The SFR Show
The SFR Show
Apr 12, 2022
Is it a good time to refinance your property before for rate rise even more?
Play • 21 min

With all the current uncertainty in the markets, recent interest rate hikes, and the fed’s talk of continuing to hike rates through out the year, the decision to refinance should be made carefully. Why are you trying to refinance? For cash out? To lock in a rate? To take advantage of current rates before they increase even more?

In today’s episode Emil, Tom and Michael discuss what they think is important to consider before deciding, and Michael shares his recent experience with a lender backing out of a deal.

 

Before we jump into the episode, here's a quick disclaimer about our content. The Remote Real Estate Investor podcast is for informational purposes only, and is not intended as investment advice. The views, opinions and strategies of both the hosts and the guests are their own and should not be considered as guidance from Roofstock. Make sure to always run your own numbers, make your own independent decisions and seek investment advice from licensed professionals.

 

Emil:

Hey everyone, welcome back for another episode of the Remote Real Estate Investor. My name is Emil Shour and today I'm joined by my co-hosts…

 

Tom:

Tom Schneider

 

Michael:

and Michael Albaum

 

Emil:

…and on this episode we're going to be diving into refinances. Is it too late as rates are going up, or should you do it now or what's what do we all do it? So let's hop into this episode.

 

What are we doing with our lives? Hey, guys. Hey, Tom, welcome back.

 

Tom:

Yeah, yes. What’s up Emil, what's up, Michael?

 

Emil:

How you doing?

 

Tom:

Excellent, excellent. Hey, but a quick, quick personal note. I was been working in my garage trying waiting to build this little lot of land and I started getting lightheaded and I realized that there is some just kind of like, toxic fumes in my garage. So back in the house, so apologies if you hear some baby noises while we're waiting to build out the exterior office. That's my yeah, I am doing good man, not not lightheaded anymore, so…

 

Michael:

and the baby's not in the garage?

 

Tom:

….Right Dukes of Hazzard area. Yeah, we switched babies in I mean, it's good young lungs, like they feel.

Obviously…

 

 

Emil:

Did you have the gas company come out and like, report on, what's going on?

 

Tom:

I did, they gotta have to come back again. So they came out, I mean, there's like two like gas entry points into the house. There is like a little further away the house like, like a little gear thing you tighten and then next to the house, there's the meter. They replaced all the meter stuff and I think it helps, but there's still stills of issue. So anyways, don't want to go too deep into that rabbit hole, yeah…

 

Michael:

Never a dull moment with Tom Schneider.

 

Emil:

Alright. Well, I'm glad you are alive, your brain cells are hopefully intact for this episode and yeah, let's get rolling. All right, so we're recording this, it is April 11. Interest rates have been climbing pretty quickly. I think I'm hearing four and a half 5% plus, when we were in like, you know, I got to 2.8 on my primary back in November, so four or five months, pretty crazy how quickly rates have gone up? And Michael, I think you have some pretty interesting going on you were in the middle of a refi currently. And give, I'm not gonna put words in your mouth. Go ahead, tell us tell us what's going on.

 

Michael:

So not even in the middle of a refi, I was at the end of it, I was supposed to close today and the lender calls me he goes, hey, Michael, we're not going to be able to do this loan. I'm like, what do you mean, we're not gonna be able to do this loan, he goes, yeah, at the rate that we locked you out, we're, we're not going to be able to do it and so basically just give everyone a little bit of context. I started this investigation like three months ago into getting 30 year fixed mortgages for multifamily commercial property. So five units and up, and I found a lender that would do it and I was making them compete against other lenders at a bunch of different quotes and I found one and they were like, We can beat it, we can do it 4.275 for a 30 year fixed on a commercial multifamily loan directly to my LLC, load docs, they just needed my property specific information how the property performs like a DSCR loan. So we're getting all the paperwork done, I paid for the appraisal, several $1,000 for each property and then my loan processor, like just stops returning my phone calls and emails. I was like, that's weird and we're getting up to the point of closing.

