What to do with Rental property with 10/1 ARM?

[montrose]

I have a 2-unit rental, originally my primary residence ( I moved a couple of years ago due to my job). I bought it 5 years ago 80-10-10, with the first mortgage being a 10/1 ARM at 6%. The value has dropped, so I probably have no equity despite paying off the second mortgage HELOC.

I'm trying to figure out if I should refinance now while rates are low or continue paying down until 2016 when the ARM resets.

Purchase price: 219k
Currently owe: 159k
Value: 130k-170k based on recent sales and rental income

Rental Income: $1600/month + ~$100 from depreciation

Expenses:
PI: 1033 based on original $172k mortgage
TI: 362
fees: 8
Reserve fund: 100
Repair/maintenance fund: 83
utilities: 40
Total: 1626
Leftover: $74

Option 1: Refi now. Assuming I keep 6.% rate, add in PMI of $120, and PI would be $953 and I would still cash flow $34

Option 2: Refi in 2016. I would owe $144k. Assuming 7.5% and PMI of $93, PI would be $1008 and cash flow would be $6

Option 3: Prepay $73/month and refi in 2016. I would owe $140k. Assuming 7.5% and PMI of $93, PI would be $977 and cash flow would be $70

Option 4: Prepay a lot more. I still have the HELOC open with $25k limit (currently 4.24% variable) and I've been getting 0% no balance transfer fees offers from CC up to $12k. I could transfer as much as possible to those lower rate loans, then I can put $437 from salary + the $74 towards prepaying the loan. $437 is an amount that would still allow me to max out retirement.

Option 5: Sell the cursed thing already, even if it is at a loss...The house is 50 miles away, and I travel there to maintain the lawn. I eventually in 5-10 years want to move from my current condo (also lost equity here), and maybe if I sold the rental, I could focus on finding other properties closer to current area.

Hope you guys can help me think this through. IMy assumptions -future interest rates, PMI etc. -are crap. But I keep wanting to prepay the loan to be "safe", which doesn't make sense financially.

[qofcc]

house is 50 miles away, and I travel there to maintain the lawn.

Are you driving 100 miles round trip solely to maintain the lawn? Depending on what you drive that's probably $15-25 in gas alone. Not to mention wear & tear on your vehicle and the value of your time. How much would it cost to hire it done.

If you're going to refi, I'd try to do it now while rates are low. Why don't you get a few quotes, then you'd have some real numbers to compare. I think you can do better than 6%.

Is the neighborhood good so that the value will likely increase over time or is it in an area that was so hard hit it went downhill and keeps sliding?

[cronewitch]

You have too much detail that doesn't help the decision.

Your first mortgage has a rate and an index you can compute what the future rate will be if it were to adjust now. So for example if it is prime plus 1 it would be 5.25% but prime can change.

Next you need the cost to refinance. So if you pay 2K to refinance and own the home another 20 months it cost 100 a month. Will you save 2000 in interest in 20 months?

The payment doesn't count at all since you might go from a 25 years mortgage to 30 year or even to 15 year with a totally different payment, only the interest is saved.

[montrose]

I can get some quotes and post again.

For the lawn: Yup 100 miles every two weeks when it's warm.

A reputable company with license and insurance was billing me $50/cut five years ago. Last year, another company wanted $65. The lawn isn't that big but the house is on a hill with steps up so they can't get their big riding mowers on to the property. I'm paying for the fact that they have to have someone pushing the mower for 30 mins.

A neighborhood hustler would charge me $25/cut every two weeks or as needed, cash only, no receipts. So I'd need to drive up there to pay him. The previous neighborhood hustler stole my lawnmower (I have no proof though). Prior to that, he was calling me whenever his rent was due to tell me that the grass needed cutting. I'd rather just do it myself.

Now you have a good idea of the neighbors...

Actually, just a solid working class neighborhood - electricians, plumbers, bank tellers, skilled construction workers, hairdressers etc. Values will likely be stable.

[Deleted]

I went through the requirements and it looks like this is available even when not your primary residence:
www.makinghomeaffordable.gov/programs/lower-rates/Pages/harp.aspx

The beauty of the program is, if you didn't have PMI before, you don't have to take it on the new loan even though you don't have 20% equity.

