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Should We Refinance The Rental Home?

by retirebyforty on May 25, 2011 · 57 comments

in real estate

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refinance rental home

The interest rate continues to plunge, creating refinancing opportunities and my conundrum is – should we refinance the rental home?

Here are the details of the current loan:

Amount owed – 87,000

Loan terms – 5.25% 15-year fixed rate loan. We have less than 7 years left on this mortgage.

Payment – monthly payment is around $1,350. About $1,000 of that payment goes to the principal every month.

Have you refinanced yet? Quicken Loans can rush your refinance through very quickly so if you are in a hurry, give them a call.

quicken loans refinance

I called up the bank and they quoted me a 15-year loan with 4.625% interest rate. This is a rental and a non owner occupied home will get a .5% worse rate than a regular owner occupied home. This rate frankly sucks badly so I will check with another bank later this week.

The bank fee will be about $3,000, so here is the new loan if I refinance with our current bank.

Amount owed – 90,000

Loan terms – 4.625% 15 years fixed rate loan.

Payment – $700

Pro – Extra $650 in cash flow. This will be a huge step toward getting a positive cash flow with one income.

Con – If I just stay put with the current loan, it will be paid off in 6.5 years and then it’s all gravy after that. If I refinance, the loan will reset and it will take 15 years to pay off…. Do I really want to do that?

retirebyforty’s rule of thumb – If you make the same payment regardless of the new term, will it be faster to pay off? So if I refinance and continue to pay $1350/m, the new loan will be paid off in about 6.5 years… They come out to be very similar. The main advantage of refinancing is that it will give us flexibility. For example, if we get a prolonged vacancy, we can stop paying extra until we get a new tenant. I like the flexibility, but then again it’s a lot of trouble to go through all that paper work and appraisal for minimal gain.

Update #1: The current rent is $1,450 and the cash flow is about -$150 at the moment.

Update #2: I got a quote from another bank and the rate is 4.75%. bahhh!!

What do you think? Should we refinance or stay put with the current mortgage? I think we should refinance if I can get 4.25% interest rate.

 We finished refinancing the rental home! Read all about it.

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{ 48 comments… read them below or add one }

No Debt MBA May 25, 2011 at 5:23 am

Is the additional flexibility provided by refinancing is worth $3,000 to you? That $3,000 could buy you nearly five months of the same low payment if you don’t refinance and instead set the money aside. Your personal financial situation and plans are probably more important to this decision than the cost of the loan. If you’re serious about moving to one income ASAP, the cash flow and flexibility provided by refinancing could be completely worth the cost and effort. However, if you plan to stick with two incomes for the 6.5 years it takes to pay off the loan it probably isn’t worth it.

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LLF May 25, 2011 at 6:28 am

yes NDMA is right about it depending on if you need the flexibility. Also, what are you getting in rent? Does it cover the mortgage and property tax? After that is there left over for HOA, repairs, licenses, etc? If it does great, leave it alone.
If not, I would refi. Is the 30 yrs same rate as 15 yrs? Even if the rate for 30 is 5% it’s still a good option because you currently are paying interest of the whole loan you had before which is 5.125% of 150k+, and will continue to do so for the next 7 years. Where as the new loan is making you pay interest of 90k for the next 15 years, but since you are shortening it with extra payment, it’ll be for the next 7 years.
If you use the MS spreadsheet mortgage amortization template, you can look at the total of the next 7 years’ interest vs the total interest of the new loan with extra payment to see if the difference is savings of 3k or more. Then you can figure out if it’s worth it.

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retirebyforty May 25, 2011 at 8:32 am

I updated the post with the rent.
We are collecting $1,450 at the moment. The monthly cash flow is about -$150. This is not a big deal right now because we both work and consider it an investment.
I’ll check the amortization calculator. I think it’ll be almost the same.

