Should I refinance with current interest rates?

Question

Should I refinance? Currently in FHA loan with 2.5% interest. Lender is offering conventional at 5.8% but I’d get about 21k back to put towards more real estate🏄🏻‍♂️

Nicholas Misch · Answer

I definitely understand your dilemma. I love when I can pull cash out of a property to buy more investments with it. I always feel that it's wasting away sitting in a property. For myself however, I do think I would have a hard time taking it out at 2.5% and then be paying 5.8%, unless the deal or investment I am going to put it in can beat the 5.8% and compensate for the hassle and fees to refinance, so I would probably have to get 8% or better to make it worth my while.

Mike Dymski · Answer

Nope.  You're going to pay an extra $3-4k minimum in interest per year (and higher depending on your debt balance) on the new loan to get access to $21k.  So, you will have to make $3-4k per year minimum on that $21k or 15-20% return (and higher depending on your debt balance) to break even.

Look into a HELOC if this is your primary residence.

Nick Barlow · Answer

@Michael Elder is this your “forever house”? If so, then nope, don’t refi. If inflation falls off a cliff (unlikely) and we average 3% per year for the next 30 years, you technically make money on the mortgage.

An argument can be made that 30 yr fixed rate 2.8% debt is the asset.

HELOC or find another source of capital.

Nick Belsky · Answer

@Michael Elder

All depends on how much additional cash flow you are going to pick up from the cash you take out.  If you are not planning on using that money to make more money, then leave it alone.  If you are planning on using it in another RE investment and can justify the added interest costs, plus some additional proceeds of a desired percentage, what are you waiting for?  What most people fail to understand is that usually a very small extra amount of monthly minimum payment applied to a principal each year can easily offset a few points in interest on a loan amortized over 30 years.  If your P+I payment is $1200 per month, look up an amortization schedule and add an extra $100 to that payment... see how much less interest you just saved over the next 10 years with a higher interest rate...

It's magic in numbers.

Cheers!

Raymond J. Rodrigues · Answer

@Michael Elder that rate seems kind of high for a cash out refinance. I’ve seen lower. It all of course depends on your credit score.

Jacob St. Martin · Answer

I think it depends on how good of a return you think you can get with that money. If the cash flow substantially outweighs the extra interest you are paying it might be worth it. Not only that, but then you would be building equity on two properties over time so that ten years down the road when you go to do another cash out refi you have twice as much capital to invest. If you aren't very confident that your return will be higher if you pull out the money I'd leave it in

Should I refinance with current interest rates?

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