Refinance from 15 to 30 year

21 Replies

I know people often refinance from a 30 year to a 15 if they can get a competitive rate that does not dramatically increase the monthly payment. I am looking at doing the opposite. I bought a property (my first) with a 15 year VA loan. I bought the property before I started seriously educating myself and diving into real estate (a mistake I know). The plan is to keep the house as a rental property. I am moving sooner than expected and do not have a ton of equity in the property. That said, the monthly rent I expect to get will not quite cover the monthly mortgage payments. I am considering refinancing from the 15 year loan to a 30 year loan using a VA Streamline or VA IRRRL. I can lower both my interest rate and my monthly payments in order to achieve positive monthly cash flow. I know I will end up paying more in the long run on interest, but I will also be getting a better return on the investment as opposed to having to cover the difference between the mortgage and the monthly rent brought in. Just looking for other people's thoughts/comments/insights on this use of refinancing.

Fully support!  At current interest rates, I never want to pay off my mortgages.  I'd take a million year loan if I could get it.

When you increase your principal payment, you reduce your interest expense.  That cash, is just "buying" the interest rate of your mortgage.  That means you are going to make something like a 5% return on your money. 

Alternatively, if you can get double-digit returns in real estate, aren't you better off investing those funds in new real estate investments?

Good move.

I do think it depends on long term goals.  For example, I am not looking for current income, I am looking to aggressively acquire property in combination with aggressively paying them off.  Hoping that i can retire in 5-10 years.  With that goal in mind, I buy everything on a maximum of 15 year notes.  Some are even on 10 year.

I recognize that if I purchase on a 30 year not I can make extra payments, but I find that the reality is I don't consistently make extra payments.  I prefer to force myself into aggressively buying down.

Again - This works for me based on my goals.

I also think it is a good idea as a beginner to purchase on as long a term as possible since beginners are more likely to make mistakes and thus need more cash flow.

Originally posted by @Bennett Smoot :

I know people often refinance from a 30 year to a 15 if they can get a competitive rate that does not dramatically increase the monthly payment. I am looking at doing the opposite. I bought a property (my first) with a 15 year VA loan. I bought the property before I started seriously educating myself and diving into real estate (a mistake I know). The plan is to keep the house as a rental property. I am moving sooner than expected and do not have a ton of equity in the property. That said, the monthly rent I expect to get will not quite cover the monthly mortgage payments. I am considering refinancing from the 15 year loan to a 30 year loan using a VA Streamline or VA IRRRL. I can lower both my interest rate and my monthly payments in order to achieve positive monthly cash flow. I know I will end up paying more in the long run on interest, but I will also be getting a better return on the investment as opposed to having to cover the difference between the mortgage and the monthly rent brought in. Just looking for other people's thoughts/comments/insights on this use of refinancing.

 You said the magic words..."positive cash flow".  That means you aren't paying the interest (and principle)...your tenant is.  Good work.  Stop thinking interest rate, and star thinking in $$$$$.

Originally posted by @Greg Scott :

Fully support!  At current interest rates, I never want to pay off my mortgages.  I'd take a million year loan if I could get it.

When you increase your principal payment, you reduce your interest expense.  That cash, is just "buying" the interest rate of your mortgage.  That means you are going to make something like a 5% return on your money. 

Alternatively, if you can get double-digit returns in real estate, aren't you better off investing those funds in new real estate investments?

Good move.

 This answer deserves an A++.  The answer is to follow the dollar$, not the interest rate.

Originally posted by @Bennett Smoot :

I am considering refinancing from the 15 year loan to a 30 year loan using a VA Streamline or VA IRRRL. I can lower both my interest rate and my monthly payments in order to achieve positive monthly cash flow. 

I'd do a simple cost/benefit analysis.  Cost in $ and cost in hassle.

A typical refi costs about $3500 and 45 days of hassle.  Not doing that without serious benefit.

What does a streamlined VA refi cost? How much hassle? Current rate vs new rate?

The CF argument to me is weak.  Nobody maximizes the return on every cent.  Having paid-off RE isn't as horrible as it's made out to be. Signing up for 360 new months of payments may keep you on the rat wheel forever.

Originally posted by @Joe Villeneuve :

Having paid off RE IS great, but I prefer to let the tenant pay it off for me.

I agree.  Especially with fixed low rate conventional house loans.

The OP mentioned rent almost covering the 15 yr payment.   I'd at least take into account principal paydown.  Some of mine break even or even cost me up to $200 per month but pay down $500-$1300/mo.   I honesty don't have a better use for the few hundred in extra cf I'd get by stretching the payments out 'til death as the word muerte, I mean mortgege, is designed. ☺

^ I am considering refinancing from the 15 year loan to a 30 year loan using a VA Streamline or VA IRRRL. I can lower both my interest rate and my monthly payments in order to achieve positive monthly cash flow. 

If you can obtain a lower interest rate on the 30 year, then can't you also refinance your 15 year to a better interest rate on the 15 year VA Streamline? Food for thought: I had a client refinance his loan 3 times over the course of about 10 years. When he decided to sell, I ran a calculation for him that showed if he just left his first loan alone, he would have pocketed another ~$90k at closing. Every time you refinance you jump back to starting at the beginning of the amortization table, so you're losing your place in line, so to speak, with where you are on the current amortization schedule.

I'm with Steve on this one. I don't think you've made a mistake buying your first home with a 15 year loan. And cash flow doesn't have to be the only factor to consider. If you truly want to be an investor and keep this home long-term, just remember that once the 15 year loan is complete you'll own it outright. 


$300,000 loan amount. 

30 year @ 4.25% = $231,295 total interest

15 year @ 3.50% = $86,037 total interest

The one piece of the puzzle that is missing from the original poster is that if the opportunity is there for a VA streamline to get the interest rate on a 30 year lower than his current 15, then it would seem reasonable that a refinance to another 15 year will be even better.

