Should I Refinance Rental Property for $135/mo savings

Question

I can't decide if I should refi this property. At this time, I think this is a buy and hold investment. The total interest savings is $40k which is attractive. The monthly savings is only $100 and I plan to put monthly cash flow back into paying off the loan faster, so who knows if I would really save the $40k. Loan cost is $4,600 ($1,750 of loan cost is initial escrow pmt at closing. TN requires taxes and insurance to be escrowed). Any advice is appreciated.

Current Loan 30 year @3.685, New Loan 30 year @3.125 - total interest savings over life of loan = $40,000

Current Payment - $2,182 , New Payment - $2,082

Current Rent - $2,900

Purchase Price 515K

Current Value $700K - $750K

Current Loan 30 year @3.685, New Loan 30 year @3.125 - total interest savings over life of loan = $40,000

Current Payment - $2,182 , New Payment - $2,082

Current Rent - $2,900

Purchase Price 515K

Current Value $700K - $750K

Theresa Harris · Answer

If it costs you $4600 to 'save' $100, it will take you almost 4 years for you to actually save $100/month.  I wouldn't do it.  Also check how much you'd save in interest.  If your current loan is 30 years, but you are 5 years into it, only look at how much interest you have left to pay in the remaining 25 years of the loan.  Most mortgages are front loaded with the interest you pay (eg at the start 50% of your payment is to the interest and at the end 5% is-totally making up numbers).

I see many of the same points were raised by Simcha.

If you are pulling out equity to buy another property, you also need to factor that into the equation.  How much money will you be pulling out?  You said the balance is $392K.  Based on the numbers you ran, it appears you would be simply refinancing for the $392K and not a larger amount.

If you plan on buying another place, talk to your bank first to find out if you qualify for another mortgage and if so, how much.  That may also affect your refinancing.

Steve Vaughan · Answer

Net cost is $2900 plus the indigestion of qualifying.  Break-even of 29 months.  .5% rate drop is my minimum so you're right on the cusp.

I guess it depends on what you redeploy the capital into.  Hard to get good value on the MLS with a loan contingency.  Don't be a motivated buyer.

It's a meh decision to me unless you have a specific awesome deal already in the works.

Simcha Davidman · Answer

@Stephanie Gledhill it all depends what your long term goals are. Are you planning on refinancing the same loan amount, i.e. not pull any cash out? I calculate a loan amount of approximately $487k - if you're right about the home value, that means you're sitting on 30-35% equity. You could do a lot with that equity :)

Just to clarify - is the $40k savings considering that you're already X number of years into the loan, or did you just run the current loan interest cost as the life of the entire loan?

If you have to escrow anything at closing, wouldn't that release whatever you had to escrow for the original loan - and that should be close to a wash.

It's going to take almost 4 years to break even. If you have any doubts about holding this for more than 5 years, refinancing now is far less attractive.

These are just some points to consider. Good luck!

Brian Plajer · Answer

I've always heard it's not worth it unless you can save at least 1% on the interest rate.  I guess it really depends on if you're going to put the additional income to work for you. If it's going to generate more money then maybe it's worth it, otherwise probably not.

Simcha Davidman · Answer

@Stephanie Gledhill I'm not sure you finished your post :) If you did, I apologize for not understanding what the problem is. I will wait for clarification before I respond.

Stephanie Gledhill · Answer

Thank you @stevevaughan. What comes first the new investment property or pulling money out of the existing property? I don't want to pull money out if I don't find something, but you need the money ready to go if you want to buy something in this market. Right? I hate to pull money out and be paying interest on it if there's nothing to put it into.

Stephanie Gledhill · Answer

@Simcha Davidman thank you for your response. I forgot to mention that the loan balance is $392,000. I would like to buy another property with the equity that has been made. Here's my problem though.

Should I Refinance Rental Property for $135/mo savings

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