Rental home w/ 3.5% int rate. Refinance?

frugalilfcker wrote:

Brilliant letsrunners. I own a home that is a rental property. I have about 20 years left on the mortgage which has a 3.5% interest rate. Is it worth it to refinance? I’m really only interested in shortening to a 15 yr loan or reducing the monthly payment, not really interested in taking out a bunch of equity.

If it costs you little to no money to refinance and you can do decently better than 3.5%, then sure.

I would NOT take a 30 year loan out though. 15 is a good idea. I also would not take ANY equity out.

I could change my mind depending on knowing what your circumstances are though.

If you are crazy wealthy (it doesn't sound like you are), I would just pay it off.

If you are planning to sell within 5 years, I probably wouldn't bother with refinancing.

But, other than that or some extreme circumstance in your life, sure, refinance for either what is left in time (20 years) or 15 or even shorter term.

I own a rental

Make sure you're taking depreciation every year. You'll have to recapture it regardless when you sell.

Plan some expenses for the year you sell. Will help reduce capital gains.

3.5% is cheap money. Probably not worth it to refinance. How much left do you owe?

It might be more worth it to consider where you can save $ in other areas. Or just raise your rent a tiny bit to get the same effect without the hassle and cost of refinancing

There are mortgage calculators. Get some mortgage quotes and plug in the current numbers and the numbers you're quoted to compare. I just refinanced from 3.6 to 2.8 percent.

I went from 24 years left on the loan to 30. However, like you, I didnt want to just kick the can down the road, so I set up automatic payments to be the same as my old payments, so an extra roughly 600 per month over the 30 year payments. That means with the same exact payments, I'm now on track to pay off my loan in 17 years from now rather than 24. That saves me almost 150k with those 7 years chopped off. My closing costs were about 4 grand, which I paid with cash. But even if I had just financed them in, it just becomes a few extra months, so still a big savings in the life of the loan.

But somebody smarter than me could even take it a step farther. Many smart investors can beat a 2.8% return. Which means its smarter to refinance to a lower interest rate and 30 year mortgage, then take that extra money each month and invest it. Im more risk adverse and not market savvy enough to do this, so I took the more conservative approach above.

TLDR: plug in the numbers with the new interest rate, but keeping your monthly payments the same. After factoring in closing costs, if the lifetime of the loan becomes shorter than you have left, do it.

You will NEVER find lower than 3.5% on a rental property so it doesn’t really matter.??

Not true

Hmm... Interesting. You may be right that refinancing can save money vs your current loan. Prob depends on loan size, time left, and the rates.

But where you're wrong is this. Don't pay the extra principal each month. 2.8% is free money. Put that towards stock market. Even VOO will get you 8% every year.

Over time. You will make way more $ than the savings from paying off 2.8% faster.

Hopefully the rental is in a LLC. I would stay leveraged in case there was a law suit for whatever reason. Yes you have insurance but if there is a large mortgage who would want the house. It's another way to protect the property.

frugalilfcker wrote:

I’m really only interested in shortening to a 15 yr loan or reducing the monthly payment

These are completely opposite goals. I don't understand what you are trying to do.

A 15 yr loan will be a bigger payment than you have even if the interest rate is lower. You'll be financing the closing costs in addition to your remaining principle. It will build equity sooner, but so will simply paying more each month than your mortgage statement without the closing costs.

If you think you will sell the property anytime soon, don't refi regardless of the rate.

If you want to hold the property a long time, go with 30 years to get the lowest payment.

That will give you more positive cash flow to deal with maintenance for the investment property or money for your pocket or to invest otherwise.

Someone already mentioned that rates for investment properties are higher than for owner occupied homes, so you might not get a better rate.

frugalilfcker wrote:

Brilliant letsrunners. I own a home that is a rental property. I have about 20 years left on the mortgage which has a 3.5% interest rate. Is it worth it to refinance? I’m really only interested in shortening to a 15 yr loan or reducing the monthly payment, not really interested in taking out a bunch of equity.

