Worth Losing Money to Keep an Awesome Mortgage?

Question

I'm considering buying a new home and keeping my current house as a rental property.  Last year I re-financed this current property into a 15 year fixed rate mortgage at 2.875%, which I love.  Monthly expenses (PITI) are currently $1550.  I know I can rent this house out for ~$1450.  Obviously this means I will lose about $100 per month if I change nothing.  But if I refi out to a new 30-year note, I can only save about $200 a month in P&I.  This would allow me to cashflow (barely), but I would then lose the super low interest rate of my current 15-year mortgage.  My gut tells me to keep the 15-year mortgage and try to fully pay off the property as fast as possible rather than refi out to a new 30-year mortgage so I can cashflow $100/month.  In essence I feel like the loss of cashflow is worth the much faster equity I'm building in the property.  Curious what other would do in this situation.

Bruce Runn · Answer

When I ROI, I do one with actual cash flow and then a 2nd with principal pay down included with cash flow as that is income as well.  Moving a 15 yr mortgage to a 30 yr mortgage just shifts the money from principal pay down to cash flow except the interest rate is higher on the 30 yr so you actually "net" less money.  If you are going to keep the SFH, keeping your current mortgage is better.  Other comments are good in that, I'd never keep something that doesn't cash flow so if your long term plan is to buy more properties, and you have equity here, better to sell and put the month into a multi family that cash flows.

Marc Jolicoeur · Answer

@John Woodington I think the decision boils down to whether you can afford to weather the storm and cover for the unforseen expenses for the next 15 yrs.

Lets say there is a recession in a few years your tenants could lose a job and you may have to kick them out.   Then, you will be looking to get new tenants but maybe all applicants are having trouble keeping good jobs so you are forced to drop your asking rent to get it rented to a good applicant who makes enough money.

I would say you need to plan for the following to happen to you during the next 15 years:

- May need to drop rent by $200/month for a while due to market conditions

- May have 2-3 months of lost rent due to vacancy and/or eviction

- Broken garage door opener, hot water tank, furnace, or appliance requiring a repair man and possible replacement

- Need to replace carpets or re-paint the entire unit and it's not covered completely by damage deposits.

- HOA fees and taxes continue to go up every year but may not be possible to increase the rents due to market forces.

If you have a good W2 job and you can hang on for 15 years and cover these situations I would actually say you should keep the place!

In 15 years you will have a free and clear property that is cashflowing significantly, and it's value increased about as much as inflation and maybe more.   Your dumping probably $3000 a year into this asset but it will be worth a couple hundred thousand.  Lets say its worth $150,000 now- in 15 years of 3% inflation it could be worth $227,000.  If you took that same $3000 of annual savings and put them in stocks that make 7% per year on average you only end up with $75,000.

Regarding refi to 30 yr loan you have already shown how it costs you more interest.   I would not refi to save only $200 a month.

If you are not 100% sure about keeping the property for the long haul, I would say either sell now in this hot market and re-invest your proceeds into something else, or keep it for 3 years as a trial run and sell it before 3 years so you can avoid paying capital gains on it.

Chris Mason · Answer

15 year math is actually quite different from 30 year.

On $200k @ 2.875% over 15 years, payment one consists of 35% interest and 65% towards paying down the balance.

Same scenario, but 4.25% over 30 years, payment one is 72% interest, 28% towards paying down the balance.

And of course note that those percentages shift further in your favor with each payment you make.

A good strategy if, short term, you have income to spare that frees you up to zoom out to the 15 year timeframe and not focus on the month to month and year to year.

This is more conservative than prevailing thought here on BP, which emphasizes short term cashflow gains, maxed leverage, and views equity as a bad thing.

If you're determined to pay that house off rapidly, refinancing into a 30 year at a higher rate, and then making a bunch of extra payments, would be folly.

Account Closed · Answer

I'm in the same situation - but I refinanced into an 8 year loan a little over a year ago.  Payments $1,600/month.  I have a little less than 7 years to go.  I'm staying put (unless something drastic happens like having to move out of state for work) and I'm looking forward to not having a house payment going forward.

The thing you also have to worry about is you're probably currently taking a tax deduction for the mortgage interest you're paying since it's your principal residence.  You have to plan for when your interest deduction falls below the standard deduction on your income tax return.  In my case, I have about 2-3 years left before I can no longer file a Schedule A....it's at that point when I plan on starting to funnel money to pay the loan off as fast as I can.

Daren H. · Answer

Your PITI is $1550, you rent it out for $1450. Please do not believe you are only going to be losing a $100 a month. You are going to have some vacancy potentially with the change over to a rental. You are going to have minor expenses getting the property ready to rent. Your tenant may be needy in regards to repairs. Property taxes might go up because you lose homestead exemptions. You sound like you would be new at landlording so you might lease to a bad tenant. If you decide to pay an experienced PM instead you are losing even more money because the PM is going to cost you ~$100 a month. Also, in my recent experience, higher priced rentals can attract more entitled tenants. I have a $1650 a month rental in my local area and I swear the guy thinks he should have a freaking new house. Any they don't stay as long in my experience meaning you are going to have turnover costs. My past two tenants each bought their own home. Just my thoughts. FYI, Cash flow is never Rent - PITI.

John Woodington · Answer

@Bruce Runn That's the way I'm thinking about this as well.  I don't know if I want to buy more properties or not in the long term, I'm just trying to figure out the best financial approach for the long term.

Joe Villeneuve · Answer

Most definitely well worth it....for the lender you have the mortgage with.

Harjeet Bhatti · Answer

I would say keep the current mortgage. Its not huge difference and $200 is not saving.  If you will do your calculations it could be more loss to you.

John Woodington · Answer

@Steve Racicot, that is true.  Any home expenses would be a straight loss.  This home is in an association, so I don't have to cover roof/siding/exterior in any way, but water softener, furnace, appliances etc. are obviously all on me to maintain.

Worth Losing Money to Keep an Awesome Mortgage?

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