Refinancing an ARM to higher fixed rate on a rental property

[resident_1]

Hoping to get some advice on a situation that occured due to some emotional attachment to the property and not enough planning ahead of time.

During residency purchased a home for $200k with 5-1ARM at 2.875% physician $0 down loan. Liked the comminity, neighbours, schools, etc. But after finishing residency this year moved to another state 2000miles away for wifes fellowship in AZ. Initially put house on the market, but werent getting offers that we were comfortable with (keep in mind the offers would have given us $15k profit). But at the time felt the offers were coming in too low and also felt attached to the home and possibly moving back was in our heads. So decided to turn it into a rental (rented within 1month). Currently we break even (if including maintenance costs). So at least building equity at expense of the renter.

Issue is the 5-1ARM is going into variable rate in May 2017. Bank sent a letter anticipating rate to go to 3.7%. Although the ARM terms allow for rate to increase by 4%.

Another issue I didnt account for is that its harder to refinance a rental property.

Currently looking at a 4.625% 30yr fixed with same bank as original mortgage.

Plan to rent for at least 2yrs.

So should we refinance now in anyicipation of rising interest rates?
Or keep with the ARM and hope the rate doesnt increase above 4%.
In any case we are actually loosing money with this process. Just trying to minimize how much.

[DMFA]

Ouch. Refinancing costs a pretty decent chunk of money, too. Beware "zero cost" refinance which adds onto the principal owed. You might not ever get that back, especially if you sell in the next couple years. Banks should have a refinance calculator to find when your break-even point would be.

Can't you just pass on the increase in interest rate to the renter?

[Zaphod]

No one knows for sure what will happen to rates going forward, so you will have to make a decision you're comfortable with going forward. I would actually calculate out how much you might save vs. the fixed rate given a normal/expected rate path (can use fed dot plots, etc...). Basically, how fast and far would the rate have to increase to make refinancing and all its associated costs worth it? If that isnt very likely or near break even you can certainly wait and keep up with things and change if the information swings a different direction.

Are you sure you're losing money? You're building equity and assets, its better than a punch to the gut. I always think about my rental as buying the house at a discount.

[resident_1]

Its the unpredictable nature of the rates.
Im thinking of waiting to see wtat the adjusted rate will be in May and if it is 4% or less to not refinance.

[Zaphod]

resident_1 wrote:

Its the unpredictable nature of the rates.
Im thinking of waiting to see wtat the adjusted rate will be in May and if it is 4% or less to not refinance.

Click to expand...

You can know at least to the tenths place if you check the documents and see how its calculated. Whats the formula?

[The White Coat Investor]

One option is to just run the interest rate risk yourself and if rates climb dramatically, just sell. It's not like you're stuck unless there is also some huge real estate meltdown.