Refi with an LOC?

Question

Can anyone help analyze this refi scenario?

I am looking at refinancing 2 SFH properties which currently have 15 year amort, 5 year balloon, 6.625% interest, with just over 2 years left on the balloons. I have 10 properties in total, and these are the two which have the least favorable financing terms and also the lowest principal balances as $39k and $6k. Regardless of whether or not I refinance I am on track to have these mortgages paid off by June 2014, shortly before the balloons come due.

Now, I asked my local lender about refinancing these into an LOC since I am on track to pay them off in about 2 years anyway. My thought is that with an LOC I would have additional borrowing capacity to jump on cash deals if needed, as well as float some of my current renovation projects between construction loan draws.

They offered me a $140k interest only LOC, 2 year term, 5.75% interest. Out of the LOC $45k would pay off the 2 existing mortgages, $2.6k would be used for LOC closing costs, leaving me with $92.4k available on the LOC. They also asked that two of my free and clear properties be used as collateral on the LOC- making a total of 4 properties as collateral, roughly coming to a 50% LTV against the total LOC available.

Any thoughts on this financing scenario? Over the next two years I plan on using existing cash flows from my current portfolio to 1) continue the aggressive debt paydown on these two balloons and 2) purchase an additional 6 SFH or fewer multi-families totaling about $150,000 in total acquisition costs.

The options I see are:

1) current situation- continue paying off the two 6.625% mortgages over the next 28 months. total estimated interest = $4.7k
2) LOC refi- $2.6k in closing costs, plus $2.9k interest over the 24 month life of the LOC equals total cost of borrowing = $5.5k

So basically for the LOC i'm paying $800 in additional costs over the two year period to gain access to the remainder of the LOC ($92k) at 5.75% interest to be used to jump on cash deals, etc. if needed.

It seems like a decent deal- does anyone have any comments, or am i missing anything?!

Thanks! Jeremy

Jeff S. · Answer

Have no mortgages myself, only lines. Also have low yielding cash. Someday rates will rise and permanent financing will be very valuable. Rates are supposed to remain low for the foreseeable future so all should be fine for a while.

Some of us older folks think having lots of cash is comforting and worth the cost, a cost of doing business if you will. Having seen things come up that have put people out of business because of a lack of cash, it seems prudent when risk becomes less desirable.

If the lines are there for new deals but not long term you should be in great shape.

Jeremy D. · Answer

If I decide to proceed with the line i'll keep what you said in mind- i did not think that the bank calling the line prematurely was a risk. But what you said makes sense.

I figured with the line I would also no longer need to keep 20-30k of cash reserves sitting around, since I would have at least that much in the unused line.

This LOC is residential through a local bank that i've been working with for a few years now. They hold a few of my long term mortgages in house, and service the rest which are held by Freddie.

Long term financing is available but I'm tempted by the line because it would give me immediate access to cash in case I need to jump on a deal asap. I just wasn't sure if I was thinking of all of the risks associated with it.

Jeff S. · Answer

Lines are great, just don't get too hooked long-term. It sounds like you are disciplined. Be prepared for them to call the line. It has happened in the past and can happen again if your bank becomes undercapitalized. There is a lot of pressure from regulators now to keep high loan loss recerves.

Lines are nice because you don't need to pay interest on cash sitting around so profitable. Your LOC must be commercial because of the loan fee and rates. Is there no decent long-term financing available? Not saying you need it, just thinking.

Refi with an LOC?

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