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LLF May 25, 2011 at 10:43 am

OK I plugged in some numbers and got this (taxes and other fees not included because you have to pay the same either way)
A)162k @ 5.125% for 15yrs fixed = 1292/mo (assuming that you are not making any extra payments at all at any time) so the last 7 years interest is 31k
B)90k @ 4.625% for 15yrs + 600/mo extra payment = 1294/mo total interest for this is 15k.
I think the savings in interest alone over 7 year is worth the refi. These numbers are skewed if you mad extra payment in your original loan at anytime. You really have to have all your numbers plugged in to get a precise result.

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LLF May 25, 2011 at 10:55 am

oops my bad, look at the wrong field
here is the numbers redone
A) 165k @ 5.125 = 18k (next 7 years’ interest)
B) 90k @4.625 + 600 extra payment = 15k
C)90k @4.625 + 650 extra = 14.3k
is about 3k in savings, but you get positive cash flow and flexibility.

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retirebyforty May 25, 2011 at 11:05 am

Thanks for cranking the number.
It’s tough to figure out the whole number because we made some extra payment earlier in the loan.

I think A is actually around 16.5k. It’ll definitely be worth it if I can find better rate.

LLF May 25, 2011 at 11:15 am

You can get a copy of your loan history to see when and how much extra you paid. You can usually do this for free online with your loan’s servicing company.

optionsdude May 25, 2011 at 6:51 am

It really is a personal decision. I would tend to not refinance. If there is any other way that you could be flexible for 6.5 years, then having the extra income after that would be wonderful. Is there the possibility of getting a line of credit that could be tapped only if you need it without refinancing? You don’t state the value of the home to determine to LTV ratio.

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retirebyforty May 25, 2011 at 8:36 am

We tend to not refinance in the past as well. We are doing OK with the rental for now. With property tax, the current cash flow is about -$150 and we can handle that.
The house is worth at least 250k so the LTV is pretty good.

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optionsdude May 27, 2011 at 10:08 am

I see that you updated with rent and cash flow as well. Looking at that, I might be tempted to refi based upon overall cash flow. Again, it really becomes a personal decision based upon what you think your future will look like. I am sure you will let us know what happens.

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Justin May 25, 2011 at 7:14 am

The rule of thumb I’ve always heard was: don’t refinance unless you can drop a percentage point or more from your rate, which seems to be the conclusion you came to as well.

However, on a rental property, I would treat it like a business and look to maximize cash flow and would probably go through with it even if you can’t get to 4.25%

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Melyssa May 25, 2011 at 8:38 am

If I were in your shoes, I’d stay put. The payments would be the same since you plan to continue paying the $1350/month. Sometimes if we have leniency in our lives, we tend to take advantage of it when we really don’t need to. I’d stay on the same path, you’re doing great. Most people will never experience paying off a mortgage, let alone a mortgage for a rental property. 6.5yrs will fly by.

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retirebyforty May 25, 2011 at 9:54 am

That’s how Mrs. RB40 feels as well. We can plan to pay the same $1,350/m, but something will probably come up and then we would change that plan. :)

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Sandy @ yesiamcheap May 25, 2011 at 8:56 am

In order to do some calculations I need to know what your original loan amount was. Can you share?

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retirebyforty May 25, 2011 at 9:53 am

I think it was around 165k. Thanks for calculating! :)

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Ashley @ Money Talks May 25, 2011 at 9:11 am

I wouldn’t refi. The idea of having the property free and clear in less than 7 years is too good. Plus the fact that if you do refi and make the same payment it doesn’t pay it off any quicker. To me, that answers the question right there.

it comes down to whether or not the closing costs are worth the flexibility to you.

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Kevin @ Thousandaire.com May 25, 2011 at 9:13 am

Always maximize cash flow in a business. Refinance that sucker pronto!

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Melyssa May 25, 2011 at 12:51 pm

But wouldn’t they have ultimate maximized cash flow in a very short amount of time when they have owe nothing on it?

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Kellen May 25, 2011 at 11:36 am

Aren’t there additional fees that come with re-financing too? Loan origination costs and so on? Because those could change the equation quite a bit.