So I got a hold of, I called I called his line, and somebody else answered and I said, hey, I'm trying to reach this person. They said, oh, they're no longer with the company. But this other person is handling all of your stuff now and I said, okay, I mean, that happens, turnover happens and this new person who's handling my, my, my files, sends me this email, she's like, hey, I need all these things from you. I'm like, I already sent those to your company months ago, the original person had that, like, do you not have access to my file and went back and forth and back and forth and I got them all these docs, and then they go, oh, we're gonna have to close on Monday, otherwise, your rate will expire and I said, okay, great I'm ready, let's do it and today, Monday, he calls me and says, hey, we can't do this loan. And what I'm pretty sure happened is they just realized that I got too good of a deal, and they can lend that money elsewhere and get a higher interest rate for it and I still have not heard back from them as to why I haven't got a direct specific answer. But as soon as I do, I'm going to be naming and shaming these people all over the place because I posted about it on Twitter and seeing if there's any kind of recourse and be like, yeah, I've been hearing this happening more and more of lenders just dealing with bad PR, rather than taking the loss on their, to their pocketbook.

 

Tom:

What does a rate lock mean, if that doesn't allow you to like lock your rate, right?

 

Michael:

That's a great question and so what a lot of people online have been saying is that, oh, if the rate lock expires, then then the rate lock is no longer valid and which I totally get. But the question that still I'm having is, well, what if a lender is just dragging their feet intentionally to drag out the rate lock to expire? So that they can say up great lock inspired, sorry.

And so they recorded they said, well, we can re quote you at today's rate and I said, great, do that and they said, oh, it's at six and a quarter. I'm like, so 2% greater than what I locked it in and I did this three months ago, because I knew that rate hikes were coming, everyone was talking about it and I said great let me just lock this in, set it and forget and be done with it. So it's pretty infuriating, so everyone, stay tuned, I will keep you all posted, how it how it shakes out, but I have yet to hear a get a call back from these folks explaining themselves.

 

Emil:

I wonder if this is like a you said it's a commercial loan product. It's a portfolio loan, right? Like it's a loan they're doing themselves. It's not like government backed or anything from I wonder if there's like different rules, you know, if you're going to get your traditional conventional 30 year fixed rate, Fannie, Freddie, like, is that would that have gone through versus like a portfolio? And like you said, they're like, why would we? Why would we put this money out there for 2%? Less than we can get it today or two to 200 basis points, not 2%. But you know what I mean?

 

Michael:

Yeah, no, I gotcha gotcha. Yeah, I don't know and that's the one of the questions that I have out to the Twitter versus Hey, what kind of rules and regulations are these companies governed and bound by and how do we hold them accountable? Because I think for the government back stuff, it is a little bit more clear cut, I would expect this less to happen in that space. But it seems like the commercial world, the private lending world is just a bit more unregulated and so I'm wondering if that just might be the cost of doing business because of that lack of regulation.

 

Tom:

Like they're, you're, you're done with, like, their lifetime value of you have a customer is gone. You know, I don't know, like, I think that like, could be kind of short sighted. You know, there's funny, these different vendors where there's like perverse incentives, you know, like for this example, like them just kind of like waiting out the clock, because they see the interest rates going up. There's a couple other incidents, other scenarios where vendors that you rely on could have like, bad incentives, you know, like for literally, property managers that get paid on work orders, you know, they're making more money on work orders, they're gonna be loved to be performing work orders. So I guess this speaks to that whole, like, trust and having a, like, a good partner that you're working with, but and Michael as yeah, that's a that's a bummer like, what a huge jump.

