I received an offer to refi a 3/2 townhome rental property I purchased as a primary residence in 2011 for $238K @ 4% through a 30 yr VA loan. The current balance is $210K and current monthly payment is $1718. The offer is for $220K (addl $10K closing/fees) 30 yr VA refi @ 3.5% with a monthly payment of $1609. Cash flow would increase from $130/mo to $240/mo. Plan on keeping the property as a rental long term. I know cash flow is king, but I'm looking for another set of eyes on this to see if its worth a refi. Thanks for any help!
Patrick, what do you think your townhome may be worth today? What do you think the appraisal would come in at? Also, am I correct that you bought it at $238K purchase price correct? or was that your starting loan amount?
You are adding more years on your refinance to get more cash flow. Have you done your comparison with 24 years and see if saving is there. When you doing comparison do consider your closing cost so you can do right comparison.
@Alex R. - Today its worth around $250K and I bought it at $238K
@Harjeet Bhatti - For my current mortgage I'd pay $171 in interest over the 30 yr term, and with the refi I'd pay $113 plus the $10K closing. However if I'm netting an additional $110/mo for 30 yrs that's $39.6K. My plan is to take the extra funds (minus CAPEX) to start funding notes. Do you see anything I calculated incorrectly? I'm leaning towards taking the extra cash flow.
@Patrick Kucera I think I understand now. Here are my thoughts.
Your Home is worth: $250K
You owe: $210K
Your current loan: 30 yr. Fixed VA loan @ 4% on 238K = $1,136.25/mo. just Principal & Interest.
Your proposed loan is: 30 yr. Fixed VA loan @ 3.5% on 220K = $987.90/mo. just Principal & Interest
Difference of $148.35/mo.
Patrick some of this stuff you may already know but I'll go down it anyway so that we're on the same page.
Your refinance options would be: rate refinance or cash-out refinance.
On cash-out refinance now: Most banks will only allow you to cash-out 75%-80% of the appraised value, meaning that you have to leave 25% to 20% in the property (skin in the game). If your appraised value is $250K then 80% of that is $200K -- since you still owe $210K --- that option is off the table for now (not enough skin in the game yet).
On $238K at 4% for 30 years you'll pay a total interest of: $171,048.79 over 30 years.
On $220K at 3.5% for 30 years you'll pay a total interest of: $135,642.85 over 30 years.
Difference of @ $35,406 over 30 years.
.....But wait... I'm going to assume you have not made any extra payments on your current loan and that you have had it for about 6 years. If that is so... then you have already paid $53,957 in interest on your current loan.
So because like @Harjeet Bhatti mentioned, you would be adding more years - essentially restarting the 30 year clock, we need to adjust for that and see the difference between holding what you got or going forward with the refi.
I think your current situation looks much more like this:
On $238K at 4% for 30 years you'll pay a total interest of: $117,091 over the remaining 24 years.
On $220K at 3.5% for 30 years you'll pay a total interest of: $135,642 over 30 years.
------------------------------------------------- Difference of @ $18,551
....So.... if you rate refi. for $220K you will gain an additional $53,406 in cash flow over 30 years but will spend an additional $18,551 in interest ------- the remaining cash-flow would gain you $34,855 over 30 years or $1,161 a year or $96 a month..
So in short yes... moving forward you would increase your cash-flow by $148/mo. but if you were to take whole thing into account you would really eventually even out to $96/mo. gained. Also, note that you kept the property for less that 15 years, I'm pretty sure you'd loosing money regardless, the question you have to ask is if the immediate cash-flow gained from this refi will net you a gain on the next investment you're putting it into to offset any loss here, if any (if you kept the house for less than 15 years).
Personally, I think that if you do decide to refinance, that you refinance out of your VA loan if possible, so that you can free it up in case you wanted to use it in the future for another primary residence or primary residence/investment property. Another consideration is also if you waited and with a combination of your balance getting lower every month and your property possibly appreciating you could do a cash-out refinance aim to pull out as much of your down payment as possible, but again always freeing up my VA loan. Food for thought.
I hope this helps you.
@Patrick Kucera I hope you have save your amortization table from last closing. If not you can always ask your lender to do the calculations from previous closing as well as current closing. Your saving is adding years and closing cost. But I do see point you are leaning towards extra cash flow.
@Alex R. - Thank you for your help with the analysis. I understand your intent with the VA loan use, and I've checked into that. I have a total of $417K available for a VA (less my current VA balance) so I have a little over $200K remaining for our next move. We plan on moving this summer and will use the remaining VA for a new residence. For the refi options I'm looking at the rate refi like you mentioned to increase cash flow for expenses and reinvestment. Thank you again for your help!
Did I read that right, a refi will be 10K? That seems extremely steep. Is that a normal price for people? My cash out refi was less than half of that that I completed earlier this year.
@Paul G. - This includes escro for taxes. If I take that out it would be about $5K for closing.
ok cool thats better. Sorry. Escrow for taxes, but you should be getting taxes back from your previous escrow account, so net would be 5K.
That's much more reasonable :)
The re-fi would work against my core criteria and that is down payment & exit strategy. Not enough equity and may not be able to sell in a downturn due to that. What if you instead got pre-qualed for another zero down VA loan and made this town home an Investment Property? I have two VA mortgages and I did the VA re-fi once for the measly cash flow increase but it was on a $236,000 mortgage so I came out ahead on interest over time, I was only 6 months into the loan, and the rate went down to 3.25 from about 3.6%, and the value was about $400,000 so I had the equity to raise the balance with refi fees, and keep my exit strategy of being able to sell in any market, you do not. Too much energy from you to raise only $100, I would save the energy and time out of market while in underwriting to buy another.
@Chris Mason thoughts?
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