Advice on Cash Out Refinance

[Scott Luetgenau]

Hello BG Community!

I'm interested in a cash out mortgage refinance. Here's the current situation. We currently have a 15-year mortgage from Wells Fargo on this 3-bedroom, 2-bathroom SFR in downtown Raleigh. We owe about $100K on the mortgage and have around $70K from a HELOC and home equity loan we used to renovate the property. We think it's worth approximately $300K. We'd like to refinance to a 30-year (to aid cash flow), pay off the HELOC and HE loan ($70K), and pull cash out of the deal for a down payment on another investment property. We have tenants in the space who pay $2K monthly for rent. Our current cash flow is -$200 a month and we'd like to fix that.

The initial numbers came back from Wells Fargo at a 5.25% interest rate. Based on a $300K appraisal, the LTV would be $225K which would allow us to pull out $55K after paying off the $100K owed on the house and the HELOC/HE loan ($70K). The monthly payment would have been $1,435.

She then emailed back to say she had made a mistake and based the interest rate on owner-occupied housing.  Her new numbers were based on a 6.125% interest rate which would increase the monthly payment to $1,689.  

This small change in interest made me take pause and realize I should reach out to the collective knowledge on this forum.  Is there a better way?  Is 6.125% a standard rate for an investment refi?  If not, what should I be looking for?  Finally, does anyone suggest any other lenders for this type of deal?  Many thanks for your patience and guidance!

[Andrew Postell]

@Scott Luetgenau before I even got to your 3rd paragraph alarms were blaring!  Yes, a rate closer to 6 is more of what you should expect on a 2-4 unit cash out investment property refinance.  Also, you will be limited to 70% of the home value if it's an investment property.  So their loan amount is wrong too.  Now these are cash out loan rules for Fannie/Freddie loans (if you recognize those names).  Those are good loans because they have the lowest rates, are 30 year fixed loans, etc. and that's the loan that big banks like that will have available to the average consumer.  There are other loan types but the rates will be different, or the term will be a 20 year term (which makes your payment higher), or the rate might be adjustable....and sometimes all 3 of those!  But the other loan types might get you more money out...as in closer to 75%.  We call those loans commercial or portfolio loans.  Again, an entirely different loan but if you can get a Fannie/Freddie loan it will help you cash flow more...which will in turn help you qualify for more loans later.  

Now, should you go to another lender.  YES.  Absolutely.  Large banks are out for investors.  ESPECIALLY if they are publicly traded large banks.  Just too much red tape and too many rules.

Please do look for a smaller, maybe even local bank.  And I would recommend asking some specific questions (referenced below) to see if they are flexible with investors.  While those are just 7 questions....and there are a LOT of other things that are important....if they answer those questions right, then they will likely answer all the other investor questions correctly too.  

Now, which banks to ask?  Try posting in the North Carolina forum "Looking for lender near X city" as your subject line and give a little of what you need (like what you posted above) and you should have some good locals provide who they use for this sort of thing.

I hope all this makes sense how I am describing this but feel free to tag me with anything additional you want to ask.  

Questions for Lenders

1. When do you start using rental income to help me qualify? (the answer needs to be immediately)
2. How long do you need me to be on title to refinance? (this is important if you do need a short term loan to purchase then refinance out - and the answer should be 1 day...very important that it is 1 day on title is all that is needed to refinance)
3. What is my minimum down payment required? (if they only require 15% down on a single family home that is usually a good sign that you are working with a flexible lender)
4. Can I change title to my LLC?
5. Do you sell your mortgages?
6. What is your loan minimum?
7. Can you explain to me what your reserve requirements are?