Refinance Rental A good idea??

[Jennifer Ozuna]

We have a rental property that we owe $105,000 on. We paid around $136,000 for it new in 2004. It's now only worth about $140,000 but it rents out at $1350 and pays for itself with a small amount of cashflow. It's in a great school district and area, and rents to single families. It's on a 5/1 Arm and the 5 years has long since run out. The last time I inquired, I don't think my LTV ratio was ideal, because they wanted me to come up with about $20K in cash that I didn't have or want to invest in a rental property that pays for itself.

I'm now looking at starting to buy and hold other rental properties.  I am low on cash on hand, but have a little.  We also have excellent credit and my husband has a full time job.  I've yet to start looking for properties yet...I really just want to educate myself on how I might be able to use this current rental to help  me finance another if I'm planning on keeping it.  

Should I refinance to a fixed mortgage on the rental I own? (I think getting out from under the 5/1 arm would be wise) and would my numbers be advantageous for refinancing at this point?  

Advice would be awesome.  Thanks!

[Andy D.]

@Jennifer Ozuna From what I understand you are looking to get money out from the existing rental property. I don't see how that's going to work. As others have stated, you're pretty much at 25% equity. Even if you find a lender that will go lower, i.e. higher LTV, (doubtful at reasonable rates) you probably do not want to do that - overleveraging at this point in time is not a good idea! Don't you see what you did in 2004? Yes, you overpaid (albeit unknowingly) and therefore, factually, overleveraged. Just look where that got you over the last decade. Sorry to point it out but it's a fact.

Just be happy that you now own a rental property which - even with a comparatively expensive ARM - seems to cash flow positively. Don't jeopardize that in this market.

As for reducing the monthly payments: it's all about running the numbers. A 30 mortgage is going to be much more expensive than, say, a 5/1 ARM when comparing current rates. Then again, it might be cheaper than what you currently pay for your old ARM. Only you can know that by looking at the figures involved.

In any case, don't try forcing the purchase of another property by whichever means necessary. The market is toppish, i.e. expensive, and you probalby do not want to repeat "your 2004"...