As long as interest rates are low, keep refinancing for 30 yrs. This is a rental. The whole purpose is to generate cash flow in the short term. Since this is a rental, you aren't tied to this property and can sell at any time. So suck as much money out of it as you can in the short term and invest it. If you get in trouble with cash flow at some point, you can always sell the property and pay off the mortgage.

The refi costs may eat up any savings you get on APR. You really need to drop a full point to make a refi worth the transactional costs that will be baked in the new loan.

Spreading payments out to a 30 might be worth it especially if you do not have a lot of room between the rent you collect and mortgage/taxes/maintenance costs.

On the other hand, the benefit of owning a rental free and clear is that you can then use it as collateral to buy more rental property (or sell it and use the cash to make down payments on 2 or more properties).

Renewed Marathoner wrote:

Not true

Link it up with the loan parameters associated with the rate. Doubt you’ll be able to beat 3.5% on an investment property without shelling out thousands in points.???

For the record I know it's unlikely. But there are ways. My friend got one about 7 years ago. In the 2s by doing some sort of loan against his parents retirement acct or something like that.

It's not a normal scenario to be fair. Just saying it is possible.

Renewed Marathoner wrote:

For the record I know it's unlikely. But there are ways. My friend got one about 7 years ago. In the 2s by doing some sort of loan against his parents retirement acct or something like that.

It's not a normal scenario to be fair. Just saying it is possible.

My point stands, can’t beat current rate which the OP obviously got while living in the property.

I had a house that I owned and lived in and refinanced in 2005 with a variable rate.

That was a sweet deal.

I moved and then started renting it out in 2009.

So I still had the owner occupied rate and the rate kept adjusting down as interest rates steadily went down.

My mortgage payments got lower each year without closing fees or new paperwork and I could raise rent now and then, so the cash flow improved even though I had to have things fixed.

I still looked into refinancing it at one point to pull out equity to buy a new home.

That's when I found out I couldn't get as great a rate as I could for buying a house to reside in.

Once you have the mortgage, you're locked. So, you can live in it first and then rent it and keep the rate.

An example of how a variable APR can be good.

You're probably right

Renewed Marathoner wrote:

You're probably right

Thanks ??. I didn’t need to be but knew I probably was.

Renewed Marathoner wrote:

But where you're wrong is this. Don't pay the extra principal each month. 2.8% is free money. Put that towards stock market. Even VOO will get you 8% every year.

Over time. You will make way more $ than the savings from paying off 2.8% faster.

Did you read my post? I wrote exactly that: "but somebody smarter than me..." then proceeded to say investing the extra money would be smarter.

Oh. You should do that then :)

VOO there ya go. Basically guaranteed 8% in the long run

frugalilfcker wrote:

Brilliant letsrunners. I own a home that is a rental property. I have about 20 years left on the mortgage which has a 3.5% interest rate. Is it worth it to refinance? I’m really only interested in shortening to a 15 yr loan or reducing the monthly payment, not really interested in taking out a bunch of equity.

I'm not an expert, but I do have some experience with this. Rental mortgage rates are a bit higher than personal property rates. MortgageNewsDaily shows current 15-year rates averaging 2.63%, but that will probably include points. Plus, if you refi more than the existing balance, the rate will probably go up.

To me, the big advantage would be going from 20 to 15 years. I'd seriously consider it for this reason. You will be shocked at how little your mortgage balance has gone down in the 10 years you've held the 30-year mortgage. If the home has appreciated a lot, you might be able to refi for 60-70% of the current market value without the rates going up too much.

An LLC is controversial. Some landlords in my area are dropping their LLCs due to the hassle or expense and buying umbrella liability insurance policies instead.

So to answer the question, is it worth it to refi, I'd say yes to reduce the remaining term from 20 to 15 years.

Oh, and I prefer ARKK and ARKW and the rest of the ARK ETFs and QQQ to VOO, but VOO is a good choice. The great thing about stock market investing (or ETF investing in this case) is that you can easily own all of them, whereas with rental properties, you need a lot of capital to buy several properties to spread out your risk.