Q: We purchased a foreclosed home last summer making it our primary residence.
We feel we got a great deal since the home is in a very well maintained subdivision with a very strict homeowners association (HOA) and other homes that have sold since we moved in have sold for a minimum of $40,000 more than what we paid.
We paid nothing for closing costs for the property, and the bank gave us the
difference of approximately $7,200 to cover real estate property taxes and
insurance. The term of the loan is 30 years at an interest rate of 4.65 percent.
We currently rent our former primary residence for $1,100 per month. We still owe approximately $48,000 on that house. We pay $564/month at an interest rate of 6.5 percent.
After listening your show this week, I feel as though you understand the current real estate market fully and I believe you would keep the rental going and not try to sell in this terrible market. This is what we are thinking of doing.
If we go in this direction, does it make sense to refinance either of the properties?
A: It sound as though you’ve made a really good decision to buy the new place, a decision that has already paid off for you as other properties in the neighborhood begin to sell at higher prices.
We think you could try to refinance the other property, which you are now using as a rental, but you don’t owe that much, and it may be difficult to get a lender to refinance you now that you don’t live there. Mortgage lenders today are reticent to refinance for small amounts of money, and rental properties require at least 25 to 35 percent equity (depending on the lender). Even if you have the equity, you don’t owe much, and doing a cash-out refinance is pretty expensive.
If the rental is cash neutral or cash positive, you should keep the property and wait to try and sell it. In the meantime, you’re paying down the mortgage and building up the property’s equity.
As for your current residence, you can try to refinance that loan. If you do, you might want to shrink the loan down to a 15-year fixed rate mortgage and take advantage of the lowest 15-year mortgage rates in history. As we write this, lenders are routinely quoting around 3 percent on a 15-year fixed-rate mortgage with very low closing costs.
But you have to see if it makes sense to do this refinance. The four ways to tell: You lower the interest rate; you lower the monthly payment; you shrink the term of the loan, and you can pay off the closing costs with the savings within eighteen months.
If you can meet all of those conditions, you have a home run refinance. And, that’s the only kind of refinance to do these days. And keep in mind that you can refinance your new home’s loan and may be able to get a reduced payment on the loan, but that refinancing will not lower your property taxes or your insurance costs. While you might get the loan interest rate down, you will have to factor the other costs that go into refinancing a loan to see if it works for you.
Ilyce Glink is an award-winning, nationally-syndicated columnist, television reporter, radio talk show host and bestselling book author. Her syndicated column, Real Estate Matters, appears in more than 100 newspapers and Web sites across the U.S.