Cash-Out Refi on - Lenders Asking >40% Equity and 4% Rate???

[Christopher D.]

Anyone else having trouble getting a decent deal on a refinance right now for rental properties?

I've got a 3 bed / 3.5 bath condo in a popular beach town in San Diego.  Incredible long-term, cash-flowing performance as a long-term rental property (no vacancies ever!).  Also, I've got near-perfect credit and really good W-2 income.  On the down side, all 4 units in the building are now tenant-occupied, which I know lenders do not like.  Also, this is one of four mortgages in my personal name (all four rentals are cash-flow positive).

The property is worth about $840k and I owe about $408k on the current mortage (7 years into a 4.25%, 30-year, fixed rate mortgage).

I'm looking to refinance for two reasons: (1) take advantage of historically low interest rates and eliminate the PMI that was built into my old rate; (2) take out $200k+ in equity so I can to be in a better position to buy more rentals in another area in case the market goes down. I'm looking to stick with a 30-year, fixed-rate mortgage, and believe I can do all this while leaving 25% equity in the property, which will allow me to break even every month on cashflow.

I've spoken to friends of mine who recently refinanced at 3% APR or lower. One of these was for a rental property in the same town as mine - they locked in their rate at 2.99%.

However, my mortgage broker is telling me banks will only go up to 60-65% LTV right now (I'd only be able to pull out about $100k, which would give me back my initial capital and is better than nothing), and the best he can do is a 3.99% rate (would not really help that much in reducing the interest rate).

I feel like I am getting into this late, and banks are averse to anything that might look like risk given the uncertain state of the housing market going forward, but this seems excessive to me, given the property's "A" location and perfect rental history.

Anyone else running into similar issues, and if so, any advice?  I ran into this in late-2007 when purchasing my first property, and was still able to finance at favorable terms, although it was difficult, so I am optimistic.

[Luke Schrotberger]

Hi @Christopher D..

I'm a mortgage broker based in San Diego and I'll add a bit more info to what you're seeing and hearing. Last week Fannie announced they will not buy "cash-out" type loans that are in forbearance. Many lenders stopped doing cash out altogether and others increased rates to cover the risk. From your description of your situation, you are looking for the most "expensive" type of refi, which likely isn't apples to apples with your friend's recent refi on his rental property. Lenders typically increase the rates, in the industry we call them "hits", for investment properties, for multi-unit properties and for cash-out types of loans. You're getting hit with all those because they are cumulative.

Although I understand the advice "take what you can get", you would benefit from one more piece of info about the mortgage environment before making that choice. All the industry fundamentals point to lower mortgage rates on the horizon. Again, who knows what will actually happen, however based on the underlying interest rates and note rates, insiders would expect mortgage rates to be lower. Part of this is related to the "note" problem referenced by @Ken Calvin, which has interrupted the normal flow of mortgages through the process. Eventually the flow of the mortgage notes will regain some normalcy, but the timing and underlying fundamentals at that time are the big unknown. Which is why the advice, take what you can get, could be the best thing for you.

Something else you may consider is the path I'm encouraging for many of my clients, which is refi the original loan and get a HELOC. I've use a HELOC company that has a 30 year loan. The first 10 years you can utilize the Line of Credit and during that time you pay interest only. The next 20 years you pay off the balance. This tool allows you to only pay interest on the money once you've found another deal you want to invest in. You also get rid of the Cash Out "hit" on the loan, which should get you a better rate for the 30 year fixed.