Refi worth it?

Question

Hi everybody I had the following question:

I bought my house for 140k a year ago with a conventional loan and 20% down. Wondering if I should refinance my down payment of around 30k back out now to re-invest. I owe 105k on the loan now (after refi will be 135k) and the property would rent for 1250-1300 a month. Is it safe to refinance my money out...or leave it in for now? I live in Northern California- Property Tax of 1% and right now insurance is $50 a month.

Gilbert Dominguez · Answer

I think you have left some needed information out like what is the market value of your home now and do you have actual applicable comps for you house or an appraisal. Will th bank appraise your house for what you are think and again we do not know what that number is .

Also what is your payment now and what will it be if you refinance. Will the interest on the new loan be lower, higher or the same as your current loan.

Than what is on the market and where do you intend to purchase this additional property.

Would you qualify for a second mortgage beings that you will have one mortgage on the existing house. Have you approached a lender that has pre- qualified you for a second loan and what amount of a loan would that be?

Do you intend to rent your current home out and then live in the second property? Will $30K be enough for a down payment plus your end of closing cost. Again what will be your payment on the second loan and will you then be able to cover insurance and property taxes on both properties , maintenance etc. ?

Kevin Siedlecki · Answer

There are a lot of factors to consider here.  I am struck by the way you phrased the question: "is it safe." What does that mean to you?  What are you going to do with the $30k you take out?  If you simply mean is now a good time to borrow the money, the answer is "yes."  Interest rates don't have much room to go lower, and plenty of room to rise.

Looking at your plan without that "safe" word, but as a general investment, I am a big fan of taking cash out to reinvest as long as you're still going to be cash-positive on the original place. We don't have enough information about your house to tell you if it will.

By my calculation (135k borrowed at 5%, 30-year amortization) You have about $250/month left in cash after taxes and insurance.  That could go real quickly if you have to replace a roof, furnace, or even an appliance.  Just one month of vacancy knocks you back almost 5 months of profit, even if there are no expenses except taxes and insurance, which of course is not going to be the case.  Snow removal alone could take that whole $250 in a bad winter month.

I wrote a blog post about understanding the numbers of an investment property last week. Here is the link: http://www.biggerpockets.com/blogs/6815/blog_posts...

Hope it helps!