Increasing Loan Amount When Refinancing

[David Cherkowsky]

I purchased a rental property in June with 20% down and financed with a conventional loan at 8.125%. Obviously, with rates dropping I am looking to refinance to reduce that rate. I have a loan estimate from a lender that increases the loan amount by ~$3500 which essentially cancels out the out of pocket expenses, and reduces my rate to 7.5%. This reduces my monthly payment by ~$100 a month.

Am I correct to think that I am essentially paying $3500 for this refinance? If it were zer0 dollars out of pocket without increasing the loan amount, it seems like a no brainer, but increasing the loan has me skeptical. I'm looking for thoughts from more experienced people than myself to make sure I'm thinking through this correctly.

Thanks in advance for the help.

[Nick Belsky]

@David Cherkowsky

Rates are no longer dropping.  Treasury notes increasing have already erased the very short-lived drop in rates and now they are even higher than before the FED cut.  Unless you are coming out of Hard Money, I would not recommend refinancing right now.  It is not uncommon for rates to rise this close to an election, then adjust back down right after.  Happens every 4 years, regardless of whom the winner is.

Increasing your refinance will also result in cash out refi versus rate and term.  From a lender standpoint, this means a higher interest rate.  As pointed out, the loan fees and such are usually rolled into the loan meaning you are paying interest on more than just the principal of your home at that point.  You will need to weigh in the costs of the refi and determine a break even point.  If it takes 5+ years to break even, before you actually start saving, is that worth it to you?  Most folks will refinance every 3-7 years for one reason or another...

Cheers!

[Elias Halvorson]

I wouldnt recommend refinancing at that. That doesnt seem like a good rate but rates have skyrocketed the last 3 weeks. I would hold off until after the election. Rates could go a lot higher, but what you're being offered isnt that great of a deal so if they did, not refinancing wouldnt be that big of a deal. 

[Derek Brickley]

Hey David!

Couple takes on this: 

Generically speaking, yes it often does make sense to increase your loan amount for monthly savings.  As already mentioned in the responses above, figuring out your break even point (how many months it will take you) will be important for determining whether to move forward with that or not.  

Question: If the rate is .625% lower and only saving you $100 net a month, what is your loan amount? The reason I ask is that certain areas like parts of VA have incentives for everyone, and if that's the case, then that 7.5% seems a bit too high. I don't know the entire situation, so that might be about par, but just my first instinct says that.

Also, as mentioned above, rates have quite literally shot back up.  Considering you purchased in June and with the drastic increase in rates over the last month, everyone we are working with we are recommending to line up the refinancing: get through processing and underwriting, but don't "pull the trigger" on it until rates soften.  That way you would be ready and when rates hit your target mark, you can lock it in and close right away.  

[Frank Chin]

Hi David:

I started years ago in 1983 investing in MF rentals when interest rates were at it's peak. By 1985, I had several MFs with mortgages totally $300K at 13.5% interest. 

The real estate market in New York City peaked in 1986 and bottomed out in 1993. Mortgage interest dropped from 13.5% in 1983-1985 to around 10.5% at in 1990. Should I refinance? I didn't. I thought the downturn still has some room to go and I should wait a while. It's a 50/50 decision to refinance at 10.5%, a savings of $9K/year, or take a chance to wait a bit that rates would go down further. I chose to wait.

Good thing I cashed flowed even at 13.5% interest, living almost rent free at one triplex. Interest rates continued to drop till 1992 reaching 7.5% when I decided to pull the trigger. But by then my wife became a stay-at-home mom and my DTI prevented me from getting larger mortgages. I refinanced the $300K mortgages keeping it at $300K increasing my cash flow by more than $18K/year.

The good news is 1993 was a bad year and there are pages and pages of RE auctions. I accumulated enough cash with the added $18K/year to purchase at foreclosure auctions, including the duplex I currently live in, now mortgage free. Duplexes and triplexes increase overall by $1 million or more since 1993 here in NYC.

Comparing my situation to yours, if I were you, I would hold off. Refi will not increase your cash flow by much nor can you cash out by much. Thinking back, had I refi at 10.5%, I probably had to do it again when rates dropped to 7.5%, doubling my overall refinance cost.

The other lesson I learned is develop good banking relations. My DTI was borderline with my wife not employed but having friendly bankers on my side did it.

[Erik Estrada]

Quote from @David Cherkowsky:

I purchased a rental property in June with 20% down and financed with a conventional loan at 8.125%. Obviously, with rates dropping I am looking to refinance to reduce that rate. I have a loan estimate from a lender that increases the loan amount by ~$3500 which essentially cancels out the out of pocket expenses, and reduces my rate to 7.5%. This reduces my monthly payment by ~$100 a month.

Am I correct to think that I am essentially paying $3500 for this refinance? If it were zer0 dollars out of pocket without increasing the loan amount, it seems like a no brainer, but increasing the loan has me skeptical. I'm looking for thoughts from more experienced people than myself to make sure I'm thinking through this correctly.

Thanks in advance for the help.

 Hi David, 

What is your APR on the Loan Estimate sent to you by your refinance lender? That will give you a better idea of your true interest rate factoring the closing fees.

If you are only saving $100 per month and your closing costs are $3500. It will take you nearly 3 years to breakeven on your cost to acquire the loan and see true savings from an interest rate reduction. As others suggested you are better off waiting. 

There is no such thing as a no closing cost refinance loan. You are either paying with a higher rate to receive a lender credit, or paying the costs at closing.