Lender who advertises using the government program:
aimloan.com/homeaffordable/default.asp

[montrose]

cronewitch,

Shouldn't the payment be more important than the interest saved because it is a rental. That is, if the tenants are paying the mortgage, shouldn't I be more concerned about getting a return on my investment

I can get that information on rate caps and index when I get home.

[qofcc]

Would one of your tenants be willing to take care of the lawn in exchange for a rent discount? They could text you a picture each time to show you that it's being done. With SFHs it's common to require the tenant to mow. Not so much with a double, but I don't know how the lawn is divided.

[midjd]

That's what we did at our last house... our rent was $400, we got a $30 discount per week of mowing (sometimes we'd mow once a week, sometimes twice). This was using our own mower/gas. We were happy, and the landlord was happy.

I'd say if you don't trust your tenants to do that, you may need to find different tenants...

[montrose]

MMC,
Thanks! I didn't know investment properties were eligible.That site looks useful.

[8 Bit WWBG]

I've been around here long enough to know that rentals are about cash flow. Of the options you laid out, the status quo has the highest cash flow.

I think if you can get the tenants to mow, that will save you money over your gas and time.

Otherwise, if the property is getting close to needing some very large repairs (roof, HVAC...) maybe you should just sell. You could probably make $74/month by cutting out one or two dinners out.

[montrose]

QofCC and MidwesternJD,

One tenant (trustworthy) isn't interested, but I haven't offered him a discount. I may do that this weekend. The other tenant is flaky.

It's annoying sometimes, but it's not that big of a deal to go up there and mow the lawn myself. But you've given me a couple of good ideas I could use with the neighborhood 'entrepreneurs', e.g., have them text me a picture or have the tenant pay and deduct from rent

[phil5185]

I went through the requirements and it looks like this is available even when not your primary residence:

I think HARP is strictly for home owners, not available to investors. (But I could be wrong.)

I would use option 1, refi now and lock in the low rates for 30 yrs. I see no point in prepaying or adding equity, I would keep the biggest, longest loan possible. Your $1600/m counts the same as W2 income toward qualifying for new loan. The current NonOwnerOccupied premium is about 1/4%, I'm guessing that you will be at 5% to 5.25% on the new loan.

[Deleted]

Jun 16, 2011 15:59:12 GMT -5 phil5185 said:

I went through the requirements and it looks like this is available even when not your primary residence:

I think HARP is strictly for home owners, not available to investors. (But I could be wrong.)

I would use option 1, refi now and lock in the low rates for 30 yrs. I see no point in prepaying or adding equity, I would keep the biggest, longest loan possible. Your $1600/m counts the same as W2 income toward qualifying for new loan. The current NonOwnerOccupied premium is about 1/4%, I'm guessing that you will be at 5% to 5.25% on the new loan.

You are wrong, but we'll let you slide

There is a qualification check you can go through on the website and that is one of the questions. I selected the non-primary residence option and it still said I qualified.

This from their website contradicts the eligibility checker:

How do I know if I am eligible for a refinance under HARP?
Answer
​You may be eligible if:

•​You are the owner-occupant of a one- to four-unit home.

[montrose]

WeWillBackGowron

the status quo has the highest cash flow.

True. But it's an ARM, so the party won't last forever.

large repairs (roof, HVAC...)

Gas furnace (steam radiators) is pretty old.

You could probably make $74/month by cutting out one or two dinners out.

My entire entertainment budget for the month is $100. Plus, f I wasn't mowing the lawn, what would I do all weekend? ;D

Just kidding. You all have persuaded me to find a better way to deal with the lawn.

[midjd]

I can't imagine the non-flaky homeowner will pass up a chance to lower the rent by taking care of the lawn, if the price is right.

[montrose]

I went through the requirements and it looks like this is available even when not your primary residence:

It looks like there are some extra hoops to jump through if the loan was originally underwritten and sold to Freddie Mac as a primary residence, then you try to refinance to an investment loan. But otherwise, I think it might work.

If I can get around the PMI, then I can finally pay someone else to mow the lawn!

[montrose]

Phil,
Thanks for this:

I would use option 1, refi now and lock in the low rates for 30 yrs. I see no point in prepaying or adding equity, I would keep the biggest, longest loan possible. Your $1600/m counts the same as W2 income toward qualifying for new loan. The current NonOwnerOccupied premium is about 1/4%, I'm guessing that you will be at 5% to 5.25% on the new loan.