Need some advise on 20 year refinancing. I already am 27 months into my existing 20 year fixed mortgage term loan. Rates have dipped a bit now and I reached out to my lender if he can further reduce my monthly payments by refinancing to 20 years fixed (closing cost added in the interest rate). Now, I am not getting very favorable rate i.e. from existing 3.375% to 3.25% but my monthly mortgage payment ($2500) will drop down to around $200 that will be break even to the rent payment ($2300+-) in the area I am in. If later I buy another house and make existing one as rental, the rent should cover the mortgage atleast. Do you see any flaw in my approach, I know my clock would be reset to 20 years again. Do I have any better way to tackle this approach?
Why 20 years? Why not 30? Great idea to do it while it is a primary residence for better rates etc. But I would do 30 years If you want more cash flow. Kinda depends on your overall strategy. I used to just want to own them outright but now see the value of leverage (despite greater risk) See if it is worth it with all the closing costs. Traditional wisdom was that refis made sense if you could improve by a single percentage point on your rate. Not saying that is always good advice.
I have my house on a 15 but rentals are on 30 year fixed notes with ridiculously low rates.
Good luck with whatever you decide to do.
Do you plan on holding your house for such long term? If you foresee appreciation in the short term and imagine selling this house within 10 years, why not go for a 10 year loan and get lower rate and more cash flow? Obviously assuming that you plan to sell the property within 10 years but may people do.
You need rent to be quite a bit more than PITI to be cash flow positive. Banks use the rule of thumb of 75% * rent - PITI. That formula implies rent needs to be one third higher than the mortgage to be break even. I think that's on the optimistic side and assumes you will be managing it yourself. This doesn't look like a good rental to me, so any long term plan to convert it is not the best choice, IMHO.
With a refi you need to consider the savings vs. cost. You will have non-trivial costs to do the refi. So you need to consider how many months of savings it takes before you cover the costs of the refi and truly start saving.
Jon Holdman, Flying Phoenix LLC
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