Why Refi?
Posted on September 20, 2006 - Filed Under Business |
Ken asks: Cliff, I’m confused. Please explain why you are refinancing just before you sell. Is it due to the 1031 exchange?
The reasons behind doing the refinancing right now were never fully explained.
Right now, there are two loans. There is the regular mortgage on the house
and the HELOC, which was used to finance the renovation of the houses. Now, the mortgage
payment is locked in at a certain interest rate for a certain period of time. HELOCs are
not. A thirty day notice can either increase or decrease the interest rate on the HELOC.
As a recovering Engineer, my credo is "Hope for the best, plan for the worst."
For this situation, the worst case scenario would be if the houses did not sell. The bubble burst people got their wish and the market crashes by 10%. With that, Disgruntled Worker and I have to hold onto the houses for a year or so.
To top it off, the mustache twirlers at my bank decide to purchase that "house in the Hamptons" after all. They pen a letter, announcing their intentions on raising the interest rate on the HELOC by two or three percentage points.
This is where refinancing offers protection. By refinancing, the HELOC is being pulled into the mortgage payment. This will help preserve the cashflow, in case the "house in the Hamptons" scenario comes true.
If this has an ancillary benefit of helping in the 1031 exchange, I don’t know what that would be.
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6 Responses to “Why Refi?”
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That an interesting choices of words… “House in the Hamptons” I didn’t realize that even on the West Coast that saying holds true. Here on Long Island that phrase is used constantly. Everybody wants to have a place out there.
If you are lucky you can buy Seinfeld’s place that he bought from Billy Joel. He was a little peaved when Billy didn’t tell him that the ocean view included a view of a nude beach. Who’s complaining?
Hypothetically, since I have multiple houses for sale, I could refi the properties that don’t sell, pull out equity, and use that cash toward the downpayment on a commercial deal to supplement the equity I’ve captured through 1031′ing the houses that did sell. How’s that for a run-on sentence! In your case, though, you would defeat the purpose of refi’ing if you’re also exchanging. I can see why you decided to go ahead with the refi, though, given the restriction you have with Wells Fargo. Ever thought about using a different lender? Is Wells Fargo really that great that you’re willing to put up with their one-year-no-refi-after-listing rule?
Trisha, what run-on sentence?
Between the Real Estate Agent and the Loan Officer I have one great team. It took me a while to find two people that I could really work with and are willing to work with me. They understand what I’m trying to do and, more important, they are doing what I’m trying to do. I don’t want to break the dynamic duo up because of some little rule at Wells Fargo.
Cliff,
How much is this refi going to cost you in closing costs? Your HELOC is tied to prime which for the past two occasions the Fed has not raised. I doubt your HELOC will go up more than .5 point over the next year. You are probably close to its max rate. If your refi is going to cost say $2000, you have to calcuation the number of months of increased HELOC payments to cancel it out. I have a feeling its going to be about 1.5 years or more, which would make refi’ing a poor option. Chances are you will sell it before 1.5 years.
Refi’ing before a 1031 may send the IRS flags. This is because its a sneaky way to get money and not pay taxes for it. If you are increasing your mortgage amount just before a 1031, the IRS may see it as you withdrawing money from your properties and calling it boot on your 1031. If your goal was to take out money, it’s better to refi after you do your 1031.
Ken, congratulations. The gears in my head are now spinning. I’ve scheduled a meeting with the Real Estate Agent tomorrow to go over this with a fine tooth comb.
This is what I was thinking - you are improving cashflow for a big reduction in profit relatively speaking. If the saved interest in the period till you sell is less than the fee it doesn’t make economic sense.