Should I refinance my house-hacked HML?

Question

Hello all,

My name is Anthony and I'm new to BiggerPockets. I've been learning about real estate for some time, graduated in May '22 and recently purchased my first property. I'm looking at the financials of refinancing and want some other opinions. Here are the details of the property:

DR Horton originally goofed and built 4 townhomes connected in my area. Per ADA (disability) code, new builds are required to be compliant if 4 units or more. When DR Horton learned this, they decided to combine 2 units into 1 so ADA compliance wasn't necessary. They did this by creating an interior doorway removing a linen closet, wall, and stove/cabinets. I would not be required to be ADA compliant as I wouldn't be a new build and will have that work undone. All of that meant I was unable to get a conventional or FHA loan.

The 2 units are different: a 3 bed and a 2 bed. The other units in the new complex are selling for $220k and $200k respectively. My hard money loan is at 80% LTV of the agreed upon purchase price of $350k. So $70k down and $280k financed. My interest rate is 10% meaning a $2457 monthly payment + taxes/insurance. The property appraised for $380k with the units being combined as they are so $30k free equity. I withdrew $18k from my Roth IRA to pay the downpayment.

I'm looking to have the work done to undo the combining within the next few weeks. I'll live in the 2 bedroom and rent out the 3 bedroom.

Looking at the financial options moving forward, I have a few options:

-Get an appraisal (assuming it comes in >$400k with the modifications), then refinance into a no-cash-out conventional or FHA loan at 70% LTV (since it's multi-family) at the current interest rates of ~7.6%. Whichever interest rate is better will determine conventional or FHA. At 7.6%, it would be $1980 per month, a $477 monthly saving. My best guess for closing costs is about $6k.

-Get an appraisal (assuming it comes in >$400k with the modifications), then refinance into a Cash-out HML loan at 75% LTV at the current interest rates of ~7.6%. If I took $20k out, this would be $2118 per month, a $339 monthly saving plus the growth on my Roth IRA investments. My best guess for closing costs is about $6k.

- Wait for 12 months of seasoning with my current 10% rate. Get an appraisal (assuming it comes in >$420k with the modifications), cashout conventional at 70% LTV so $294k. I expect interest rates are about 5% by this time next year. That would be $1578 per month and $14k back. That'd be $869 per month savings.

My obvious goal is to maximize my net worth through house-hacking/investing. It's a no-brainer to refinance once rates come down, but in the meantime do I step my interest rate down and pay closing costs again? No one has a crystal ball to predict interest rates and be able to say waiting until March of 2025 instead of December 2024 will help by X amount, but opinions are always welcomed. All-in-all, assuming I refinance December next year, the $477 or $339 savings+Roth gains are about a wash against the closing costs. I have until mid-January to return the funds used for downpayment, otherwise it would just go into a brokerage account.

It's a rather unique situation and this is my first property so any advice/resources you may have are greatly appreciated. I'm also curious if people think this is a good deal given the current market... It's the best house-hacking option I've found in my area since I started looking May 2022.

Thanks!

Chris Seveney · Answer

@Anthony Williamson

If you can reduce your interest rate and payment I would definitely look to refi out of a HML.

Joshua Christensen · Answer

@Anthony Williamson It's a great question.  First, I believe your assumption about 5% interest rates is aggressive.  Owner occupied cash out refi's come with a hefty bump on the interest rate. I would assume a 6.5% rate for a cash out by the end of 2024.  Don't wait.  Remember that when you refi, time it in such a way as to close the first week of the month.  You can skip that month's payment & the next months giving you roughly 45-50 days without a house payment.  It is all absorbed in interest and in your costs, but not out of pocket each month.

Numbers are the real story at the time of the refi.  Don't focus so much on the cost of the refi as your monthly savings will provide you a break even point.  Typically on a refi, that should be the 18 month to 2 year point.  With a 10% hard loan, I don't think you'll have a difficult time hitting that.

Example.  Your closing costs are going to be closer to $8000 or so.  Look at a $500 savings.  How long will it take to break even on a new loan?  16 months.  That's a heck of a deal.

Don't overcomplicate the Roth IRA into the equation.  You're overthinking it.  keep it simple.  Rinse and repeat as often as you can.

If you plan on keeping the house long term, the overall long term effect of tenant paying the mortgage and appreciation will more than pay for the refi.  Your NetWorth will climb.  It's a long road.  Keep harvesting equity over time to reinvest.  You do not have to pay taxes on loans.  In fact, the interest can save you money on taxes as interest expense against the rental income.

Hope that all helps!

Anthony Williamson · Answer

Thanks for the response @Chris Seveney!

My post essentially boils down to: should I refinance once in 12 months or twice over the next 12 months?

I'll be refinancing regardless, I just don't know if I'm better off to wait and invest the closing costs from the extra refinance.