Vexing Refi challenge - help!

[juddruther]

Ok folks, here's a fun (hopefully for us real estate nerds) refi strategy puzzle I could use your help with.

My partner and I separately own homes in DC (row hosue) and San Francisco (condo) which are currently rented at cost. Both have 20 years left on the mortgage with rates at ~6.7%, and $100K/$170K balances respectively. Zestimates are $250K/$400K respectively on these. Furthermore, after reading Seattle Bubble religiously and convincing ourselves we'd timed the bottom correctly, we jointly bought a house in Seattle in late 2009 for ~$570K, with very little down on a 30 yr 5.5% FHA loan, current zestimate ~$520K and remaining balance $550K. (We didn't ignore the 20% down rule, but there were external factors urging the buy). So now we're probably slightly under water.

We'd like to refi all three houses to 15 years (DC/SF) and 20-25 years (Seattle). This would bring our costs and/or terms down significantly. Here's the rub. Our credit scores are currently ~670/720 respectively. So I could refi the SF home comfortably and still have a decent credit score, but my partner would pay points and his score might take more of a hit (due to shortening the average length of current open credit lines). So this could limit our ability to then refi the Seattle house.

The second issue is clearly the underwater-ness of the Seattle home. We could pull out equity from our DC/SF homes to fill in the gap and meet the 20% down.

So should we:
1) refinance our DC/SF homes separately without getting cash out, and give up on refi-ing the Seattle home? (small savings and risk)
2) refinance DC/SF separately, get cash out (at the lower rate) and pay down part of the Seattle mortgage (to lower our monthly payment)? (moderate savings/some risk)
3) refinance both with cash out, then use cash to refi the Seattle home (possibly paying points for the loan)? (large savings and risk)
4) take a longer-term strategy: refi SF home now with cash out, get the partner's credit score up, then refi DC (possibly with higher rates), then refi Seattle (possibly higher rates)? (uncertain savings and risk)
5) Something else I haven't thought of?

Thanks Folks! I really appreciate the "wisdom of crowds" from this great community.

[Haybaler]

Ok. I'll take a stab at this.

First, I'm doubtful that you will be able to accomplish a 'cash out' refi on either of your non owner occupied houses in this environment, But if it can be done you'll need the help of a tenacious mortgage broker.

My instinct is that you need a totally different plan.

Why don't you sell the house in DC where the market is stronger.

Apply all or a portion of the net funds to the house in Seattle. (Work out an agreement on the equity created in Seattle between you and your partner because it will be the result of one of your homes being thrown into the pot.) At this point you may be able to take advantage of the current lower interest rates in a refi of the Seattle place.

[juddruther]

Thanks Haybaler. I appreciate your ideas. Selling is not our first choice, since the rental income is starting to pass the break-even point, but it's good to look at all options.

We're hoping a cash-out refi is possible due to the large amount of equity in the other homes relative to what we would pull out. So of a total of ~$380K of equity, we would need to pull out only ~$130K. But you might be right about this being difficult in the current climate.

Anyone else have insight into this, or feedback on the above options?

Thanks!

[Haybaler]

As I stated before, if it is doable, you will need a good mortgage broker.

If you walk into your local big bank with your story they will smile and say sorry "we don't have a program for that".

A broker gets bombarded by every lender in the country with faxes and emails outlining the programs they offer.

What you will be up against is that lenders have "loan to value" restrictions on Non Owner Occupied purchases and refi's.

First off you will be restricted to a Rate and Term refi at a maximum of 70% loan to value....maybe only 60% loan to value on non owner occupied houses.

Most of that "equity" is locked up and untouchable. As a consequence, all of those cash riches that you are salivating for are on paper only...until you actually sell something.

You will be required to purchase an appraisal ordered by the bank. The banks' underwriter will review the appraisal with a jaded eye.

Second, it is unlikely that any lender will make a "cash out refi" on a non owner occupied house. Most lenders would assume that they were simply buying the house from you and that you would walk away with whatever proceeds you could take. IF a broker can find a "cash out" refi the rate will be higher and fees higher to cover the risk.

If you are thinking Second mortgage or Heloc please think again, I hope by now it is clear how dangerous those products are to borrowers.

I understand what you are trying to accomplish.... Improve your financial position by improving your cash flow through the recast of your long term secured debt. Lower rates and lower monthly/ or shorter terms and same size payments are a good thing. Sometimes you just can't get there from here.

[Rhonda P]

You can do an FHA streamline refi with your current property in Seattle (assuming you still have the FHA mortgage) without an appraisal and with the current credit scores... the rub is that FHA mortgage insurance rates that are paid monthly are probably more expensive than what you currently may be paying.

[juddruther]

Thanks (again) Haybaler, clearly you have some good insight into the gory details of home loans that I do not. So this is quite helpful. I did a cash-out refi in 2007 on the SF condo, but didn't consider that my occupation of the home might be a factor (it makes sense now that you say so).

Thanks also Rhonda for the FHA info!

[davidlosh@davidlosh.com]

You should sell both properties you have equity in. You are obviously not Real estate investors, and own properties that may, or may not have value. See what you can get first.

The row house may have some value, maybe, you could hold onto that, but it depends on the neighborhood, and proximity to transit, or to government buildings. Get rid of the condo.

Don't do anything with the house in Seattle unless it is in a very prime location. If it's worth having then apply money to the principal balance to amortize that more quickly.

[Haybaler]

I had the opportunity to discuss your story with my friendly mortgage broker of many years today.

His assessment is that a "cash out" refi of your NOO properties might be possible.

And your Seattle house might qualify for a government sponsored refi for underwater homeowners if the note is owned by a government agency (not the same as a servicer that you make your payments to). He can determine that info with your property address.

If anybody can get your deals done, he can, but from my experience it will require patience on your part.

His name is Jack, at 253-221-6000 in Tacoma.

[tomtom]