Should I refinance?

10 Replies

I am currently following Dave Ramsey’s plan on finance. If you don’t know it is summed up with 7 baby steps. I’m on step 6 which is pay off your home early. I currently have a 15 year loan at 3.3% with 11 left if I let it ride with no early payments. Im rentIng thIs home. After reading about cash flow I learned that I can refinance back to a 30 year loan and get about 700 cash flow. Should I bite the bullet and pay down the house and get 100% cash flow in about 5 years with early payments or should I refiance to a 30 get instant cash flow and save up for a second home? Thanks!

@Charlie Gomez - If I were you, I would refinance and take the increased cash flow. Use that to save up for a second property. 

Dave Ramsey's point of paying off all debt is geared towards people who are not very savy with money and get into trouble with debt. The idea is... you can't get in trouble with debt if you don't have any. 

However, having a mortgage on a cash flowing property is totally fine. You just need to be financially astute and be sure that you are cash flowing with enough buffer such that if something happens you aren't going under. 

@Charlie Gomez Is this your residence or your rental?

My suggestion: complete Dave steps first, then do other things. 

As for cash flow or pay off early, I just posted a longer answer to another thread just started about leveraged vs unleveraged

Personally, I would keep the loan and not refinance - I don't think you'll see such low rate for other loans any time soon. I would leave it alone, or just make early payments till the principal payment is substantial bigger than the interest payment (like 80/20 ratio) and then let it ride.

If you refinance (which you can do at any time), what would you do with the cash flow? Do you have the means/knowledge/opportunity to put it to work at a much better ROI than the 30 year loan rate of interest, plus tax and inflation?

Do the numbers yourself. If cash has a opportunity investment value of 10% and you have a fully paid for 200K property the first $1666 of your rental income goes directly toward a return on your equity. Does that leave enough of a monthly cash flow to justify holding the property as a rental. Investors paying down a rental are the most extreme conservative investors and rarely understand how little their dead equity is actually earning. They could achieve higher returns mortgaged to the maximum on a 30yr with their cash in a income fund than sitting dead in real estate. They are mostly hoarding cash out of fear without realising that a turn in the markets could wipe out their savings.

Truth be told the maximum return on equity in a property is the prevailing mortgage interest rate. Is that really enough to bother having equity sitting dead and at risk in a property. 

Should you refinance....only if you want to maximise your returns. If on the other hand you are retired and have more money than you know what to do with why bother.

Originally posted by @Costin I. :

@Charlie Gomez Is this your residence or your rental?

My suggestion: complete Dave steps first, then do other things. 

As for cash flow or pay off early, I just posted a longer answer to another thread just started about leveraged vs unleveraged

Personally, I would keep the loan and not refinance - I don't think you'll see such low rate for other loans any time soon. I would leave it alone, or just make early payments till the principal payment is substantial bigger than the interest payment (like 80/20 ratio) and then let it ride.

If you refinance (which you can do at any time), what would you do with the cash flow? Do you have the means/knowledge/opportunity to put it to work at a much better ROI than the 30 year loan rate of interest, plus tax and inflation?

Thanks Costin! This is my rental. I may or may not live in it later. Living with mom and at some point will move out again. Thanks for the sounds advice!

C

@Charlie Gomez , listen to episode 6 of Keith Weinhold’s Get Rich Education podcast on why financially free beats debt free.   Then come back and tell us what you think.  

@Charlie Gomez I think it comes down to what are your goals. They should be determined first and then whether to refinance or not would best be decided by which way moves you closer to your goals faster.

I don't think you'll get nearly as good of a rate if you refinance to a 30 year loan at this point.  Your rate will probably go up a full percentage point.  

The question is, do you really need the $700/month in cash flow right now?  If you don't need it, there is no reason to go through the hassle of refinancing.  The same question applies for paying off the mortgage early - you have relatively cheap money that you're getting from the loan so you might as well let it ride.  In my opinion, I would save up what you can and work on your next deal.

@Brandon H. Thanks for the question. The answer is no I don’t need it. And you’re right my rate will go up .6% and I can live with that. I’m responsible with money and will reinvest it back into real estate and if things change use the cash flow to pay down my mortgage. I like the options I now have. Thanks for the thought-provoking question because it really did make me think!