HARP refi on rental may not yield savings borrower imagines

Q: I enjoy your free weekly newsletter and Ilyce's Sunday show.

I have a 6 percent mortgage with my lender on a rental property that has a balance of $75,000. The current value is about $30,000. I can't qualify to refinance with a conventional lender. Is there anything I can do to get my lender to lower the interest rate on this loan?

I have made every payment since I bought it in 2007.

A: No lender will do a traditional refinance of a property (rental or owner-occupied) that is 50 percent underwater -- or even 10 percent underwater. What you'd need to do is have the property qualify under the Home Affordable Refinance Program (HARP 2.0).

While not all lenders do HARP refinances of rental properties, the good news is that your lender does offer some HARP 2.0 refinances of rental properties. But, you do have to qualify under the MakingHomeAffordable.gov rules.

In short, the mortgage on your rental property must be owned or guaranteed by Freddie Mac or Fannie Mae. In addition, the mortgage must have been sold to Fannie Mae or Freddie Mac on or before May 31, 2009. The mortgage for your rental property cannot have been refinanced under HARP previously unless it is a Fannie Mae loan that was refinanced under HARP from March through May 2009.

The current loan-to-value (LTV) ratio must be greater than 80 percent (not a problem for you, since your loan-to-value ratio is about 160 percent). Finally, you must be on time with your mortgage payments, with an on-time mortgage payment history over the past 12 months (also not a problem for you, since you've always made on-time payments).

If your loan doesn't qualify, then you're at the mercy of your lender. Sometimes, lenders will modify loans or adjust the interest rate simply so they can keep customers who pay on time. But sometimes they won't. If your lender won't modify your refinance, then you're stuck with the loan you have, unless you have $40,000 in cash to bring the outstanding balance into parity with the value of the property.

The problem with that is most lenders will want to see at least 25 percent equity in a rental property. And if you pay down the loan that much, you'll have a difficult time finding a lender who will refinance a $25,000 loan.

The silver lining is that the mortgage rate on your rental property is 6 percent, and if you were able to do a HARP refinance, you'd only be able to knock that down a half a percentage point, or maybe slightly more. What we're hearing is that HARP refinancings are running about one percentage point above the best 30-year fixed-rate mortgage programs, or about 4.5 percent. The interest rate for rental properties is usually one-half to one percentage point higher than that or more. And, then you'd add lender fees on top of that.

Don't get us wrong: Any savings is good money you'd rather put in your pocket. But your real rate of savings might be only as much as one percentage point on a $75,000 loan. Perhaps that amount is less than you imagined.

Q: Is it OK to buy a car while I am refinancing my home if I am paying cash for the car?

A: If you don't take out a loan for the car and you have plenty of cash left over, then it shouldn't affect your refinance. But it's better to be safe than sorry. If the lender sees a large chunk of cash coming out of your account, it might put the brakes on what would otherwise be an easy refinance.

If the lender reviews the loan and sees a certain amount of cash in the bank, it may approve the loan based on that amount of cash. If you then spend some of the cash, the loan underwriting changes along with it. You might perceive that the changes are small, but if your loan requires you to have $10,000 in cash on hand and you buy a used car for $5,000, the lender will not fund the loan.

If you have ample cash on hand and that cash is more than enough to cover any amount required by the lender, you might not have problems with the loan transaction. But, again, better be safe than sorry and wait to buy the car until you have closed on the new loan.

(Ilyce R. Glink is the author of many books on real estate. She also hosts the "Real Estate Minute," on her YouTube.com/expertrealestatetips channel. Samuel J. Tamkin is a Chicago-based real estate attorney. If you have questions, you can call Ilyce's radio show toll-free (800-972-8255) any Sunday, from 11a-1p EST. Contact Ilyce and Sam through her website, ThinkGlink.com.)

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