 

Michael:

Oh, my God, it's yeah, it's so incredibly frustrating and like, I had so many big plans for this money, too. So it's just been a bit of a whirlwind of a day. But in speaking to, like, the question, and the topic for today, I don't want this whole episode of your woe is me session, my therapy session, you guys can build me later. I hope you take insurance but um, I think it's really important for everyone looking at their portfolios now, or looking at their properties now to determine and kind of ask themselves the same question of hey, does it make sense to refinance right now and for me, it made total sense when I locked it in three months ago, I was paying a little bit higher interest than the current mortgage that I had on the property, but it was going to be a longer amortization period, at 30 years over the 25 years that I that I currently had on the product and then it was going to be fixed also for 30 years. So it wasn't gonna have to go refinance in five years or 10 years, like I will, with the current properties of it, the current mortgages that I have on these properties, and one of them is coming due, I think, next year, or in 2024 and so I said, you know what, I can lock in the rate for 30 years, I know what it's going to be, there might be times when my rates a little bit higher than what the current market is.

 

But my guess is that for the most part, it's going to be less than the average interest rate that we find ourselves in over the course of the next 30 years. So let me just lock it in and I'm sure I'll be stoked today at 6% and a quarter percent, I can't say that with as with as significant with as much confidence and so for everyone out there listening if your rate is less than what you're going to be refi into think long and hard about giving that up. But also, if you're going to be taking I mean, there's two ways to refi right, there's the cash out refi and then there's just a rate and term refi. For your rate and term refi, if you're going to refi into a higher interest rate now might not be a great time to do it. But what are your guys thoughts about like the cash out piece of this?

 

Emil:

I mean, look, if you bought a long time ago, maybe you've put some money into the property, you fix it up, your cash flow is nicer and you're sitting on an opportunity to pull some cash out and still cashflow, that's something you should still consider.

I don't think it's like, okay, rates have jumped 2% now, it's a definite no, it's just, it's like we always talked about, you gotta run the numbers, see if you're still cash line, right? Don't don't make it negative cashflow I in in my eyes and yeah, make that make that call for yourself.

 

Tom:

I'd say, you know, you, obviously you do have like tons of equity and like you have a plan on what to do with that equity if you were to convert it into a cash out finance, that makes sense. I think in, in some markets, with interest rates going up, you would expect a little bit of a reflection in pricing to go down potentially, I don't know, it's hard to say because there's a there is a good amount of demand, I would say it's more likely to be in like secondary and tertiary markets where you have a property with a lot of equity, cash out, refi, get that in your back pocket, there could be some opportunistic acquisition opportunities with interest rates going up, I would say with like primary cities, you know, like really big ones, Dallas and whatnot, since a lot of the maybe institutional investors out there are not going to be, you know, have too much moving within their debt structures. But I'd say in some of the secondary and tertiary markets, there could be a bigger impact on rates going up, and potentially prices going down. Like I don't know, you would you would assume that right, I don't know that, that's my 10 cents, Michael, and Emil thoughts on that take.

 

Michael:

I mean, I think that makes sense. But I'm wondering, too, if we can kind of try to think like two steps ahead and is there an instance or a scenario where it makes sense to take out cash via cash out refi, because you know, what the rate is today, and you have equity in the property, knowing full well that you don't have a plan for it in the immediate future. But you are opportunistic, you foresee an opportunistic environment and so you're just going to kind of sit on it and see what happens versus doing nothing and then you might see that equity actually evaporate from the property.

 

Emil:

It's good point, right? If rates are going up, right, I just before we hit record, I just threw my loan into a calculator, right that our primary, looking at that 200 basis points difference and it's, it's huge, like, I don't know, if we would have bought it like it's over $1,000 difference, you know, and so it's like, it's big. so, you know, you can't have rates keep going up payments keep going up and like, we have the same kind of crazy appreciation. I don't think I'm not looking into a crystal ball. But yeah, so that that is a good point, right?

If you think okay, rates are gonna go up, rates are going up, it's going to keep putting pressure and like prices need to come down, then yeah, that could be a great time to cash out refi, hold some cash, then buy when there's a little bit more opportunity down the road.

