Boys and girls who own rental property and pay an interest rate of 6% or over have a unique and DO IT NOW opportunity to lower your rate, increase your Gross Margin (Rent minus PITI = Gross Margin) which will dramatically (Why didn't I do this sooner?) increase your Net.
One of my goals of 2015 is to refinance or reset (lower rate with current bank without fees or a settlement) 50 of my 75 rental houses and reduce my PI (Principle and Interest on your mortgage payment) by $5000 a month or about 10%. If I am successful, my Gross Margin will increase by 18% and Net Income by 24%. As I have explored this refi bonanza, I get giddy thinking of its almost infinite possibilities.
Let's go over how I have approached the banks and lending institutions and all the goodies I have discovered.
I have used local commercial banks, well versed in neighborhood real estate lending, for the last six years and have established a first-name relationship with each lender. I have made an appointment, and arrived armed with a package as follows:
a) 2013 Form 1040 (2014 Form 1040 not ready yet).
b) A 2014 spreadsheet giving the profit and loss of 2014's numbers.
c) A spreadsheet of my loans they currently hold, which includes property address, interest rate, term, rent minus PITI = gross margin minus expenses = net, loan number. I want the presentation (Yes, it's a presentation) to be simple and logical. make it easy for them to say yes.
d) A global spreadsheet of all my properties.
e) Photos - 3 pages, 4 pictures a page, of two of the properties that they have financed for me. These photos show the property beautifully. The pictures are taken after the original rehab.
I'm casually well dressed, friendly and enthusiastic. I tell them I want to just "reset the rate", not do a refinance. I ask what rates, amortization and LTV (loan to value) they are currently offering. I inquire if they are interested (loan officer's eyes get large!) in financing additional property, because another financial institution may not be willing to reduce their rates. I follow up with a personal note thanking them for their time and hoping I hear back within ten days.
2. National mortgage servicing companies -
Many times mortgages are sold or serviced by a company other than the originator. I have four such servicing companies: Nationstar, American Servicing Company (ASC), Ocwen, and Wells Fargo. Call and ask your servicing company if your loans are held by Fannie or Freddie. You can also go on Fannie and Freddie's website, type in your name and property address, and the site will tell you. If the answer is a positive, consider yourself very lucky and immediately apply for HARP or HARP's brother, the 3-Step program.
a) Government programs to help the investor are HARP (Fannie Mae) and the Three-Step Program (Freddie Mac). If you have investment mortgages that were originated before 2009 and were then sold to Fannie Mae they may be eligible for HARP. The rate will be in the middle to upper 4s with a 30-year fixed term and a low criteria for acceptance. Little to no income verification, and if the mortgage is higher than the fair market value of the house (under water) it is still acceptable. Only in America, Baby! Take it while it lasts!
b) 3-Step Program - If your loan was originated before 2009, and now resides with Freddie Mac, you may be eligible for an even more liberal refinance called the 3-Step, which all you need to do to qualify is say "One-Two-Three" and you're in.
Note: All of my HARP and 3-Step refinances are in progress and I am saving between $120 and $250 per month per refinance.
3. Banks or finance companies that turn you down -
I have constructed individual spreadsheets of mortgages held for each of these companies and presented them for refinance to:
a) Local commercial bank - I suggest a blanket loan and ask the mortgage term, LTV (loan to value) term, rate, and closing costs. These commercial banks, once you have established yourself as a good-paying client who knows landlording, seem open to new opportunities.
b) Mortgage broker - I have found that many mortgage brokers are worthless, but I have found one who is honest, energetic, creative, and works in his client's best interest. I therefore have presented him with these opportunities as well, and I am currently waiting for acceptance and its terms.
4. Rate, term, balloon payment, and closing costs -
This is an area which the right or wrong answer is lodged comfortably in the future without email or cell phone. However, my thoughts are as follows:
a) Amortization - Back in 2005 and until the recession in 2009, I could, through a mortgage broker, obtain investment 30-year fixed rates, which were then sold to Fannie Mae, Freddie Mac, and others. these have the advantage of stability should the interest rates climb. I lived through the 1970s where the Prime Rate went above 14%, so I'm sensitive to that possibility, but I do not believe it will happen again. The HARP and Three-Step programs are the only low-rate 30-year offerings I'm aware of.
Local commercial banks generally prefer 20 years, sometimes will charge a higher rate for 25 years and generally have a 5 or 10 year balloon (or reset).
The longer the amortization, the higher the rate. The longer the balloon, the higher the rate. The higher the loan to value, the higher the rate. Get as many quotes as possible. I have many 20- year mortgages with a 5-year balloon or reset--I'm not enthusiastic about these--however, after the 5 years are up, the banks have done nothing or lowered the rate.
b) Rate rule of thumb: I tend not to refinance unless there is a 1 point or more difference in the rate.
c) Refi cost rule of thumb: A refi settlement cost must pay for itself within three years with its monthly cost savings. Let's say you are saving $100 a month x 36 months = $3600. Therefore, the cost of the refinance should be below $3600 give or take a few dollars. Resets of interest rates on current loans may cost 1/8 or 1/4 of a point and are much less expensive than a full refinance.
d) Balloon payments- automatic or reset: The balloon payment or reset is the method the bank uses to protect itself against the surge of inflation and higher rates. No one knows if higher rates will surface, and if so, to what extent. Balloon payments or an automatic reset are bank levers that investors must deal with since they have the money.
I hate to forecast, but I live in the same world as you do, so here goes: I do not believe that rates will skyrocket like they did in the 1970s. Rates may go up a few points, but that would also mean that the federal government, which owes trillions, would have to pay higher rates, which it can't afford to do. I therefore think that rates will stay moderate for the forseeable future.
Refi madness!! Go for it!!
