Should I refinance or let it ride?

14 Replies

Hello everyone. This is my first Official post. I will try to be as descriptive as possible.

I own a SFH in Virginia Beach that I purchased 7 years ago with an ARM. I'm currently paying 2.375% interest and it's set to change Nov 1st. I bought for $200k and currently owe about $180k. I'm receiving $1125/mo and expenses are $1035.

So with this in mind, I have been debating on either sitting on this since my interest rate is so low or refinancing and taking advantage of some more cash flow. I originally figured I would wait to refi when the ARM adjusted to a higher %.

I'm a little stuck here.

@David Soleymani  

You have a double edged sword based on the info you provided. If you refinance, your interest rate will go up to 4-5% more than likely. Interest rates are increasing here in the next week or so. That would probably put your expenses > income! That's not a good situation. 

I don't know how much it's worth, but it doesn't seem like there is a whole lot of room to pull equity out. What is this property worth in its current state?

@David Soleymani , usually, having a very low interest rate for your investment mostly helps if it then allows your cash flow to be healthy. Doesn't look healthy to me. What's the current value of the property? If your Lender will let you keep the interest rate it's due to change to, but for a different (swapped for better cash-flow) property, would that idea appeal? All the best...

@David Soleymani  How would your cash flow increase with a refi? Most likely the rate will go up from the ARM you have right now.

Its always good to have a fixed interest rate. Having an ARM, you might be taking a bit of a gamble and hoping that the Fed will not increase rates. Your prayer was answered today, but will it continue to be answered. What will your game plan be, if you stay with the ARM, when the Fed increases rates?

Upen Patel, Mortgage Banker
Federal NMLS# 1374243

@Devan Mcclish @Brent Coombs @Upen Patel The current value of the property is about $215k. It was my thinking that I could lower my mortgage by financing less money and get rid of the ARM (two birds). I've gotten very lucky with the ARM, as it's always gone down. I know my luck will be changing, eventually, so I want to cash in before I start to lose.

My game plan as far as staying with the ARM is to keep it as long as it's lower than what I can get with a fixed. There's a yearly cap of %1, so I know it would take several years up only upward trends.

Being very new at this and trying to learn as much as I can, I'm at the point where I think I'm making good decisions, but I'm never certain. With this property, I'm not making much money in my pocket, but my expenses are paid every month and over the 4 years it's been renting, it's only been vacant a couple months. Is there a better way to make more money from this place? I am also on the opposite coast.

You can't refinance and pull money out. You're already leveraged on the property up to 80%. No bank will let you exceed that. You can't refinance lower without bringing money to the table. They are not going to let you refinance from 180k in debt to 150k in debt. They would be losing 30k on that. and you can't lower your mortgage by getting rid of the ARM. You have to bring money to the table to do that

You have three options here. 

1. Keep renting it and keep breaking even at the current rate. When rates go up, you will start to lose money.

2. Sell it - which is what I would do because this isn't a very good cash flow deal anyway.

3. Refinance and lose money because the rate will go up.

@David Soleymani

If I was you I would think hard about selling the property and moving the equity to a better investment.  If you came away with 20k could you buy a property for 100k that rents for 750-800 a month? 

Are you sure in the long run you are not losing money on you current investment. Do your expenses include things like vacancies, property management and cap-ex? 

Did you live in this house before hand?  is their any kind of tax break you could get by selling? 

@Devan Mcclish

Thank you. I think it's clear what I need to do. I'd rather get rid of it and buy another property closer to home.

Originally posted by @Joshua D. :

@David Soleymani

If I was you I would think hard about selling the property and moving the equity to a better investment.  If you came away with 20k could you buy a property for 100k that rents for 750-800 a month? 

Are you sure in the long run you are not losing money on you current investment. Do your expenses include things like vacancies, property management and cap-ex? 

Did you live in this house before hand?  is their any kind of tax break you could get by selling? 

The thought of selling was always an option in the back of my mind, but just got a hard shove to the front. I think I can find another property out here for $100k, but it might be difficult.

I am sure that I'm not losing money. I'm doing a little better than positive, which I don't like. I did live in the house for 3 years before moving across the country. I don't know of any tax breaks, but I'll start looking ASAP!

@David Soleymani

When did you move out of the home? There is a tax loophole for those who have lived in their home 2 of the last 5 years. You pay NO taxes on the gain...  If this applies to you then I would encourage you to sell while the profits are that good. 

Just my thoughts. See a CPA for better info.  

The purchase price of the next house is not as important. Getting a good return on your money is... Figure out what that is and make it happen. 

@Joshua D. Unfortunately, I moved out of there in Jan 2011. I'll talk to my CPA about other options. I think everyone's in agreement that this property needs to go!

Thank you all for the support!

@David Soleymani ,  a CPA should be able to submit that even at full current market value, there is no capital gain anyway? 

(But for future, you SHOULD aim for capital gains)! All the best...

Updated about 3 years ago

Or, if you don't care about capital gains, at least try to make sure that the cash-flow is significantly healthier than this one! Cheers...

Interest rates can only go higher from here. I think the rent on this property is too low for the value, but then again, I don't know that market. 

If you can't raise rents then I would most likely sell.

Alternatively, if you don't want to sell, refi to a fixed, but put some money down in order to lower your monthly payment. 

If it was me and I wasn't able to raise rents to $1500 (At least) I would sell and move one. 

$90 cash flow is not attractive to me.

@Brent Coombs @Luka Milicevic

When I purchased this house, years ago, I wasn't trying to make money off it. I wasn't planning on investing. Life happened and I moved away so I decided to rent it out. From what I've learned the last few weeks and especially in this post is that I've really just been lucky.

That being said, my next purchase will be with income in mind! And $90 is unattractive to me, as well!

@David Soleymani I agree with the others. The cash flow is low, just get rid of it and invest into something better. 

I used to live in San Marcos, I miss the west coast.

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