference in terms of current value of house - mortgage - any down payment with refinance.

I am thinking, have you considered refinancing to a fixed rate lets 15, 20 or 30 year mortgage where rent will pay mortgage providing you are able and willing to manage rental. In this way you will have short term pain but in the long run you will own the house with mortgage paid off via rental. You need to look at rental market in that area and problems with tenets and house like leaks, roofs etc.

If I remember correctly, with any rental properties you may have to pay larger down payment which I think can be high like 20%.

Reason I am thinking of this is, if you are able to manage rental from your current location, have down payment then perhaps you return on capital will be lot higher than any stock market.

On the other hand, your property is rental property now. If you refinance now with a intention of selling in a year or two, you still may have to pay larger down payment plus mortgage difference plus realtor fees (which can be as high as 6%).

Have you considered asking your tenet about rent to own deal? In that way you might save on realtor fees? In this way you can take the pain in terms of decline in property value but you might be able to sell with 5 years of your original mortgage without much worry about rising interest rate providing tenet don't back away from the deal.

 

[odieoh]

Let me ask from a different point of view.

Where ever you are, are you planning on staying there? Not sure or may move if there is better opportunity?

Can you handle rental from your current location? If yes then can you handle rental for next 15 years also?

There are 2 costs for refinance.
One is actual cost of refinance. Bank fees etc. How long will it take to recover these cost in terms of lower mortgage payment? I assume it is 2 years that's what you have written?
Other is you might have to pay the difference right now as your home is worth less than current mortgage. How much is the difference in terms of current value of house - mortgage - any down payment with refinance.

I am thinking, have you considered refinancing to a fixed rate lets 15, 20 or 30 year mortgage where rent will pay mortgage providing you are able and willing to manage rental. In this way you will have short term pain but in the long run you will own the house with mortgage paid off via rental. You need to look at rental market in that area and problems with tenets and house like leaks, roofs etc.

If I remember correctly, with any rental properties you may have to pay larger down payment which I think can be high like 20%.

Reason I am thinking of this is, if you are able to manage rental from your current location, have down payment then perhaps you return on capital will be lot higher than any stock market.

On the other hand, your property is rental property now. If you refinance now with a intention of selling in a year or two, you still may have to pay larger down payment plus mortgage difference plus realtor fees (which can be as high as 6%).

Have you considered asking your tenet about rent to own deal? In that way you might save on realtor fees? In this way you can take the pain in terms of decline in property value but you might be able to sell with 5 years of your original mortgage without much worry about rising interest rate providing tenet don't back away from the deal.

Really not sure if I will be staying in my current location or not, but likely will not be returning to the city where the townhouse is. So far no problems managing it from a distance but its a somewhat unusual situation. I have another resident renting it who is very low key. I hear from him every 4-5 months. He sends me 4 months worth of rent checks at a time and I cash one each month. I realize it won't be like this forever and other tenants might be more needy. Current renter would not want to rent to own, will be moving after residency.

I guess I would really prefer to sell. Since buying it I've learned the builder was known to cut corners. I have had no problems so far but don't really want to wait around for something to collapse. Otherwise yeah, keeping it as a rental/investment property would be great, although currently it is a losing prospect.

With a refinance, would you always have to have a down payment? Probably you are right that it being a rental now they would want something down. Bleh. I've been sinking all my excess cash into extra payments on student loans.

 

[sam1999]

I think you should talk to a mortgage broker (if there is any one left in the business) or mortgage specialist at a bank to get some idea.

http://www.freddiemac.com/sell/factsheets/invprop.htm

Mortgage rules are different for personal residential property vs rental. It seems like you will be paying though the roof.

It seems like you are not considering at all realtor fees and closing costs of selling. If you want to sell it then it will be better to list it now when it is already occupied. This way at least you have some income. Not sure how long will it take to sell it.

Imagine in a year if you want to sell it. Tenet is gone and you list your property then it will be dobble wammy as you will paying both mortgage payement plus investment loss plus closing costs.

It is tough situation. I am sorry about you loss. Most advice I got is never buy a property unless you want to live there for at least 5 years. Many people just ignore closing costs. I think it has been fed into our DNA with buying property you are building wealth as you are not draining into rent plus mortgage interest is deductible!

 

[odieoh]

Well, I don't have quite as gloomy an outlook about the situation as you would have me. First of all my renter has 2 years left in his residency and he would be glad to stay in it both years, he's not going to want to move for just the last year. I plan on putting it on the market about a year from now to test the waters.

I have definitely considered closing costs/realtor fees. I know its not going to be cheap. I also remain hopeful that I will be able to sell it for close to if not all of what I owe. Brand new units in the same subdivision go for slightly higher than what I owe. Mine is a few years old, but does have a few upgrades as I mentioned. I would also be willing to sell it furnished, with the washer/dryer/nice leather couches/52 inch tv. Hopefully with that all added up I would come out close to even, if I end up paying a couple thousand out of pocket so be it.

Realtor's fees are what scare me the most and what seem like a huge rip off.

I think you should talk to a mortgage broker (if there is any one left in the business) or mortgage specialist at a bank to get some idea.

http://www.freddiemac.com/sell/factsheets/invprop.htm

Mortgage rules are different for personal residential property vs rental. It seems like you will be paying though the roof.

It seems like you are not considering at all realtor fees and closing costs of selling. If you want to sell it then it will be better to list it now when it is already occupied. This way at least you have some income. Not sure how long will it take to sell it.

Imagine in a year if you want to sell it. Tenet is gone and you list your property then it will be dobble wammy as you will paying both mortgage payement plus investment loss plus closing costs.

