Thursday, October 11, 2007

Mortgage Refinancing and Rental Income

Read this post at Brownstoner:

Renegotiating a Mortgage: One Man's Quest

A reader emailed us the letter he was planning to send to his lender in an effort to renegotiate the terms of his loan. We thought it would be interesting to get readers' input, both in terms of changes/improvements to the letter as well as predictions about the likelihood of his success.

Dear Madam or Sir:

I am writing to be considered for a loan modification. I am currently in year three of a 5yr fixed mortgage at a rate of 5.75%. As I weigh my options, I am asking that MORTGAGECO extend me a lower, fixed rate for a term of 30 or 20 years. I have every intention of exploring my mortgage options with other lenders but first I wanted to contact you. I would be happy to remain a customer of MORTGAGECO under the proper terms.

In no way should this be considered a plea from a homeowner in financial distress (I will detail my current status below). I simply would like to offer you the opportunity to retain my business, and at the same time take a loan of yours out of the adjustable-rate category and move it to the fixed-rate (which I'm sure is in your interest as well given the current storied "mortgage crisis").

The three-family home at which my wife and I reside was purchased in December of 2004 for $625,000. Having kept an eye on the area real estate market, and considering the amount of renovations we have done, I would estimate the current minimum price at $750,000. The rental income from the other two units is $2,550 per month (30,600/yr). My credit score is approximately 830. My income is over $70,000 per year. The second mortgage is approximately $50,000. I carry no other debt.

(Although she is not part of this contract since we were not married at the time, I wanted to mention that my wife's salary is $45,000 per year and her credit score is also north of 800.)

Responses to the post seemed to lean towards, well, thinking this person is on crack, because why would any bank think they had anything to gain from this? But my first thought upon reading this was to wonder how he could afford a $625,000 house to begin with if he only makes $70,000. It's unclear exactly how much the person is borrowing in total, but given the reference to a 2nd mortgage of $50,000, let's assume it is $550,000: 80% financing would be $500k, plus the second mortgage of $50,000. The monthly payment must be about $3,200... but when you factor in the rental income, it actually works out quite well: a net cost to the owner of only $650 a month! It's actually probably more, since the second mortgage would not be at the same rate of 5.75%. And I'm sure there are some hefty property taxes on top of that, and you'd have some costs involved in maintaining the house and the apartments, but still, it really made me sit up and take notice after I did the math! I doubt I have what it takes to be that kind of landlord but given what people can charge in rent here for even small apartments, it's certainly an interesting option to consider! Of course for a current price of $750,000, assuming this person is in any of the neighborhoods Brownstoner ususally covers, I'm not sure you get all that big a house... the owner might have less space to himself than I have in my apartment...


Boston Gal said...

Multi-family dwellings are almost perfect homes for the first-time buyer or the single or childless couple (for some reason once kids enter the picture it seems harder for folks to stick with the multi-family house). You can qualify for a much more expensive home (a percentage of the rents are factored into your income limits for the mortgage) and once you have purchased and moved into the home you have someone (or more, depending on # of units) helping you pay the mortgage, insurance, taxes, upkeep, etc. on the property.

Fewer and fewer of these homes exist - since so many have been turned into condos and new construction rarely produces multi-families. So good ones are harder to find. But if you do stumble across one in a good area and with the space or amenities that appeal to you - it is something to seriously consider.

The other benefit is as the years pass and you pay down the mortgage, the rents will likely rise. At some point you will be "paid" to live in the house. Of course you do have to deal with the risk of vacant units or bad tenants.

frugal zeitgeist said...

How much space do you have, if you don't mind me asking? I'm sure it beats my paltry 1BR/577 sf in total.

Sicilian said...

Having just done this process to get some money out of my house to get it ready to sell, I can tell you I don't make what your friend makes, but getting a loan refinanced with a better rate was not hard. I have excellent credit, and no debt.
One thing you might be surprised to learn is that Texas is a community property state. I could not redo my loan, even though the house is in my name and I owned before I married, without my new husband's signature. I was not happy about that fact, but I did it.

Anonymous said...

Frugal Zeitgeist and "if you don't mind me asking" brought up a great point ..... the question of how much housing space you have for what cost (and mortgage interest rate) is related to the income question - awkward to ask about (outside of NYC) but a topic everyone really wants to discuss. I think it would make a great post.

I have a 1700+ sq ft, 2 bed, 2 bath, 2 story end unit condo with a small back yard, about 7 miles from the White House, a block from a bus stop but not near a metro/subway stop - purchased for 265k in 2003 with a 30 yr fixed 4.88% mortgage.

Anonymous said...

What I'm surprised about is that he's asking for a fixed at way less than the going rate and less than his current rate. It would make a lot more sense to a bank for him to ask for a fixed at about 6. This is a good rate in the long run, and probably better than what he'll get when he adjusts, but a little more than he's paying now

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