Payoff loan balance, refinance or do nothing?

9 Replies

I have a rental property in another state. I have excellent long term renters that pay 1000 per month. I pay biweekly and more than loan principle at 1200. The loan is FHA at 5.875. I know I have net negative cash flow but was looking at things like “someone is paying off the bulk of my mortgage.” payoff date wIth extra Is dec 1 2025. payoff datw with no added prIncIple Is dec 1 2027. Should I: 1. Decrease payments to a minimum which decreases monthly bleed? 2. Refinance and if so recommended time? 3. Payoff off loan with cash Thank you for the advice Jeff

Question number one would be is it in a place where your FHA loan is allowed to continue on this as a rental property, if not you may have no choice but to refinance.

Ok if you pay off the loan with cash you get a guaranteed return of 5.875% and your cash flow jumps immediately.  A refinance will increase your cash flow slightly but may lower your overall return.  What is the minimum that you would decrease to?

If it is FHA, are you still paying MIP/PMI on property? Sounds like you bought the place well before the rule of FHA loans never lose MIP. But at 5.875% I'm curious why you never refinanced before when rates were at about 3.5-3.75%. As it stands now you should be able to refinance and get a better rate, while also pulling out cash for reinvestment. You'll have to ask yourself what your goals are. Even if you don't want to buy more real estate, I would think a lower mortgage rate and cash out could give you higher returns and options on that money.

There are a couple of key questions to ask that can make a difference in reaching your goals on this property. Is your goal leverage to buy more investment properties or maximize cash flow by paying off all mortgage debt? This is the paradox of almost every investor based upon where they are in their "investor life". Tell me your goal and I will tell you your options. I will assume that based upon the age of the loan, the MI has fallen off the current FHA loan? That brings me to; How much do you owe and what is the value? How many other properties do you own and how many are financed? Based upon the goal you have, you ave options. Refi to a new loan that either matches the cash flow or pays if off more quickly. Maybe take cash out and pay off other debts? Use what I call, the "I'll decide what I pay mortgage." You refi to a 30 year but pay it off like its a shorter am period. You do this because, just in case the tenant moves out or if you have a cash flow crunch in your life, you can always "just pay" the lower 30 year AM payment. You pay a little higher rate for a 30 year but you gain control of the situation for that cost. Email me for actual options pertaining to your exact situation. Jim Koulos

@Aaron K. Thanks Aaron. My minimum payment would still be $53 less than my rent payment. I never refi because I was just was too busy starting my career (poor excuse) but I was super overworked. Presently I’m trying to get things in order. I have 67400 left in it and I have 50% equity. My goal is to buy more properties. Maybe best to refi and pull cash out?

If you want to buy more a refi is probably the way to go I've never been a huge fan of pulling cash out but even doing it for the lower interest rate would probably be worth it.  I think you mentioned that you could pay it off in cash, so that is probably more than enough for a down payment on another property.

Originally posted by @Jeffrey Fleigel :
I have a rental property in another state. I have excellent long term renters that pay 1000 per month. I pay biweekly and more than loan principle at 1200. The loan is FHA at 5.875. I know I have net negative cash flow but was looking at things like “someone is paying off the bulk of my mortgage.” payoff date wIth extra Is dec 1 2025. payoff datw with no added prIncIple Is dec 1 2027.

Should I: 1. Decrease payments to a minimum which decreases monthly bleed? 2. Refinance and if so recommended time? 3. Payoff off loan with cash

Thank you for the advice Jeff

 If cash flow right now is not your biggest concern, I would refi and at least break even or even little cash flow. 

Being a  CPA I have to bring up tax savings. If you at least break even, you will have negative cash flow because of depreciation. You can offset other income with the tax loss and actually save money on taxes. Give there is Limitation, but it works for most of the investors.