I’d be all about the additional flexibility.

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retirebyforty May 25, 2011 at 2:53 pm

The quote I got had a $3,000 fee. That’s pretty expensive…

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Miss T @ Prairie Eco-Thrifter May 25, 2011 at 11:49 am

I think you should stay put. 6.5 years is not that long of a time to be debt free in the end and have your house paid off. 15 years difference is a long time. But if you really need that extra money per month right now than you may not have a choice. Maybe there are other ways you can make an extra 600 a month without refinancing.

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krantcents May 25, 2011 at 12:24 pm

You are paying $3K for the flexibility. Your rent is not fixed, you should make small increases every year. Your costs increase, you need to cover that. Have you checked the market for your rent recently?

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retirebyforty May 25, 2011 at 2:54 pm

I’m reluctant to increase rent here since the last time I raised rent I had to find a new tenant. I will probably increase rent in a couple of years.

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krantcents May 25, 2011 at 6:09 pm

Remember you are not doing the tenant a favor if you are losing money. Most tenants will not move if you give them a small increase every year. I am referring to $25-50 per month. $50 is definitely the upper limit.

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Financial Success for Young Adults May 25, 2011 at 12:25 pm

I’d say refinance only because it will give you the extra flexibility. You can choose to continue making the payments that you are making now, or you can pay the lower payment if you decide. Positive cash flow is very important.

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Sustainable PF May 25, 2011 at 1:21 pm

I assume your bank will allow you to up your payments to equal the prev. payment upon refinancing? When we got our new place we couldn’t stick with the same payments we had on the old place. We started slightly lower on the finance, did an immediate 20% hike in payment then 4 months later when 2011 hit started paying 20% more once again.

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South County Girl May 25, 2011 at 3:41 pm

This is hard… If it was your primary home i’d say no because the re-finance doesn’t do much to accelerate the loan since your paying the majority of your payment as principle already. The question becomes this: Are you in a position to loose the home?

if yes, refi… but you have to ask yourself if you could make the re-fi mortgage payments with your regular income in addition to your home? It would stink to toss 3k down the drain if you wouldn’t be able to cash flow the mortgage until you got another body into the property…

BUT–If your jobs aren’t in jeopardy, and you have a healthy Emergency fund, why throw away 3k? Why not take that 3k and making it your rental EF… If you get a vacancy, use the 3k to cover the payments and THEN use that time to Refi to a 15 year fixed. If the rates go up slightly it won’t make too much of a difference because you will be further along in the life of the loan and paying even more principle than you are right now. Then the refi will be worth it because it will help you during the vacancy and since you have plenty or equity you aren’t at risk of being unable to re-fi later.

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retirebyforty May 25, 2011 at 4:20 pm

Both our jobs are pretty secure and the tenant is going to be here for at least 3 more years.
It’s a difficult decision because there is not a huge advantage either way. :)
That’s a good advice to keep the 3k until we really need it.

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June Young May 25, 2011 at 9:52 pm

It’s a matter of cost vs. benefit. If you pay it off right now, you’ll negative your cash flow but defer future value of money. Rent might increase, interests might increase, those are the risks of refinancing. If you really want to refinance, you must have a separate fund for paying your extended payments so your flexibility will not be compromised.

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101 Centavos May 26, 2011 at 4:45 am

Bit of a quandary, but for me, I’d stay put. Seven years goes by quick, especially if you have a young’un to mark milestones (“where does all the time go?”)

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Money Reasons May 26, 2011 at 9:57 am

Ha, I just erased a long and lengthy comment I was writing.

I would fire up my spreadsheet and let it do that work for me!

If the savings is less that $1,000 I would just ride out the mortgage… But I’m lazy that way :)

Just curious, could you go for a 10 year mortgage instead? I have a neighbor that did that term instead. I would also go for a no costing cost (or any fees period) loan.

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retirebyforty May 26, 2011 at 4:28 pm

10 years mortgage might work better actually. I’ll check it out. I completely forgot about that one. Unfortunately, I haven’t been able to find no fee refinancing.

