Rental Property Conversion Series: Refinancing Mortgage Loans

Make Money Mondays

Make Money Mondays is a forum to discuss ways in which you can create additional sources of income.  I try to focus on particular ideas and steps you can take to create alternative income and passive income sources. 

My husband and I have decided to turn our primary residential property into a rental investment property once we move to our next duty station.  In a previous post, I talked about how turning our property into a rental property is one of the things I want to accomplish while he is deployed.  My husband and I have a small row house in a Washington, D.C. suburb.  I purchased the home in 2004 in a seller’s market, but fortunately our house has maintained increased value since it was purchased.  Today, we have at least a 35% increase in the value of our home, which has fluctuated higher in recent times. 

We have decided to place our house on the market as a rental property instead of selling it, however.  Right now, it is a nice little investment that is poised to bring in a little additional income for at least the next couple years.

REFINANCE

The first step we are taking before converting the property to a rental unit is refinancing the mortgage loan.  I originally purchased the home before meeting my husband.  So, the loan and title are in my name.  I had a 7 yr. adjustable rate mortgage (ARM) with a fixed rate of 5.75% for 7 years.  The loan is set to readjust in 2011 to a variable rate. 

The purpose of refinancing the loan is to obtain a lower rate, which will result in a lower monthly mortgage payment.  But, refinancing a loan comes with some costs.  Therefore, if my husband and I were going to sell our house this year, it would not be worth it to refinance now.  Even if we were to obtain a lower mortgage payment, if we were to sell the property within the next year, the money we spent on the closing costs of the refinance would cancel out our lowered mortgage.

Although our refinance transaction has not yet closed, we were lucky to have gotten in while the mortgage rates were lower and have locked in a 5% rate, which is lower than our current fixed rate.  We will also add my husband to this loan and to the title of the home.

Once our refinancing transaction is complete, we will be able to confirm how much lower our mortgage payments are and can determine where to set the rates for rent.  We will also need to update our research of the rental market in our area to stay abreast of changing trends. 

If you are planning to refinance a mortgage, here are some of the factors a mortgage lender will take into account to determine your rate:

·      Annual income of the loan-holder(s)

·      Income during the past 30 days

·      Recent credit acquisition – incl. new credit cards, consumer loans

·      Credit worthiness – incl. FICO scores

·      Other assets – incl.  cash in savings & other accounts

·      Existing homeowners insurance policies

·      Equity in the property – taking into account your balance on the existing loan and any appreciation or depreciation value in the property.

If possible, find a lender that can lock in your assessed rate for as long as possible.  In recent times, mortgage bankers such as Suntrust and Wells Fargo have seen a significant rise in refinancing transactions and are sometimes running at a rate of 90 days to complete a refinancing transaction.  This data will depend heavily on your location and your lender.  The longer the rate lock-in, the less chance that your rate will expire before the lender has the chance to complete your transaction.  Articlsbase.com offers additional information about how the recent surge in financing has impacted financiers in Mortgage Refinance Surge Tips for 2009.

Have you thought about refinancing your property?  What has your experience been in this market?  Please share your comments in the comments section.  

UPDATE: Please be aware that some loans may have certain requirements that owners remain in the property as a primary residence for at least a certain period of time after closing on the refinancing.  In my case, there was a restriction that we maintain the property as a primary residence for at least sixty (60) days following settlement, which we had already planned to do.  

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5 Comments

Filed under Alternative Income Sources, Make Money Mondays, Real Estate

5 responses to “Rental Property Conversion Series: Refinancing Mortgage Loans

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