Plus, when a prepayment penalty stands in the way of a refinance
By Lew Sichelman
Last Update: 12:01 AM ET Sep 21, 2012
Realty Q&A is a weekly column in which Lew Sichelman, a nationally syndicated columnist who has been covering the housing market for more than 40 years, responds to readers questions on real estate.
WASHINGTON (MarketWatch) Question: My husband and I are interested in buying real-estate property. We are currently in Raleigh, N.C., but are willing to buy property as an investment anywhere in the United States.
We would like to know which real-estate markets are more likely to go up in value. Also, I would really appreciate it if you could let me know what information sources to check before making a decision of where to buy this property.
I really hope to [be] hearing from you soon. Thanks in advance. A.
Answer: Wow. Your requests are way too broad to completely answer here. But let me mention a few things that come to mind.
First, you can find a top 10 list for practically anything these days. Just search the Internet. Recently, for example, Money magazine published a list of the 10 best places for buying residential rental property. The list included Las Vegas, Orlando, Fla.; Colorado Springs, Colo.; Memphis, Tenn.; Jacksonville, Fla.; Atlanta; Columbus, Ohio; Phoenix and Tulsa, Okla.
And there are always other lists, including the 10 best places to buy rental vacation homes or my personal favorite, the best places to invest in student housing.
Your home town of Raleigh isnt on Moneys tally. But for novices like you and your husband, I strongly suggest that you invest close to home, say in your own neighborhood or at least nearby. That way, you can keep a close watch on your property and your tenants.
Tenants can come and go pretty quickly in rental housing, and if you pick the wrong ones, they can do a lot of damage to your place not to mention your pocketbook in the form of unpaid rent.
Besides choosing a market in which you have firsthand knowledge, I think it is wise for rookie investors to hire an experienced property manager for nothing else than expert guidance. Besides not fully vetting potential tenants, any number of mistakes can prove fatal.
One major error on the part of Mom and Pop landlords is to buy into sob stories from tenants who beg their landlords to wait just one more week or one more month for the rent. Wait too long to file for an eviction and you can quickly find yourself trying to collect two, three or fourth months rent, with very little chance that you will succeed. A professional property manager will pounce quickly.
Once you gain some experience, you can start landlording on your own. But when you are just starting out, you need all the help you can get. Learning by your own mistakes can be very costly.
One other thought: Jump on maintenance items very quickly while they are still relatively minor. Ive found that tenants tend not to report little things, and before you know it, they become big things that are expensive to fix. Its called deferred maintenance, and many a tenderfoot landlord has been taken down by it.
For example, a small leak can lead to big damage if its not corrected early. Or a clogged furnace filter can kill the furnace.
Question: We have a fairly large mortgage on our home, with a balance of roughly $880,000. Our place is worth roughly $1.3 million. I realize in many parts of the country that sounds like a spectacular mansion, but in these parts, for our family of five, its a very modest home.
Our $4,000-a-month payment is something we feel painfully every month. Our interest rate on our 5-year adjustable rate mortgage with no points is 3.5%. We have no other debts and live otherwise very frugally.
Heres my question: I know we can get a better rate elsewhere. Our bank penalizes us for refinancing with another bank within three years of taking out the loan, which puts us out about two years. The penalty is three months interest, which in our case is about $7,500.
In this day and age is that still legal and is there any way to get around it? M.D.
Answer: Prepayment penalties are still very much legal, Im afraid. They are placed into loan agreements to make sure that the lender is paid at least something when a borrow pays off a loan earlier than expected. And about the only way you can get around the fine is to refinance with the same lender. Thats probably the only way the bank would waive the fee.
But Im not so sure you are looking at this clearly. First of all, you didnt tell me how much you borrowed originally. But it must have been a whale of a lot more than what you owe now. Otherwise, I dont see what youll accomplish by trying to refinance.
Yes, you might be able to jump out of an ARM, the rate on which will almost assuredly rise after the initial 5-year period runs out, and into a loans with 30 years of fixed and therefore known payments. But I wouldnt expect a better rate, at least not unless you went with another adjustable.
On a fixed-rate loan, youre probably looking at something around 4%. And being that youd be in the so-called jumbo category, which are loans above the limit that can be purchased from primary lenders by Fannie Mae and Freddie Mac, youd probably pay even a little bit more.
Just to be certain I didnt miss something here, I ran your question by Chris Carter, a loan originator with Brentwood in Naples, Fla. And sure enough, he and I are on the same page. Carter says you might be able to avoid the prepayment penalty if you call your bank and negotiate some kind of settlement by agreeing to remain with this lender instead of going to another for a new loan.
And like me, Carter also questions your rationale for refinancing, noting that your break-even point that is, the time it takes to recoup your out-of-pocket costs to refinance in the form of lower monthly payments is years down the road. And that only includes the $7,500 prepay penalty, not your closing costs.
My advice to someone in this situation would be to wait until the prepay penalty is no longer in force, the Florida mortgage originator said. Im just not sure how good the benefits would be to switch so early in the term. I dont know details, but this general scenario doesnt seem to make sense for the borrower.
Hope this helps.
Nationally syndicated columnist Lew Sichelman has been covering the housing market for more than 40 years. MarketWatch readers are encouraged to send their real estate questions to him at email@example.com. Answers will be presented in this column every Friday. However, because of the volume of email he receives, he cannot answer every readers query.
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