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.

[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.