The second takeaway that's important to understand is if you refinance you're going back to year 1 on the amortization schedule. So, for my $300k loan example, in year 7 of the original 15 year loan the payment is about $1,550 to principal and $580 to interest. Starting over with the $300k 30 year loan at 4.25%, then it's $1,475 to interest and $413 to principal. Complete flip-flop of the payment allocation.

I don't care about the total interest...you're not paying it.  All you pay is the down payment...the tenant pays the rest.  What do the number$ (not percentages) look like for each in the way of monthly payments and cash flow...mainly cash flow?

I greatly appreciate all the feedback. Here are some of the numbers. The original loan was for $105,000 (nothing down) at 4.125% (15 yr loan). The monthly payment with tax and insurance is $1,015. If I refinance to a 30 year, the rate drops to 3.75% with the monthly payments hovering around $750. Rent wise, in our are for similar houses the average rate is roughly $850. There are relatively few houses for rent and ours has some unique perks so I do not think getting $900 is unreasonable.

With the 30 yr refinance, I would go from still having to pay $200 ish a month to cover the mortgage to bringing in $150 in cash flow.

Originally posted by @Bennett Smoot :

I greatly appreciate all the feedback. Here are some of the numbers. The original loan was for $105,000 (nothing down) at 4.125% (15 yr loan). The monthly payment with tax and insurance is $1,015. If I refinance to a 30 year, the rate drops to 3.75% with the monthly payments hovering around $750. Rent wise, in our are for similar houses the average rate is roughly $850. There are relatively few houses for rent and ours has some unique perks so I do not think getting $900 is unreasonable.

With the 30 yr refinance, I would go from still having to pay $200 ish a month to cover the mortgage to bringing in $150 in cash flow.

 Refinance.  You're losing money every year as it stands now at $2400/year.  That means you would be paying your tenant $200/month to live in your property.

REFI gets you income of $1800/year.  That means your tenant is paying the mortgage/tax.ins for you...and, you get a bonus of $1800/year to do with as you please (as long as you don't put it towards the mortgage...which would put you right back where you are now...on.y worse).

Originally posted by @Mike Giallanza :

^ I am considering refinancing from the 15 year loan to a 30 year loan using a VA Streamline or VA IRRRL. I can lower both my interest rate and my monthly payments in order to achieve positive monthly cash flow. 

If you can obtain a lower interest rate on the 30 year, then can't you also refinance your 15 year to a better interest rate on the 15 year VA Streamline? Food for thought: I had a client refinance his loan 3 times over the course of about 10 years. When he decided to sell, I ran a calculation for him that showed if he just left his first loan alone, he would have pocketed another ~$90k at closing. Every time you refinance you jump back to starting at the beginning of the amortization table, so you're losing your place in line, so to speak, with where you are on the current amortization schedule.

I'm with Steve on this one. I don't think you've made a mistake buying your first home with a 15 year loan. And cash flow doesn't have to be the only factor to consider. If you truly want to be an investor and keep this home long-term, just remember that once the 15 year loan is complete you'll own it outright. 


So what if in 15 years he owns the home outright.  In 15 years he also will have lost $36,000 from the negative cash flow.

 

Originally posted by @Mike Giallanza :

$300,000 loan amount. 

30 year @ 4.25% = $231,295 total interest

15 year @ 3.50% = $86,037 total interest

The one piece of the puzzle that is missing from the original poster is that if the opportunity is there for a VA streamline to get the interest rate on a 30 year lower than his current 15, then it would seem reasonable that a refinance to another 15 year will be even better.

The second takeaway that's important to understand is if you refinance you're going back to year 1 on the amortization schedule. So, for my $300k loan example, in year 7 of the original 15 year loan the payment is about $1,550 to principal and $580 to interest. Starting over with the $300k 30 year loan at 4.25%, then it's $1,475 to interest and $413 to principal. Complete flip-flop of the payment allocation.

 The total interest on the loans don't matter.

The tenant is paying the 30 year total interest since it will be positive CF.

The Owner is paying $36,000 of the interest on the 15 year mortgage because that's the amount of negative cash flow over those years.

@Bennett Smoot

My strategy is a mix of 15 & 30 year loans. I don’t work full time at real estate, but my goal is to retire 100% inside of 20 years from my day job. My 30 year loan properties are providing cash flow right now, and my 15 year properties are going to be my cash cows so I can meet my retirement goals. Personally I wouldn’t want a note that rent isn’t covering. I’d look at refinancing it to 30 years or selling the property and buying a deal that will cash flow better.

During the days of my REI christening rates were double digits so we paid it down fast. Problem is :)) we ended up with a LOT of paid off properties & still own them all.

These days I'd go long on these incredibly low % rates & keep buying.

I'd absolutely do it. If you really want to pay it off sooner and have the means, you always have the option to pay more than your minimum payment.

^ So what if in 15 years he owns the home outright. In 15 years he also will have lost $36,000 from the negative cash flow.

Joe, you're quick to analyze without all of the details. You don't know: how many years he's into the loan; how much he's already paid down on the loan, which needs to be factored in, and; surely you don't expect everyone here to believe that rents will stay stagnant for 15 years, do you?

Bennett, you're not giving us two important details: what's your current balance on the loan; what's the interest rate you can get with a refinance to a 15 year. 

But it may not matter. Right now, based on what you're providing, I'm not sure this property is worth keeping at all, even with a refinance to a 30 year. A 30 year refinance only gets you $150 a month in cash flow, but I don't see any detailed breakdown on cap-ex, maintenance, vacancy, etc. So, while you may gross $150 a month, this will not be your net. The numbers seem very tight on this deal.

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