Refinancing Our Rental Property

Interest rates for the last several years have been at historic lows, and will likely remain relatively low for the foreseeable future.  This environment of low interest rates have led many people to become serial refinancers.  Refinancing provides a proportional savings to the loan amount, with closing costs not varying a lot, because of this someone with a $1 million loan benefits much more from a refinance than someone with a $50,000 loan.  This isn’t to say that refinancing doesn’t make sense for people with low mortgage amounts, it just means rates have to drop more for it to make sense.

When Mrs. C and I bought our first home in 2006 we both worked low wage jobs and had no credit.  Despite putting 20% and getting a 15 year mortgage we ended up with a 7.37% interest rate.  When we went to sell the house in 2011 it would have made sense to refinance, but we didn’t think we would be hanging on to it for any length of time.  As the months drew on I realized we should refinance, but alas, you can not refinance a house that is listed for sale.

When we pulled the trigger on turning the house into a rental, this went away, but we had so much going on that a refinance was put on the back burner.  In order to lower the payment we decided to get the ball rolling on a refinance in December of 2013.

Hassle Factor:

We had to meet once with the loan agent, respond to several inquiries and schedule a closing.  All together I would say the refinance took a total of 20 hours of our time. I was amazed at how much extra documentation was required compared to previous home loans I have had. I ended up having to provide 3 years of W2s, a full year of bank statements, a letter explaining the variations in my income, and a letter about why we unlisted our home.

The Numbers:

Total Closing Costs of $1,600. One major cost in here was the appraisal. Due to this being an investment property the appraiser charged almost twice the cost of a typical appraisal.

Our original loan was for 15 years and $432 a month at 7.37%.

Our new loan is for 10 years $340 a month and a 3.85% interest rate.

Note: Interest rates on rental properties are a bit higher than on primary residences.  Once again, I would have saved even more money had we refinanced sooner. Using my home mortgage spreadsheet and calculating out the amortization of both mortgages, We saved $7,000 in interest over 10 years by refinancing.  In addition to the interest saved we also saved  $92 a month in cash flow.

What if I had refinanced in 2011 before listing the house for sale? I would have saved another $4,000 in interest! I would have refinanced to a 10 year, with a slightly higher balance, but with a 3% interest rate.

Even with a low mortgage balance, you can still benefit from a refinance.  If the area you live in has a stagnated housing market with several months of inventory, it may make sense to refinance before listing your home for sale to avoid the situation I was in.  At the time we listed our home our county had over 15 months of inventory on the market.

Action Steps:

• Compare your current interest rate to the prevailing interest rates being offered
• Run the numbers and refinance if it can save you some money
• Do not extend the loan term. If you have a 30 year, see if you can afford a 20 year or 15 year mortgage. Depending on your interest rate it may be possible to keep around the same payment, but cut several years off the mortgage AND save thousands in interest costs.
• Shop around: When we looked for a place to refinance closing costs varied up to $4,000!  Talk to multiple lenders to see where you can get the best deal.

Current Rates at Lake Michigan Credit Union:

30 YR Fixed 0 Points 3.75%

20 Year Fixed .125 Points: 3.375%

15 Year Fixed .125 Points: 2.875%

Have you refinanced a property recently?  How did the process go and how much money did you save?