Refinance home?

My husband and I bought a duplex that was operating as a triplex. We didn't realize that this made the bank nervous. It was a difficult loan to get, and we opted to get a teaser low rate (but it does have negative amortization, though we have been paying more than the minumum.) since this was the first time we'd ever be landlords and didn't know who our new tenants would be like.

Well now we are 6 months into living here and we are glad we did it. We love the neighborhood, our tenants are superb and we consolidated our office rent and lliving area/mortgage under one roof.

However, we are a little nervous as we keep hearing about the mortgage industry is getting really strict due to the subprime markets. We both have excellent credit scores high 700's, we work for ourselves, we both have our own corps, but I worry about refinancing in Feb 08. We want to pay our loan down and also get rid of the negative amortization.

Am I worrying for nothing?

You have a very legitimate concern. The appraised value of the property will have an impact on the amount of the loan you can get, and the value of the property will be impacted by the rental rate as well as the intrinsic value of the real estate (location, construction, etc.) Appraisals based on rental income go DOWN as required returns or interest rates go UP. If the lender wants to see 5 percent returns, $100 per year is worth $100 / 0.05 or 2,000. This is called "capitalized value" -- income divided by the cap rate (expected return rate). Clearly, if the cap rate (required return) goes UP, the capitalized value goes DOWN.

Also, lenders have to package up loans and sell them to 3rd parties, and to do this, they need to prove that the loans are going to be paid, so borrower requirements will be stricter than they have been in the recent past.

Also, to sell loans requires 3rd parties to want to invest in such loans, and with risk going up (risk of non-payment) required returns go up, which means interest rates are higher, and income required to qualify for a loan goes up.

You should start asking question NOW about rolling over or refinancing your existing loan. If you won't qualify, it's best to know that early in case you have to sell the property to avoid defaulting on the loan and ruining your credit rating.

Get information from lenders NOW. Waiting may result in some negative consequences if you can't refinance.

Hope this helps.

Jeff

Contact your existing bank first and ask if they will refinance you now at a fixed rate. This is if they didn't sell the note on the secondary market. Tell them you will likely go elsewhere if they can't help you.

Now is probably a good time to consider a re-fi. Countrywide is in trouble and tightening their rules. It may get worse before it gets better but no one can say for sure.

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