Regular refinance or cash out refinance on rental property

5 Replies

Hello,

This might be a newbie question but here's my current situation. 

I am planning to refinance my rental property (due to low interest rate environment). I bought the property in 2019 and got a 4.125% rate. I noticed that rates have dropped a good 0.8-1%. So the options I am evaluating are

1: Should I spend closing costs again to go from let's say 4.125% to 3.25% (and save $100-$120 / month)?

2: Should I do a cash out refi and use the money to buy another property (original price was 250k with 25% down, comparables show at 270k) So even with a 80% LTV I could cash out ~30k

3: OR Should I just do a regular refinance, reduce my monthly payments and keep it simple.

Any thoughts would be appreciated as I am wondering which path to choose.

Regards,

Soup Nikk

A good rule of thumb is to only refinance if you will save a whole point on the interest. The loan costs sneak up on you otherwise and may negate the savings from a lower interest rate. 

Option 2 makes sense, but I would find your next property first, before cashing out your current rental. 

Option 3 is not a bad option either, provided loan costs don't outweigh the difference in interest. 

So really, a better question is: have you found another property that you want to purchase? And are you comfortable taking on more properties during a pandemic? Are you confident you can get it rented out right now? 

@Anna Swartz-Lopez Thank you for your advice and guidance. I might get 1% difference with less than 1 points I feel ... rates have dropped quite a bit.

Re: finding the next property before cashing out ... why is that necessary? Cashing out takes 3-4 weeks and coordinating the closing of rental and bringing cash out money to closing will be tough. Is there an IRS rule involved?

Rental comps for some of the homes I have seen indicate that rentals are still going off the market pretty soon. I was bit worried about investing in pandemic ... however I am not sure how long I should wait .. this could dragged into next year as well.

@Soup Nikk There's no rule involved here, I'm just saying that this is one approach that might serve you better. It really comes down to how confident you are about moving forward with your plans. None of the 3 options you proposed are bad options, so it really depends on what is your strategy. I was simply suggesting a little more caution because we are in the midst of a pandemic. But if you are confident that your market has what you are looking for, then go ahead. It's all a judgement call anyway. 

And congrats on taking action as a new investor, especially during COVID. Getting started is always the hardest part, and you are well on your way to a successful future. Happy investing! 

@Soup Nikk

This is really a math problem.  How much are the closing costs?  How long will you own the property?  What's the difference between the old payment and the new payment?  When will you begin to realize the profit from the lower interest rate?  Is that acceptable?

Not much more to it.

Welcome to BP

Stephanie

Hi @Soup Nikk , I think options 1 and 3 are actually the same thing. The way number 3 works is that you "buy" negative points with a higher interest rate. That way you can get an adjusted rate with no closing costs. 

Option 2 is viable if you have a deal that you're looking at, but just realize that you might be limited due to DTI requirements. In your case, you'll be taking on more debt with your cashout refi, and you're going to be applying for a new loan. Talk to your lender about your plan before you execute it.

Good luck!