Current 15 yr mortgage - should I refinance to 30?

Question

I moved out of my previous house and am now using it as a rental. My plan at the time was to quickly pay off the house since it was my primary residence, so I opted for a 15 year mortgage. There is currently a little less than 11 years left on it. Now that I have a tenant in the house, I have been thinking of refinancing back to a 30 yr mortgage for cash flow. The current situation is a negative ~$100 per month of cash flow, but the principal is being paid down quickly. The refinance will be about a $550 swing, so a positive cash flow of $450. Because I bought the house at the peak in 2005, I paid too much by today's market. So there is no cash to take out with the refi. This would be strictly for cash flow. Also, my current interest rate is 3.125%. The 30 year rate would be 3.75%

What would you do? Take the cash flow to reinvest or let the principal drop quickly?

Ronan M. · Answer

Depends on your personal situation. Do you need this property to cashflow now or have you other sources in income (W2) that pays your day to day living expenses.

Go online with a mortgage calculator and if you refi back to 30yrs just look at what this is going to cost your over the life of the loan. That might make you think twice.

If you do refi and diligently use that extra cash flow to save and invest that's fine. But if you use that extra cash flow for car payments, vacations, beer and steaks I think that is a very bad move.

If you have a decent source of income now and don't need the extra cashflow you will have a free and clear asset in 11yrs and you are on the gravy train.

Much of this depends on your own personal and financial situation.

William Jenkins · Answer

I would always suggest going with the longest term financing that you can get, i.e. 30 years.

On a cash flowing property, a 30 year amortization functions as an payment option loan.  You can always pay a 30 year loan off in 20, 15, 10, or 5 years, but you can never do the opposite if times get tough or if your property needs a major repair (new roof).

With a 30 year loan you are also locking in a fixed rate for 30 years.  This is EXTREMELY rare in any other business or real estate investment type loan.  Take advantage of it in SFR investing.

I personally prefer to minimize leverage but that is just me.  I would suggest doing a 30 year loan and making extra principal payments with your excess cash flow.  You can always default to a lower payment if you fall on hard times.  There is also always a chance that that rates will go back up to 10%, and you will have arbitraged the spread.

Chip Clark · Answer

@Ronan M. By no means am I rich, but I do ok in my day job. The $100 is not a big deal. I have 2 more years left on my lease. It was my first time. Knowing what I know now, I probably would have worked a stepped increase into the lease, but I did not.

I do not need the cashflow for a new car or anything like that. It would go strictly for another investment. Of course, alone, this cashflow won't be enough for a down payment on another property for 7-10 years.

The flip side to the cash flow is the pay down. My principal pay down now is about $850 a month. With the refi it will be just over $200. Everything I read about real estate investing says to invest for cash flow, but like @Matt Mason said, maybe the balance sheet is more important in this case.

Matt Mason · Answer

I'd say it depends.

What are you going to do with the cash flow?  Is that $100 material to you?  How long before you could even raise the rents to make it cash flow neutral or positive?  I think I'd be hesitant to pay several thousand dollars to refi a loan at a higher interest rate.

I think too many on BP think the only thing that matters is cash flow today and ignore building their balance sheets, which can easily be converted to cash flow in the future.

How about a strategy where you refinance it either today or in a few years and pull money out for a new investment?

Tej Trummer-dutta · Answer

Yes! In my opinion, you will be lowering your monthly payment and increasing cashflow. Also, you can always pay more than your minimum payment  but you can't pay less. It allows more flexibility.

Joe Villeneuve · Answer

I'd refi in a heartbeat.  Right now you're paying your tenant $100/month to live in your house.

Current 15 yr mortgage - should I refinance to 30?

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