 

Michael:

Yeah, and that's, it's not something that I've thought about in the past. I've always kind of said, especially as in, in coaching with folks and Roofstock Academy is like, yeah, cash refunds are great if you have a plan for that money in the next 612, nine months. Or even just know what the money is going to be used for versus getting a HELOC could be a better use of funds and time if you're not sure what you're gonna be using the money for. But now, with rates going up so fast, I might I think I'm changing my tune a little bit and saying, yeah, maybe, you know, even the fact like we were joking about Emil last episode that having your money in the bank, it loses 7% in value every year, maybe that 7% hit is more valuable than or should be is is less impactful than the future opportunity down the road. Because if prices dropped 10 or 15% I'll pay that 7% to have money sitting in the bank all day long to be able to jump on something for 10 to 15% discount.

 

So I think you're right it is super tough to know what to do. But I'm of the opinion that if you can lock in something today and you know what the payment is for the life of the loan or for the next foreseeable future that has a significant value to it and having cash in hand we know what the value is today and we don't know where rates are gonna go and so if it turns out that rates go down in a year from now okay, will you do a rate and term refi and take advantage of lower rates then get your cash out now and arm yourself. I don't know I think that I think that makes sense for a lot of people.

 

 

Tom:

So I've got a little question for you guys, I'd love your guys's feedback. So with my primary refi you know maybe a year ago also took out a HELOC use that HELOC to improve the value of my house…

 

Michael:

But not the gas line apparently?

 

Tom:

No, my the gas line is fine. It's it's more like it's a garage and it's moldy. Like don't worry yeah don't worry things are okay.

 

Emil:

Gas lines are not value add by that.

 

Tom:

I meant to say this the beginning. They do it for free, you they have a number you call they send person out there just because like massive liability if there is issues with the gas line, but my question for you guys is so I have a HELOC on the primary, did some improvements and my strategy was originally just to refinance again and then put that HELOC at into the primary, but with rates going up right now, does that make sense like I, you know, have a good sized amount of cash on that HELOC or a debt on the HELOC. Do I just eat it and roll that into a refi or because, you know, assuming rates continue to go up like that HELOC payment is gonna become more and more.

 

Michael:

Yeah. How have you seen your HELOC interest rate creep up in the last couple of months in lockstep with with like traditional mortgage rates?

 

Tom:

Um, I assume it would be sensitive to it just in that HELOC, you know, is not fixed debt and that it's moving. I haven't I haven't looked at it in a minute but that was always part of the plan was to roll that in.

 

Michael:

Do you know how big of a difference? Your interest rate would be from your current primary mortgage to what your new one would be?

 

Tom:

It's a very good question, it's very good question. These are all good, good action items to go out.

 

Michael:

Tom always finds a way to get just personal advice and…

 

Tom:

Self-serving all the time..

 

Emil:

Free coaching on…

 

Michael:

That's it on the fly. Gee, man, you're you're smarter than the average bear. I think that what would be that is one thing I would want to know is what's the new rate?

 

Tom:

You lock your new interest rate right now is 2.49. So not going to do better than that. But you know, and…

 

Michael:

That hasn't moved in last couple of months…

 

Tom:

Hasn't moved in the last couple of months, no.

 

Michael:

Yeah, so I was saying… Tom, you turned me on to that lender and I actually got a HELOC from them too and it's amazing.

Yeah, I would, I would try to get some clarity around. If you did roll this all in what would be your new primary interest rate?

 

Tom:

I like it.

 

Michael:

Because you gotta remember even if the rate blows up on the HELOC call it 567 percent. It's interest only, versus the fully amortized principal and interest payment you'd be making on that additional debt and so I would, I would look to figure out okay, where's my breakeven point, you know, at what rate can I afford to pay fully amortized principal and interest versus just interest only because interest only it's gonna fluctuate up and down versus the P&I, that's for the life of the loan.

 

Tom:

Yep, that makes sense, Michael, it's good, good feedback, sself-serving.

 

Michael:

And then I just on top of that, to also think about the cost of doing that refinance. There's several $1,000 associated with it and so if that's what you have to eat in terms of your additional interest payments on the HELOC, but you still have a better rate than then you would, that that in my mind, make means pay the extra interest, just eat it.

 

 

 

Emil:

Michael, I should have asked you this before we left the conversation of your refi changing. Are you gonna go through with it? That's the big question, right?

