Feedback on Cash Out Refinancing Terms

[Andrew Merritt]

Hey All, I'm going through some cash-out refinancing on two of my duplexes and wanted to get some feedback on the terms. I'm working with a DSCR lender if that makes a difference.

I started the process about two months ago and was told that I'd be able to cash out at a 5.5% interest rate.  I just got the disclosures recently and the rates are 7.25% and 7.485%.  I'm told that there is a premium/rate hike charged on cash out refi's right now and that he recommends doing a rate and term refi after a year to drop the rate down to something more reasonable in the mid 5's.  However, these loans come with a pre-payment penalty as well.

I could get on board with that, but I don't see interest rates going down in a year.  There's a lot of stuff that's not adding up and I just wanted to get another opinion on the situation.  I've already paid for both appraisals.  I'd rather not back out of the loans but I also don't want to do anything dumb.

Any feedback would be appreciated.

[Stephanie P.]

@Andrew Merritt

A couple of things

It takes between 21 and 45 days to get a DSCR loan closed. 21 if the stars align perfectly and 45 if the lender is dragging his feet or the borrower can't decide which hazard insurance agent to go with after having 2 weeks to decide. If it's not on your end, then the lender is dragging their feet waiting for the lock to expire so they can reprice. If you started this odyssey in the beginning of February, you already know the lending landscape has morphed dramatically since then. Most lenders in this space have raised their floor rates to high 5's (and low 6's in some cases) and will not close a loan below their new floor (even if it was locked).

No one has a crystal ball (I know it's cliché, but it's true), so telling you to close on a rate and term and then refinance in a year is nonsense.  Your prepayment penalty will knock out any short term savings with the lower rate and all of these loans have a prepayment penalty.  

Quite simply, your choice at this point is this, close at the higher rate if the numbers work and walk away if they don't.  You have to know your market and have professionals provide you with accurate information regarding loan to values, rates, taxes, insurance and especially rents, but once you get the information, ultimately it's just a math problem.  See what the numbers tell you and act accordingly.

Stephanie