Q: I wish to refinance my rental property (a townhouse). I have been advised that doing a cash out refinance isn’t possible in today’s climate, but if I want to take cash out of the transaction, I have to refinance using an equity loan.
I asked if federal or state law required me to refinance this way but I’ve received no definitive explanation. Can I refinance to take money using an equity loan? Your assistance deeply appreciated.
A: The current credit markets have made it difficult to finance rental property–even if you have a large amount of equity in the deal. Doing a cash-out refinance may also be very difficult at the moment because investors have been burned and aren’t looking to buy these sorts of loans.
You probably fall into a classification of commercial and investment loans that are currently hurting more than other loans. Your property is classified as residential but its use to you is as an investment property. In some markets the residential market is doing quite badly and residential lenders are looking closely at each deal and making it harder to apply for residential loans.
You don’t qualify for a residential loan and commercial lenders are limiting their investments in residential properties. Small investors like you are finding it hard to obtain financing for these types of deals. In a sense, what you are hearing is that you should be happy to have the financing you currently have and that new lenders are not looking to give you more money. They’re willing to extend additional credit to you as an equity loan on terms that are probably less favorable than your current first mortgage loan.
In any event, I don’t know of a conventional lender that would allow you to borrow more than 70 or 75 percent of the equity in the property at the moment. So if you’re looking to cash out 90 percent of the equity, the numbers might not work out.
Where might you go to get money? If you’re a real estate investor with multiple properties, you might have better luck with a bank that might be willing to look at your portfolio of properties and refinance all of them.
You might want to try some local savings and loans or community banks and seeing if they have any interest in lending you money. Some local banks are becoming more active in the real estate market as larger banks pull back. But that bank must be willing to give you the loan and will probably have to keep the loan on its books. It won’t be able to sell the loan on the secondary market as your townhome is rented and does not qualify as an owner-occupied residence or even as a second home.
As the real estate market improves, it may be easier to refinance your property.
NOTE: Ilyce R. Glink’s latest ebooks are "The Clutter Collector: How to Get Rid of Clutter Everywhere in Your Home" and "How to Save a Month," which are available at her new, all-video website, www.expertrealestatetips.net. If you have questions, you can call her radio show toll-free (800-972-8255) any Sunday, from 11a-1p EST. You can also write to Real Estate Matters Syndicate, PO Box 366, Glencoe, IL 60022 or contact her through her website, www.thinkglink.com. Ã‚Â©2008 by Ilyce R. Glink. Distributed by Tribune Media Services.