 

Michael:

No, I'm not because here's the here's one of the problems is like right now, I'm at three and a quarter percent interest on 10 year fixed with a 25 year amortization and I'm like, three, three years into those loans. So they haven't a long lifecycle still left, I would much rather be on 30 year fixed and at four and a quarter, I'm happy to pay the additional percentage point on interest, just for that fixed and additional cash out. So the thing of it is, it's almost like, and the payment on that was going to be a little bit bigger than my current one, even though the interest rate is higher, but I was getting a ton of cash, but it's over a longer amortization. So it all kind of smoothed itself out in the end. So I was essentially getting some free money. So yeah, it's just infuriating beyond belief.

So stay tuned, I'll keep y'all posted how it shakes out.

 

Emil:

Got it? Yeah, I just wanted to, I don't think we close the loop on that. I wanted to know, like, are you still moving?

 

Michael:

These people will be getting zero of my dollars ever and I will encourage everyone I know or ever will know, to not use these people if they don't make it right.

 

Emil:

But okay, let's say you go get the same six and a quarter whatever from some other lender, who is not a monster and screws you over like that. Would you do that?

 

Michael:

No, no, no. I mean, the rate the rate at that level just doesn't make sense from a cash flow perspective and that's why I was so excited about this long as I locked it in when it totally made sense.

 

Tom:

So not just a spike decision.

 

Michael:

It's like yeah, yeah, it's it's a financial one like he just financial this doesn't make sense. It doesn't make sense. So and that's something that people really need to be thinking about is kind of like we were mentioning Tom with your loan is the cost of the loan. If you're gonna go do a refinance, there was money involved to physically do that. Some lenders will wrap the closing costs in so you pay it, you know, paid up front, but you pay it over for the loan, and so just be factoring all this stuff in and also be factoring and like what could you do with the proceeds, if you already want to cash out refi? What kind of return could you get on that money if you want to inspect it elsewhere? Because that can often make the interest rate a little bit easier to swallow if it is high.

Yeah, you might pay in 6% but you can go back eight, nine 10% on that money somewhere else. I think it's important to to find out and take it from me what the track record is of your lender if you are going to be refunding research them online, do your homework, find out if they can actually close the loan because anyone can say anything, but until they fund that loan and it closes it's all just hearsay apparently, I'm so bitter God, this coming out terribly.

 

Emil:

It will probably be hard to vet this one because like, you know, we've been in a really low rate environment for years. So no one else has probably experienced this. I'm sure there's other people who are trying to get a loan from them who are now going through just like you, but you probably wouldn't have found any of those online because you know, rates have been low for a long time and everyone was just scooping up reefer.

 

Michael:

Right, right and they had like a guy had good reviews online. So I did do my homework. It's just a weird time in the market.

 

Emil:

Yeah, it's just interesting. Another rate lock, at least with like, I don't know, maybe just portfolio lenders it basically mean meaningless.

 

Michael:

It's meaningless until they unless they decided mean something…

 

Tom:

Rustproofing on your offer.

 

Emil:

Yeah, well, maybe that's maybe that's the takeaway for our listeners is like, if you're going out buying refiling whatever. Find out about your rate lock, like, you know, see if it really is like for 30 days, or you or however long you are 100% guaranteed that rate or can the lender opt out of it or how does it work? So good question, ask your lender.

 

Michael:

Yeah, tell them you heard a horror story on this podcast you just started listening to and say I don't want this to happen to me.

 

Emil:

And with that, we bid you all fair do, fairly well, fairly well, fair do.

 

Michael:

A fortnight fair do.

 

 

Emil:

Farewell, all right, so I guess that's probably a good place for us to end this episode. Thank you guys. As always, Michael, thanks for giving us a little deep dive into your paper cut flesh wound.

 

Michael:

Oh, dude this feels like a full digit got sawed off isn't just a paper cut. Lost the whole thing.

 

Emil:

Hopefully, hopefully the story ends out ends up well for you.

 

Alright everyone, we will catch you out on the next episode. Happy investing.

 

Michael:

Happy investing.

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