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I realize this sounds bad, but hear me out. I currently own two properties (A and B) which I rent out. I do not own my primary residence.

Property A has a 15 year mortgage at 3.25%. I'm happy with this loan.

Property B has a loan with essentially two periods. 1) a 7 year interest-only period at 6.75%. 2) a 23 year payoff period with a variable rate. This loan need to be refinanced.

The problem is that Property B is underwater. It's worth ~360K and I owe ~388K.

So, one thought I had is this: if I could get a 100K loan, I could put that 100K into Property B and re-fi into a conventional loan with a favorable interest rate. I could take the savings in the interest payment (~$800 - $1,000 per month by my calculation) to pay down the 100K loan.

Assuming my assumptions above are correct, what am I not thinking about? Here's what I can think of:

  • I probably need to put something up as collateral for the 100K loan. I could use Property A. (The appraised value should be 100K or greater than what I owe.)
  • My the percent of what my debt payments (two mortgages plus rent plus 1K/mo on the 100K loan) are compared to my income (job plus rental income) would be 46%. This is probably too high.

Am I crazy? Do people do stuff like this? Is there an easier way? Is this a horrible idea?

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You have the 2 properties, and even though the value of property B is less than the amount you owe on it hopefully you have some equity in propery A. So if you do have enough equity in property A, why don't you just go to the one lender and get both property A and B refinanced under the same mortgage. This way hopefully the combined equity in both properties would be enough to cover the full amount of the loan, and you have the opportunity to refinance at favourable rate and terms.

Sounds like you are in the USA with an interest rate of 3.25%, I am in Australia and my mortgage rates are currently between 6.3% to 6.6%.

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  • This sounds like a good option. If you are going to go this route, I would suggest talking to a small local bank or credit union. They are more likely to keep the loan on their books rather than selling it, and so have more flexibility to work with you.
    – KeithB
    Jan 17, 2012 at 17:05
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You're not crazy, but the banks are. Here's the problem:

  1. You're taking 100% LTV on property A - you won't be able to get a second mortgage for more than 80% total (including the current mortgage) LTV. That's actually something I just recently learned from my own experience. If the market is bad, the banks might even lower the LTV limit further. So essentially, at least 20% of your equity in A will remain on the paper.

  2. Banks don't like seeing the down-payment coming from anywhere other than your savings. Putting the downpayment from loan proceeds, even if not secured by the property which you're refinancing, will probably scare banks off.

How to solve this?

Suggest to deal with it as a business, putting both properties under a company/LLC, if possible. It might be hard to change the titles while you have loans on your properties, but even without it - deal with it as if it is a business. Approach your bank for a business loan - either secured by A or unsecured, and another investment loan for B. Describe your strategy to the banker (preferably a small community bank in the area where the properties are), and how you're going to fund the properties. You won't get rates as low as you have on A (3.25% on investment loan? Not a chance, that one is a keeper), but you might be able to get rid of the balloon/variable APR problem.

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