When to Refinance and Goal

Question

I have a house worth $500k with a mortgage I owe 285k with 4% interest. I don't have my next deal yet but know that I want to leverage the equity in the house to fund the next deal. Does it make sense to refinance now or when I have my next deal ready? If yes, should I aim for lower monthly payments, lower interest and longer life of the lone OR higher payments and shorter life of the loan which would give me more equity (I think).

Brian Garlington · Answer

Sally's 20% Down is definitely the weaker offer. I tell my client to take John's offer every day of the week and twice on Sunday.

Ori Skloot · Answer

I'm with @Brian Garlington on this one.  No one is going to want to accept an offer contingent on a refinance of another property.  Way to much risk.

Amberly Jones · Answer

Agreed with Paul. Rates are at historic lows right now!

Sara Kasper · Answer

Got it! Thanks all!

Paul Defngin · Answer

Refinance now. Rates are lower. Save some money in the process. Keep cash on hand and liquid at all times, where it’s readily accessible should an opportunity presents itself.

Joe Bauder · Answer

Thanks - this is great advice for me too actually @Brian Garlington - I was almost Sally, but I figured, first things first - let me just finish the cash-out refi, even though it's taking 2+ months, before I look at investing the cash out anywhere else.

Chris Mason · Answer

Actually I have a question for Realtors, specifically anyone in my area (Bay Area, Oakland, etc) but input from all over is welcome:

- John is offering a certain price with FHA 3.5% down.

- Sally is offering a certain price with conventional 20% down, contingent upon closing a cash out refinance wherein the appraisal has not been ordered yet.

- You are the listing agent. All other terms are the same, both come with a 45 day close of escrow, same appraisal contingency, same loan contingency, etc. These are your highest two offers by >5%, both are offering the same amount, and your seller is putting "I want top dollar" over all-else, so they will be taking one of these two offers - they also ignored your advice for what to put on the multiple offer counter-offers and scared away all buyers but these two, as of now these are the only two offers on the table, and one offer must be accepted tonight because reasons, no more time for back and forth or negotiations, again because reasons. John's FHA offer of course has the FHA Amendatory Clause, Sally's has the standard appraisal contingency for conventional loans.

Which is the weaker offer, which do you tell your client to accept?

Chris Mason · Answer

Your future potential seller is going to take the strongest offer. Strongest isn't just highest, it also includes certainty. "Risk premium" being the fancy finance term for it - "how much more must I pay for this home b/c I am viewed as higher risk?" It's basically the exact same question for people with bruised credit, or those doing a cash out refinance (ie, that are viewed as higher risk for some reason or another) - "how much higher of an interest rate must I pay to get this mortgage?"

Refinances have a higher fallout rate than purchase transactions for a variety of reasons ("I think my house is worth 5 billion dollars, surely your independent neutral 3rd party refinance appraiser will confirm, or he's an idiot!" - yeah, about that...) (we, systemically, also don't do a whole lot of "can they get this mortgage?" due diligence for refinances the way we do for purchase preapprovals), so if your purchase is contingent upon a refinance, it will be viewed as higher risk than if it's contingent upon a home sale, and significantly higher risk than an offer that is not contingent upon either, the infamous "no contingencies at all" (including no appraisal contingency, etc) being of course the holy grail lowest risk for a seller or listing agent (these people might get to pay a tad less than they otherwise would, and still get the offer accepted, just because they come with the most certainty). In some cases it will be the case that the listing agent advises the seller not to accept the refinance-contingent offer no matter the price they are willing to pay, because it's in such a high risk category.

TLDR: Refinance now, not when you identify the property you want to buy, b/c the seller and listing agent do not care about why you waited ("I wanted to avoid paying interest on money before I needed that money"), all they care about is the fact that your offer is weak in comparison to the other offers they have received.

When to Refinance and Goal

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