Cash out Refi Primary to Pay off Rental?????

Question

Hi BP-

I need some advice.  I have reached out to my CPA and lender but wanted to see if anyone else has done this and if it would a long term smart decision.  or if anyone can offer any insight that might help us make the right decision for our needs and goals.

Primary Residence:  Value- est $400k, owe $150k, Interest rate- 3.65%

Rental Property:  Value- $225k, owe $125k, interest rate 4.2%.  Rental amount monthly $1425

With rates being lower now, about 2.75-3% for what we have discussed with our lender on primary residence, we are thinking about doing a cash out refi on primary to pay off rental and roll it into 1- lowering both interest rates.  (if do not get enough from cash out we will pay the rest with our cash???)

Is this a smart decision?  Concerns are increased income tax on the rental income.  Will that negate a better return/lower interest rate or worsen our cash flow?

We would like to eventually own a small apartment building as well and have any properties we own paid off so if we are going to try and pay it off early does this lower interest rate help with increased income taxed on rental?

Any thing else we should be considering or looking into to determine best use of funds?

Thank you for your help and advice.  And if additional info is needed to assess this or clarify, please let me know!!  We just want to make a smart decision with this investment.

Costin I. · Answer

@Kelly Kormos

1. It's not only primary market dropping,  but all interest rates are shaking. Ask other lenders.

2. Again, if you pay off the rental, you might get better cash flow, but at the expense of non deductible interest paid from the primary. Plus, you'll loose the protection provided by a mortgage note. Plus, the equity will likely start to work for the government too, since you might end up with positive net income for which you'll have to pay taxes.

That is not the way to go.

If you want to refi the primary to pull money to get another investment property, that might make sense. But to do it to pay off the rental, that is nonsense.

Ryan Proffit · Answer

@Kelly Kormos I would want primary paid for and leave the loan on the rental.

Costin I. · Answer

@Kelly Kormos I'm dealing with a similar situation, but I'm thinking exactly the opposite. Why would you want to refi the primary residence, which is with the lower interest rate and, likely non deductible mortgage interest??

Refi the rental, get that high interest rate as low as possible, get cash out and pay off the primary, increasing your "cash flow" that way. Plus, you'll have some asset protection on the rental just because of the mortgage note. The primary is likely protected anyway as a homestead.

Kelly Kormos · Answer

@Ryan Proffit at this point I do not have a way to pay off primary- not enough equity for a cash out refi to pay off $150k but I do have that in my primary to pay off rental.  I could probably get about $70k with a cash out refi on the rental and then work to get the other $80k to pay off primary but that would not happen right away.  Have some but not $80k...anything I am missing that I could do to make this a better scenario with the numbers I have mentioned here and in the post??  Any other avenues I should explore?

Kelly Kormos · Answer

@Costin I. I asked my lender about refiing that one in general and he said it was just the primary market that was seeing rate drop- wouldnt do much and we only about have about $100k equity in the rental so with 70% LTV for cash out refi about $70k and we owe $150k on primary.  I didnt see much we could do unless we set on the $70k for a bit as we gathered the remaining $80k to pay off primary residence.  Am I missing something?  I hope that I am because I love that idea!  Thanks!!!

Cash out Refi Primary to Pay off Rental?????

Cash out Refi Primary to Pay off Rental?????

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