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Monday, July 3, 2017

My Rental Property Refinance Fail

If you haven't been paying attention, it's a great time to refinance!  30-year mortgage rates are still very low, and property prices have risen considerably.  If you bought a home during the 2009 crisis, well...congratulations!  You are probably sittin' pretty right about now with a ton of equity.  Still, this doesn't mean you should refinance your property, i.e., get a new 30-year mortgage.

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If you have a rate above 5%, refinancing to a lower rate makes perfect sense.  If you're scared to take cash out from refinancing, you don't have to, just be prepared to either pay up front for the process, or use some of your equity to pay for the added points to bring you near a 4.0% rate, 4.0+% APR.  But at least this way you get your lower rate without bringing cash to the table.

I'm a big proponent of doing cash out refinancing for investing in more real estate.  My conditions are sound: 1) Make sure you can capture a lower interest rate than the one you have currently and 2) Make sure there's enough equity so you don't have to pay for any refinancing fees, other than the appraisal and 3) Make sure your new mortgage still keeps you at 30% of your income going to housing and 4) Make sure you get enough cash back to put it to work immediately...no sense in keeping cash in an account losing value.

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Well, I had met all of my refinancing conditions this past month (June) and had a sweet deal planned out for my cash back money...I was going to buy a half-acre lot in Nevada in an up and coming city and with my father-in-law, build a spec home to sell.  In mid June, I started the refinancing process.  Here's what I did,

I went online to Lendingtree.com.  I called their number.  Within minutes I had a Loan Originator that was licensed to operate in the state of Mississippi, De Soto County where my rental is...a few minutes drive to Memphis, TN.  He gave me some preliminary numbers and potential outcomes given my conditions.

I also talked with Chase bank because they currently own my mortgage.  The loan originator gave me similar numbers.  Ultimately, I decided to go with the loan originator referred to me by Lendingtree.  His name is Christian Robinson...great guy.  Christian works for Amerisave.com.  I was dreading having to go through the paperwork process, but things have changed dramatically since I last applied for a mortgage, 2013.
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Christian gave me a link to his Amerisave.com page and guided me from point A, creating an account and login, to point Z, the last questions about my qualifications.  It took us at least an hour to get through it together, but he stayed on the line the whole time.  On the rates page, I had to make a choice.  I could buy one or two points at $3K a pop and get my rate down to 4.0%.  Or I could not pay any money (other than the appraisal fee) and lock in a rate of 4.75%, 4.9% APR (not the same as the monthly rate).  I chose the no money to close option.  My new mortgage and principal payment would increase by $37, so instead of paying $680 a month (this includes taxes and insurance), I would be paying, $717 a month.  I collect $1,050 a month on this property so as you can see, I'd still be cash flowing.

More importantly, at a stated valuation of $133K, I'd be getting a cash out check of $21K at closing.  Not bad, huh?  I had to provide Christian what I thought the property was worth.  I looked at both Zillow.com and Redfin.com and the property's valuation ranged from $125K to $138K so I thought $133K was conservative.  After completing the online application, I was given a list of documents I needed to upload to the server at Amerisave.com.  These included my W2's from the previous two years, 2015 and 2016 tax returns, lease agreements for my rentals, proof of insurance for my rentals, my personal residence's proof of insurance, property tax statements, and the list goes on.  I had at least 20 documents to upload.  Luckily, I had many of these already in PDF.  Those I didn't have, I found hard copies and scanned into PDF format.

It only took me about 2 hours to upload all of the requested documents, but that's because I knew where everything was.  Note: You should PDF all of your tax returns, W2s, and pertinent documents.  You never know when you'll need to apply for a conventional loan.

After docusigning some last minute documents, all that was left was to authorize a home appraisal online by providing my credit card information.  The appraisal cost was $575.  Christian looked over my documents and verified my income.  Once my income was sufficient to handle the new loan amount/monthly payment, he sent the paperwork to his Underwriter.  Quote Christian: "You were so fast getting all of these docs in that closing should be sometime in mid-July."  I was sooooo excited!  Here comes the money, I thought.

My wife, Jessica, and I were already writing up the offer document to the lot owner in Nevada.  The appraiser contacted me and asked about access to the property.  I told him I'd contact the property management company and make sure he'd get full access to the property.  I even told him how much we would appreciate (hint, hint) if the property appraised at $133K.  He laughed, getting the hint.

5 days later, because that's how long it took the appraiser to do the report, the underwriter called me with the bad news.  My rental property appraised $19K under the stated value!  What the heck!!  It didn't make any sense.  So what happened here?

Lessons I learned

For starters, appraisers are using criteria that is black or white, no more of this fluff we used to have in the good 'ol days.  Appraisers are now the "deal" gatekeepers of every homeowner, homeowner to be, and investor.  Be even more conservative with your numbers.

I also learned that sites like Zillow.com and others can't be trusted.  In fact, if you search your property on all the available sites that value homes, I guarantee your property's value will be all over the place.  You'll be lucky if two sites match up.

I spent $575 out of pocket for this roller coaster experience, and I can tell you that I didn't like the ride, my friends.  However, I did like how much easier it is now to apply for a mortgage.  I don't want to discourage any of you.  It's a great time to refinance to a lower rate and get cash out to invest with.  Don't let my fail moment get your own hopes down.  Refinancing is worth the shot!

Thanks for reading.  Until next time.  If you liked this post and want more like them, please subscribe below to get my latest emailed to your inbox.         
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