With rates falling as they have over the past few years, a lot of people refinanced their homes and investment properties. And yet, rates keep falling to historic lows. Does it make sense to refinance again?
I recently spoke to Marcus McCue, Senior Vice President of Guardian Mortgage Company
about my own situation with an investment property I was considering refinancing.
Candy: I have this investment property that is currently at 6.5% that I financed a few years ago. Should I be thinking about refinancing it?
Marcus: Absolutely! A borrower with excellent credit and the minimum down payment on an investment property (at least 20%), would be at a rate of 4.00% with no points right now. On a balance of $150,000, this would create a monthly interest savings of over $300. An investor who puts down 25% will get the very best rate of 3.625%
Candy: Is there a rate where I wouldn’t consider refinancing?
Marcus: Naturally there are fees and other factors that figure into this. Using our 4.00% rate, I would say that anyone at 4.750% or greater should investigate refinance options, if they plan to retain the property for at least two years. If you think you’ll sell it sooner, it is probably not worth the upfront costs.
Candy: Would I get a better rate if I got a 15-year instead of a 30-year mortgage?
Marcus: With rates this low, a lot of residential real estate investors are finding that they can pay off their loans in half the time at around the same monthly payment which is great news if the purpose of the investment is to be debt-free on the property in 10-15 years. Cash- flow investors, on the other hand, are using these rates as a way to generate greater monthly income from their properties and are generally refinancing for 30-years. In terms of rates for 15-year vs. 30-year, there is not a significant rate difference if there is only 20% equity. However, for investors with 25% equity or more, the rate on a 15-year loan would be about 0.50% lower than the 30-year.
Candy: Besides rates, what else should I think about if I want to refinance?
Marcus: Obviously, your current credit situation matters. Some of our customers don’t qualify for a refinance because they’ve had economic hits over the past couple of years. They may have faithfully paid their mortgages, but new changes at Fannie Mae mean underwriters must now consider the “probability of future serious delinquency” rather than defaults. Investment properties are inherently riskier than homes. To off-set this perceived risk; the underwriters will require “compensating factors” like additional equity, cash reserves equal to six-months of all property PITI payments and lower debt-to-income ratios.
Candy: Do you think rates will fall lower?
Marcus: The Fed has been making moves to purchase more mortgage-backed securities with the implementation of QE3. This would typically cause rates to trend lower. However, the government recently increased a component of mortgage rates – the guarantee or “G-Fee” that is assessed by Freddie Mac and Fannie Mae. This increase has off-set the downward pressure on rates created by QE3. For this reason, most experts in our industry are not expecting any significant decrease in the coming months.
Candy: What should residential real estate investors do if they are considering refinancing?
Marcus: The best thing to do is sit down with an experienced loan officer and go over your particular situation. It doesn’t cost anything to find out if you would benefit from these historic low rates.
If you have additional questions about refinancing, feel free to contact Marcus McCue at 972-248-4663, firstname.lastname@example.org or on Facebook.