Refinancing my primary residence advice, what path?

Question

Currently I am getting all my ducks in a row to my path in real estate investing and I am looking for input/opinions on which path to take on refinancing my primary home. Make a very long story short, I am currently at year 10 of a higher interest 30yr fixed. We have change courses and plan to stay at our current residence for another ~5-10 years depending how our real estate path goes.

Option A: Refinance to a 30yr fixed which would cut my payment almost in half and use that saved money for investing.

Option B: Refinance to a 10yr fixed which would increase my payment slightly but at the benefit of being mortgage free much sooner.

My future investing goal is to establish enough cash flow to leave my W2 job in 10 years so I like the idea of being mortgage free at the point in time but I am also torn between my savings on the 30yr and what that money could turn into.

Thanks.

Fyzl Atmar · Answer

@Frank Grigus Jr you are most definitely right, getting out of the 6.375% should be your immediate goal. No point paying that much interest. Refi out of your high rate 30 year in to a significantly lower rate 10 year. Then just focus on your goal of paying it down free & clear and increasing your cash flow. Best of luck brother!

Jason Bennett · Answer

@Frank Grigus Jr The calculators over at Mortgage Professor's site are great for quickly evaluating the many options available in refinancing or paying down a mortgage.

Frank Grigus Jr · Answer

Wanted to say thanks again for the advice and give an update. We closed last week on our refinance, 10yr @ 3.11%. I must say if feels amazing to know that my home will be paid free and clear in 10 or less years! I know people twice my age who are still paying their note and I know this is just one step of many but it just feels great!

Frank Grigus Jr · Answer

@Fyzl Atmar Yes, after much discussion with my wife we are going to go the 10yr and even possibly consider an even shorter term, still playing with numbers. Get our home paid asap will put us that much closer to our long term goal of me leaving my W2 job. Thanks again to every for the input, I'll be sure to update with my results in hopes another can learn something as I did.

Jim Blackburn · Answer

10 year arm mid 3s. Let me know if you have any more questions.

Frank Grigus Jr · Answer

@Fyzl Atmar I have thought about a 15 and 20yr but I think I may just fixated on get my primary home paid asap. If I went the 10yr route, I don't really mind paying a few dollars extra. My current rate is 6.375% so I'm pretty sure refinancing is in my best interest. I'll plug some numbers into an amortization table and compare.@Jason Bennett My current home is not really a good candidate for initial investment, we basically have a small homestead and do want to give that up. We have acreage in another town that we plan on building in the future so in a perfect world we want to move once more and be done.

Jason Bennett · Answer

Frank,You seem well positioned to take action on your investing goals. As @David Stone suggested you may refinance to capture equity for reinvestment. Given your 10 year commitment to the area, have you evaluated your current residence as the initial investment opportunity? If the property will cash flow, you may maximize your returns and more rapidly build your portfolio by moving into your next property.

Fyzl Atmar · Answer

@Frank Grigus Jr it all depends on what you would do with the additional savings if you refinance into a new 30YR Fixed. If your goal is to gain cash flow then paying off the mortgage would definitely help. By refinancing into a new 30YR you will be paying mostly interest again on your monthly payments whereas now even with the high interest rate, you have been paying for 10 years so your paying more principal down now at 1/3 of the life of your current loan. Rather than refinancing into a 10 year where you will be paying more than what you are now have you thought about a 15 year or 20 year where your payments might not be half of what your paying now but will be significantly less than your current mortgage. The picture would be more clear if you can provide your current "high" interest rate that you have been paying for 10 years. If its not to high it might make sense just to pay more monthly to pay down your principal faster since you only have 20 years remaining on the life of the loan and are paying a considerable amount of principal more now than you would have at the beginning of the loan. If it is to high than refinancing into a shorter term vehicle 10yr, 15yr, 20yr might make more sense. Just remember that a mortgage is an Amortized Loan and what that means is that in the beginning of the loan the majority portion of your payment goes to interest with the remaining amount going to principal, towards the end of the loan a majority of the payment is paying down principal and the remaining amount going to interests. In this way the banks make sure they are paid first. In your instance at 10 years of monthly payments made your finally paying down more significant amounts of principal rather than primarily interest. It would do you well to look at the amortization schedule for your current loan and compare it to prospective refinance option amortization schedules to find out where you stand in paying down principal the fastest. I hope this is of some assistance! If you have any questions in running the scenario the above feel free to PM me, always happy to help!

Frank Grigus Jr · Answer

Yes I have equity where that could be an option. We also have a decent nest egg in the savings to draw from and I also have the option of taken a loan against my 401k. Interest is cheap on the 401k loan, 4.5% and I keep all my assets.

David Stone · Answer

do you have equity to pull out a revolving line of credit or cash out refinance and use that cash to begin investing? i might go cash out refinance, lower your monthly payment and start building assets to cover those expenses