Rule of thumb when considering cash out refi?

Question

Hey investors!

Is there a rule of thumb people use when considering whether the closing costs are worth it when looking at a cash out refi of an investment property?

Here's an example scenario I am looking at....to pull out $60K in cash from an investment property, I would be tacking on $12K in closing costs to my loan (due to the 2.8 points that would be required to get a 3% interest rate).  Alternatively, I could get a 4% loan on the property and pay about $6K less in closing costs.

Do you have a good approach when analyzing these types of scenarios?

Thanks!

Jeff Stoner · Answer

Hey Curt,

Yes, the plan would be to use the cash to purchase another property.  If the property that I'd refinance was a long term hold, it seems like it makes sense to bite the bullet and go for the lower interest rate, even with the higher closing costs.   I'm thinking the increase in loan balance wouldn't matter as long as I held the property for the long term.  The lower interest rate on the refi would free up about $200/month in the mortgage payment, so that would "break even" with the extra $6K principle amount in about 30 months.

I suppose if I were flipping and holding properties for a much shorter period then the closing costs would matter more.

Just curious if anyone else out there had any different approaches to handling these types of decisions!

Curt Davis · Answer

Well, I would go with the 4% and only $6k.  Now you will lose cash flow as your loan balance will increase. Are you planning to buy more homes with the funds?