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Financial Samurai May 26, 2011 at 12:00 pm

The answer is NO, Joe! $3,000 refi cost for a $87,000 loan is RIDICULOUS!

You pay $1,000 out of $1,350 in principal.

PLEASE DON’T REFINANCE!

Cheers, Sam

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retirebyforty May 26, 2011 at 4:28 pm

Yeah, the fee is HIGH!

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Financial Samurai May 27, 2011 at 12:04 am

That’s the same fee for a $500,000 mortgage…. not worth it buddy! Just keep life simple and pay extra.

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Jeff @ Sustainable life blog May 26, 2011 at 12:22 pm

I think i’d skip the refinance, and if you end up going back to work after your 3 months is up, you can continue to pay down the loan fast and get rid of it. basically doubling the time of the loan isn’t worth it, in my opinion

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Aaron E May 26, 2011 at 2:10 pm

If it were me, I would NOT get a 15-year mortgage. Why get 15 year money when 30 year money is so cheap. Google, Microsoft and plenty of big name companies with lots of CASH are now borrowing long term money. There are several reasons for this. One is tax advantages because of stupid repatriation rules – but the other is that they think interest rates will rise.

I have a 30 year at 4.75% and don’t plan on playing it off early at all… this is my biggest ‘hedge’ against future inflation.

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retirebyforty May 26, 2011 at 4:29 pm

Our primary resident is also at 30 years, 4.75%. It’s just not possible to get that for the rental. I don’t like the 30 years because the time line is just too long…

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Buck Inspire May 26, 2011 at 4:13 pm

Wow interesting debate. I would say don’t. Your rate isn’t that bad and you have 6 to 7 years to go. Plus going through all that paper work for a small gain and extending your loan, not worth it.

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retirebyforty May 26, 2011 at 4:38 pm

People have strong feeling about refinancing. :)

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Everyday Tips May 26, 2011 at 6:06 pm

The only way I would refinance is if I could find a fee-free loan. If I did refi, I would still pay the old amount so it would be paid off in time.

Not sure it is all worth the hassle though, unless you foresee bad economic circumstances coming up.

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mike May 28, 2011 at 7:46 pm

It’s good that you have a good financial mind but somewhere along the line your English teachers failed. viz:
“Here is the details of the loan…” AAAGGHH!!!
There is principle and principal; in this case you mean the latter.

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retirebyforty May 28, 2011 at 10:13 pm

Oops. fixed. It happens.

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lee June 1, 2011 at 3:19 am

I’m in a similar situation. I’m leaning towards refinancing my owner-occupied triplex to 30 years with a cash out refinance with the idea my home is not a bank. I feel like interest rates will go up and its a protection against inflation. In a few years, where else will you be able to borrow for 4.75%? 2/3 of the home is a business.

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retirebyforty June 1, 2011 at 4:20 pm

The rate is extremely low right now. For an owner occupied triplex, you should be able to get 4.5% with 1/4 point or something like that. Good luck!

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J$ June 2, 2011 at 8:14 am

Interesting! At first I wanted to say to hold onto that current loan cuz you’re so close to knocking it away, but then I remembered how AWESOME it is to be “retired” at home!!! And if refinancing would help you achieve that? Then hell ya! Isn’t that the dream? To live off 1 paycheck? It would seem that you’d be right there if you hit that refinance button ;)

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retirebyforty June 2, 2011 at 3:21 pm

It’ll go a long way toward being able to live on one paycheck! I decided to go ahead and refinance. I’ll write a follow up post after it’s all said and done. ;)

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Chris March 21, 2012 at 4:49 am

I have three renter properties. I do want to buy some more but I don’t have the cash.
I want to refinance one of the property to get the cash to buy two more properties
I wanted line of credit but I was unable to get line of credit.
Now I am in the process of refinancing one of the property. I do want to pay it up in 3 to 5 years.
Should I do 7 years ARM Fix or 10 yrs Mortgage ?

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