It is tough situation. I am sorry about you loss. Most advice I got is never buy a property unless you want to live there for at least 5 years. Many people just ignore closing costs. I think it has been fed into our DNA with buying property you are building wealth as you are not draining into rent plus mortgage interest is deductible!

 

[sam1999]

Well, I don't have quite as gloomy an outlook about the situation as you would have me. First of all my renter has 2 years left in his residency and he would be glad to stay in it both years, he's not going to want to move for just the last year. I plan on putting it on the market about a year from now to test the waters.

I have definitely considered closing costs/realtor fees. I know its not going to be cheap. I also remain hopeful that I will be able to sell it for close to if not all of what I owe. Brand new units in the same subdivision go for slightly higher than what I owe. Mine is a few years old, but does have a few upgrades as I mentioned. I would also be willing to sell it furnished, with the washer/dryer/nice leather couches/52 inch tv. Hopefully with that all added up I would come out close to even, if I end up paying a couple thousand out of pocket so be it.

Realtor's fees are what scare me the most and what seem like a huge rip off.

Ok, at least you are good for another 2 years. Sometime it is good to have some planning in advance. Sorry I could not be more help. Just keep in mind people just don't value furnished stuff much at all. They will know you are gone and it will cost you a lot to move this stuff so basically this stuff is free or they will be doing a favor to you by accepting them.

Just to get an idea look at the craigslist in your area and see how much similar stuff is selling for.

 

[dotdash]

You don't seem to be in a bad situation at all. My question would be what happens in the 5th year of the loan -- is there a balloon payment (which you might have trouble making if you can't sell it on that time schedule)? I'd talk to your current lender about what options they can give you, since they are your current provider and know you, they may give you an inside rate. You can certainly get a much better rate now, but if you really don't want to keep the place, better not to put the money down to refi. Better to sell before the balloon (if there is one).

If there are many units like yours (they are a commodity, not unique pricing situation), you can get a good read on what the unit is worth. Since there seems to be a handy supply of incoming residents, you might try selling it to one of them without a broker. Being able to split the 6% with the buyer might make yours the most attractive unit in the complex. Of course if you are not there, it's hard to arrange viewings, etc. Maybe you can arrange to give your renter a break on rent in exchange?

One more thing: I'd think it would be worth it to check with a tax attorney re the tax implications of renting and then selling. There is some IRS code about living in it 3 of the past 5 years in order to qualify for some tax breaks, so even if you are not making money on the sale, the loss on the sale can also be valuable from a tax standpoint.

 

[touchadream]

While you are getting some good advice and don't seem to be at much risk, like almost all my doctors (I consult), you should have taxes at the forefront of your investment thinking. The few hundred dollars a month its costing will probably turn out to be deductions netting you more than that. I am not an accountant, but you should just get a sample estimated settlement statement from a mtge co, (don't let them pull your credit until you know you want to refi--every time they check it hurts your score), then go to turbotax for a free estimated return or irs.gov and get a 2010 or 2009 return. I think its schedule D where you list expenses and rent for rentals you own. The big deal will be depreciation, but there are other expenses and upgrades that will be depreciable or deductible if its rental property. irs.gov has a rental booklet you can look through for expenses/deductions, etc. You can even consider it rental property if it doesn't rent, so long as you are making a bona fide effort to do so. With real estate, management, collections, repairs, overbuilding, changing rents, etc. can become problems at some point. Unlike a home where you trade up over the years without paying gain, when you sell rental property, you "recapture" depreciation you took earlier and/or pay tax on gain unless you do a "like-kind" exchange, or lose money. Losses are netted against capital gains, and if you don't have capital gains, you can net against ordinary income up to 3,000 a year carrying forward the remainder. A 1031 like kind exchange is buying another property to substitute for this one--if done correctly, you avoid the gain, really just postpone it to a future sale. This is why the investment strategy with rental properties is known as "swap til you drop." No one wants to recapture depreciation and pay the gains. So, if you decide to keep it and make money, there is that to consider. Good problem to have, easy to solve if you know a nice sophisticated tax consultant! So you can just reduce this to math. www.bankrate.com is a good source. You can figure mortgage rates in your area, figure the tax breaks and rental income. They have a refi calculator which lets you figure how long it will take to recoup from a refi with fees. With all due respect, Dr., its not what you earn, its what they let you keep! With fed rates going up in 2010 to 39.6%, you'll need deductions, preferably the ones that provide asset protection and safely within the tax code. Oh, but, its going to change, so you'll need to keep up, and no, your accountant doesn't lose a lot of sleep over how much "rich" doctors pay in tax. I do because I am married to a radiologist so I lay awake nights studying how to avoid overpaying taxes. Like the great philosopher Yogi said, its hard to make predictions, especially about the future. Lots of well-informed experts say rates have to stay low for a while yet, but lots say they have to go up. I think Obama will spend the bailout before the next election to keep things ok, rates won't skyrocket but creep up, so look for all kinds of deals if you want to refi. Use your clout as a doc with local banks, they can keep your loan in-house and want you as a customer. Oh, one more thing, once the value is there get a line of credit on any home you own because friendly debt allows you great asset protection from creditors, should you need it. And your spread ( prime + 5!) is too high, so go back and negotiate with existing lender. If you don't have to, and if there isn't a bad overbuilding problem (you can ask a realtor about current inventory in the area), I wouldn't sell in this environment, as lots of ec indicators are getting better and the market should figure it out, provided there isn't any unforeseen insane unknown out there in the next few years, smallpox epidemic or errant meteor...ice age...credit crisis... Fed rules require me to tell you not to rely on anything I say here. Nice folks want you to pay for advice. Hope this gives you some food for thought. Best of luck.

 

[CompassMBO]

Just remember that on investment property, to refinance you must have at least 20% equity. Depending on the value of your property, and what you owe, it may cost a lot to refinance.