30 year mortgage vs. refinance. Pros vs. cons?

Question

Hey guys,

I hope to buy more real estate after the holiday season. I have two options for financing with my current lender, either take out another 30 year montage on my W-2 income or refinance on one of my rental properties. But I'm not sure which option is better for me in the long term.

Here are some details:

Last time I checked, I got quoted low 4s for 30 years with 25% down and mid 4s for re-fin. This would be my 3rd montage on my W-2 income and I would be maxed out on my income to debt ratio. My concerns is that I will not be able to have access to like a car lease or a small loan for a loooong time until I can bring the ratio down a bit. I'm still single in my late 20s and I don't want to over stretch myself at this stage of life.

On the other hand, I can extract my equity out of one of my rentals to support another buy. It seems to be a smarter thing to do but there are some issues. First, my agent wants me to take out the re-finance before going shopping which means I would be paying the interest before purchasing anything. The market is slow at the moment and I don't know when will I buy anything and start generating income. Secondly, the interest is definitely higher and increases my operating cost. What do you think what I should do??

Happy holidays,

-Jack

Andrew Postell · Answer

@Jack Zhuang Ok, I understand you now.  If you don't use that rental income, yes, your DTI will absolutely be worse!  But ask your loan officer why your rate is higher...maybe your credit score is different?  Maybe you have a lower loan amount?  Maybe you are borrowing a higher LTV?  There are so many factors that go into it...but DTI is NOT one of them.  Your "Debt to Income" ratio is only answers the question of "is this person approved?"...and only in a "yes" or "no" fashion.  It does not affect your rate at all.  I hope that makes sense how I am describing it.

@Jarod Dudley if you add rental properties that cash flow, your DTI is NOT negatively impacted.  Using the example of $3.2k in rent with a PITI of $3k means your property does NOT cash flow.  Now, if your income is super high and you have unlimited assets...ok, then maybe make that type of a buy for you, but you will not cash flow that property.  For everyone else you should NOT be buying investment properties at those numbers.  Follow the 1% rule to investing and make sure you are using your CapEx figures/Maintenance Expenditures to find your true cash flow.  This is the primary reason why we target lower valued homes because higher valued homes (ones with a $3,000 payment) do not cash flow.  Not every market is the same but in 90% of the markets in the US this means targeting properties at $200,000 and lower.

Andrew Postell · Answer

@Jarod Dudley I know some lenders are different when qualifying people but $3000 gross monthly income = $2250 in qualifying income for the "lease" method for Fannie/Freddie.  At a $1500 PITI that would = $750 in cash flow.  That would absolutely help DTI.  Is your company calculating this differently?

Andrew Postell · Answer

@Jack Zhuang is your current lender telling you that your DTI will be maxed?  Are they counting your rental income?  Every rental property you buy should IMPROVE your DTI....unless you aren't renting the properties?  Or aren't buying properties that don't cash flow?  I'm not sure why anyone would do either of those...and that's why I'm working under the assumption that your DTI should be view A LOT differently.  Let me know if you know the answer here.  To me, your should look BETTER to a lender after buying rental properties.

Jarod Dudley · Answer

@Andrew Postell

@Jack Zhuang

As you add rental properties your DTI will be usually be negatively impacted, even if they cash flow.

I.e.

Earned Income $10k/mo

Primary residence PITI $3k/mo

DTI 30%

Add an investment property with

Rent roll $3.2k/mo

PITI $3k/mo

New DTI 45%

If you run into DTI issues there are tons of competitive portfolio loans that look at debt service ratio instead of DTI to determine your ability to repay.

Good luck!

Mortgage Jarod

Andrew Postell · Answer

@Jack Zhuang thanks for the feedback.  Good to hear that my rambling my actually make sense!  But if you are analyzing a choice between loans then just answer the question "which one benefits me more".  And whichever one does, that's the one you do first.  So if one loan will get you out of hard money...that's a good benefit.  And if one will provide you funds to buy another property...that's a good benefit too.  But maybe staying in the hard money would be worse than staying in that other loan.  So the choice between those two would be to get out of the hard money.  I'm just generalizing here but that's the analysis that should be done.  Thanks!

Jarod Dudley · Answer

@Andrew Postell

I understand that If the property cash flows more it could be hurt for your less, but it rarely helps DTI.

Regarding the example-

10k income and 3k PITI at primary is 30% DTI, is generally acceptable conservative ratio for housing, the actual numbers aren’t really important- but for arguments sake we could lower it to $5k income and $1.5k PITI (still 30% DTI)

Even at $3000/mo rent and $1500/mo PITI it would still actually hurt the DTI , and bring it up to 37.5%

It wouldn’t help until rents  more than tripled PITI.

That’s why I say, in general- adding to the portfolio will help an investors income absolutely, but it usually hurts DTI.

Jacob Sampson · Answer

Another option is a HELOC which gives you access to your equity but you don't pay interest on it until you actually deploy it.  In addition if one of the options stops you from leasing a vehicle that will be the smartest choice you ever make.

Lastly, I use a commercial bank and currently have about 19 loans covering 38 units.  There isn't a limit that I am aware of or that my bank has made me aware of.

Bill B. · Answer

I would do the new mortgage for the lower rate. Try a 15 year if you can afford it, should save you another 1/2 percent.

Don’t worry about not qualifying for a car loan. My brother and I have both qualified without a job. Their job is to qualify everyone.

30 year mortgage vs. refinance. Pros vs. cons?

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