After Refinance - to pay down primary residence loan or reinvest?

Question

I recently found myself in the process of restructuring my finances to rekindle my real estate investment goals.
I currently have a single family home (with a decent interest rate) rented in Annapolis Maryland. I've been living in Seattle Washington in a home with an interest rate higher than most because my house (given the current market) is worth less money than I owe (about 45K diff). In the past I did not see the logic in refinancing to dig the hole deeper via refinance closing costs (10K deeper) if I was not planning on staying in the house long term. However, I recently refinanced from 6.75% to 4.3% at no cost whatsoever given the new refinance rules (HARP). The new loan amount remained the same and no closing costs so the hole did not get deeper. This obviously makes for a smaller mortgage payment hence my question is this...do I continue paying the old "larger" amount (which I can afford) in order to close the gap loan to value on my home? I'd like to be able to sell it (break even) at some point - or do I take the extra cash and invest it elsewhere? (i.e. save it for a down payment / invest on a new property opportunity).

Thanks in advance for any advice / feedback.
- Rob

Thanks in advance for any advice / feedback. - Rob

Will Barnard · Answer

You will likely get both sides of the fence on this opinion. My school of thought is this: if you can honestly stay consistent and take the excess money and invest in some vehicle that earns a greater return than the current cost of your interest rate, i would invest in the higher return, continue taking the profits and rolling it over (compounding it) and growing the excess cash and interest faster than it does by paying down your mortgage. This would allow you to apply more towards your mortgage later down the road and in a fster timeframe.

However, if you can not be consistent, can not find investments that offer a better return, and/or are not disciplined enough to take on that endeavour, then simply pay down the mortgage.

Robert Duffer · Answer

Bill Gulley Thanks too for the quick response and insight. Depending on what investment opportunities I may come across, I may think about just saving for a time and/or pay down the loan. It's rough out there.

Robert Duffer · Answer

Will Barnard Thanks for the quick response and good advice. I believe I can honestly be consistent and will take a look around to see what kind of opportunities are out there.

Bill Gulley · Answer

If you can invest on an after tax basis at a higher rate than you are paying, invest the rest. It's better to be in a position of having liquid assets and being able to payoff a debt than to pay a debt if that mentioned is the case. The problem you may have is finding an investment that earn a higher rate using small monthly amounts, like $300 a month, that doesn't open many doors. Also consider saving the balance for a period certain, and then revert to the other strategy. Just look at the cost of the rented money on an after tax basis and what can be done with it, if there is not a better opportunity, pay the loan down. Good luck!

After Refinance - to pay down primary residence loan or reinvest?

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