Refinance to a 20 year mortgage?

Question

Hey there!

Just wanted to get some opinions on what you guys think about refinancing my duplex.

ARV 250,000$

Mortgage Balance 201,000$

Currently have 30 year loan w/ 4.25%

I’m seriously considering to refinance to a 20 year these are the benefits

-loan at 3.35%

-shave off 68,000$ in interest

-shorten length of mortgage by 8 years (I’ve owned for 2)

- be debt free sooner than later

The con would be

-pay an approximate extra 150$ per month

-5,500$ in closing costs (the closing costs can be worked into the new loan)

I cash flow the duplex right now at 550-600$/month, refinancing would still allow me to cash flow just at like 4-450$/month. I currently work as a nurse making decent income (80,000$ annually) and I don’t plan on quiting any time soon, maybe decrease hours once I get my real estate license and more properties but overall I’m not dying to quit being a nurse. I’m invested in owning the duplex for the long haul as part of my retirement strategy. I do want to buy 3 more properties in the future. I’m currently 35 and a 30 year loan really seems daunting to me. Does anyone have deeper insight/opinion about this that would help me to be more informed?

Jacob Sampson · Answer

Can you just make extra payments?  Then you get all the benefits without the negative of paying the refinancing benefits.

Tim Herman · Answer

@Eva Morel You say you are cash flowing $500-$650 per month. Do you a vacancy, repairs and capex budget. That will take $250 to $300 per month away. The tenants job is to make the payments. Your stated goal is to buy more rental property. Cash flow will allow that to happen quicker. By refinancing you will be decreasing cash flow.

Darius Ogloza · Answer

Agreed.  My biggest regret in real estate investing is not applying extra principal payments to two properties I purchased in 1997 and in 2001.  Had I done so, I would be rolling in it now on those properties. You can achieve the extra interest cost savings by making extra  principal payments.  The key is having the discipline to actually make the extra payments.  Something always seems to come up.

Eva Morel · Answer

@Darius Ogloza yeah not sure I have the discipline to do that!

Chris Mason · Answer

Context:

Traditionally you had to go down to a 15YF for the rate to be any lower than a 30YF, so people would do one of those two, and you never saw people do 20YF.

A lot of banks are now discounting the rate if you go for the 20YF option, which we've been doing a tad bit more of in response to.

The thinking behind the traditional 15YF discount was "heh, good luck freaking qualifying for it.... but if you have the income and DO qualify for it, it's probably a super safe loan, here's a discount on the rate." That thinking, for some lenders, has been extended to 20YF.

Mike McCarthy · Answer

Remember you can always pay down a 30 year mortgage in 20 years and save all that extra interest. All else being equal, it’s better to stay in the 30 year - then you have the flexibility.

But with almost a 1% drop in interest rate, it might be still worthwhile. Use a calculator to see where the break-even is with the $5K closing costs if you pay both loans back in 20 years. My guess is that it’ll be only a few thousand $$ difference.

Darius Ogloza · Answer

There are a lot of online amortization calculators that allow you to compare various payment scenarios.  I recommend you try one to determine how much extra principal to pay to achieve the same result as the proposed refi or better.

Nicole Heasley Beitenman · Answer

I'm seconding @Jacob Sampson's advice. Just put the leftover cash flow (after reserves) back into the mortgage and pay it off sooner.

Refinance to a 20 year mortgage?

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