Refinancing rental properties - how does it work?

Question

Alright, don't jump all over me for the question, but I really don't know the answer

Let's say I buy a home for $100,000 and put 20% down with a 7.25% mortgage. I now have $80,000 worth of debt with roughly $450/month in principal and interests payments

15 years goes by and I have significantly paid down my debt (let's just use $40,000 for this example). House has now appreciated to $150k in value.

If rates are the exact same at 7.25%, can I refinance my $40,000 of debt and simply reduce my principal and interest to $250-300/month in an effort to increase cashflow on my rental?

My thoughts are

1) Yes, duh

2) Banks won't refi on a balance that small

3) You would have to do a cashout refinance, thereby increase your mortgage balance

4) Can't refinance at the same rate for some reason

Thanks guys!

Robin Simon · Answer

Most residential loans won't have a prepayment penalty (or if they do, it would last at a maximum of five years), so reading your situation, you probably wouldn't need to do a "refinance" - you could simply pay down extra principal as desired to accomplish the lower debt service

Patricia Steiner · Answer

You're asking if it's worth it to the lender to refinance that small balance - when you might want to consider if it's worth it to you. Closing costs on a mortgage aren't exactly a cheap date. You may want to look into other financing options that may avoid the need for an appraisal, new title policy, and more. A commercial loan (not mortgage) where the property could be pledged as an abundance of caution only or a credit line might be better options. When you consider the cost-benefit in terms of cash flow, you have to consider how long will it take to recoup closing cost expense associated with the refinance. I would look at rent price increase and additional income streams from the property (like laundry, parking, more) to improve cash flow rather than a future mortgage paydown/refinance.Just one opinion here...

Jamie Jones · Answer

Having 10 properties could actually discourage them to write the loan (assuming the property you are trying to refinance is an investment property). 10 is the max number of financed properties that Fannie Mae allows.

Jamie Jones · Answer

Yes, as long as you are bankable when you want to refinance, you should be able to find a lender that will do the refinance. As others have stated, lenders legally have to prove that there is some benefit to you, which is accomplished by showing your payment being almost cut in half. Some lenders do have a minimum loan amount, so you may have to talk to a couple to find the right fit. There are closing costs to consider, but on a loan amount that low they really shouldn't be too bad, and can all be rolled into the loan amount so you don't pay out of pocket. Rolling them into your loan amount will likely only increase your monthly payment by a very small amount, when spread over 30 years. 15 years is a long time, and A LOT can change in the mortgage/lending industry, especially if we see any kind of housing downturn between now and then. Also, my gut tells me technology will make most appraisals either much cheaper or non-existent in the next 10-15 years.

Jim Rivell · Answer

I think there's 2 parts to your question. In theory, would you be able to do a refinance as you described? Possibly. I think you'll run into trouble with banks not wanting to refinance a balance so low, but you might be able to find someone interested if you have good relations and if you look hard enough.The other part is is this worth it for you. As mentioned above, closing costs are not free and if this is only to increase your cash flow don't forget rents will also appreciate between now and 15 years from now so the cash flow would be naturally improving. When the time comes you'd have to weight the options of is the increased cashflow worth the struggle to find a lender and pay closing costs.

Andrew Postell · Answer

@Steven Barr yeah, you would think so but for most lenders that's not the case. If you need some pointers on how to find "real estate investor friendly lenders" then read this post HERE. That should give you some good techniques on finding lenders with no loan minimums (if you ever need such a thing). Thanks!

Ave Escobar · Answer

Hello Steve find out what is the minium and you may want to consider borrowering said amount and apply overage to your new loan. Debt remains the same of $4oK payment lower due to the new 30 term.

Steven Barr · Answer

@Andrew Postell I would imagine if I had 10 or 20 properties with loan balances that small, that this might encourage them to write the loan?

Andrew Postell · Answer

@Steven Barr so you are correct that some lenders won't refinance a loan balance that low. But some will. Lenders do need to write a loan that has a "benefit" to you. So even if the rate were the same, or even higher, if the payment is lower then that's the benefit to you. It absolutely is possible to refinance a loan after being in it for 15 year into a 30 year loan at the same interest rate...as long as that lender is ok with the smaller loan size. Again, some places will lend that small and some won't. But all of that is possible.Hope that makes sense. Thanks!