When my husband and I refinanced a refinanced a rental property two-and-a-half years ago, the last thing I imagined was that interest rates would drop even lower. Back then, the best loan we could finagle on a investment property was 7.5%.
Since last winter, our banker has been urging us to refinance at a lower rate. At the current rate of 4% we could afford to wrap a $12,000 emergency repair in with the home loan and change the payment term to 15 years without changing the monthly payments. What a deal!
Changing lending standards
Last week we've started the refinance process and to our surprise discovered that lending standards have changed rather drastically. Not only did we have to provide two years of financial statements and tax returns, bank statements, retirement statements and so on, we also needed cash reserves. How much? We needed about $11,000 to cover three groups of expenses.
Even though the rental we were refinancing had been continuously occupied for the past 3 years, "breaking even" from a debt liability standpoint, and worth about $90,000 more than what was owed against it, our loan officer required a six month PITI (principle, interest, taxes, and insurance) of liquid assets. This came to $5000. Also needed was a three month PITI payment reserve on our primary mortgage which was not part of the transaction. A three month reserve on our home meant an additional $3000 needed in savings.
The last expense we had not anticipated were 3% closing costs to the tune of nearly $3000. This brought the cash needed to close the deal to nearly $11,000.
How we met the cash reserve guidelines.
Since my husband and I had been throwing most of our income towards debt reduction these past 6 months, our savings account balance was only around $4000. Fortunately we both had nearly $52,000 in a retirement fund that our banker accept in lieu of cash savings. The closing costs we were able to roll into the mortgage as well but only because we were borrowing less than what we qualified for.
For landlords looking to refinance a rental property, it takes a lot more than good credit these days to swing a new loan. Our experience has demonstrated that higher closing costs and nine months worth of cash reserves now seem to be the new standard, making it tougher than ever to refinance a home mortgage.
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