Should I refinance by duplex?

Question

Hi all -- looking for your opinions on this. I have a duplex in NJ and my mortgage loan is a 30 year, 5.625% rate, 77,175 initial balance, opened August 2018. It's now down to about ~75,000. My principal and interest payment is $444 per month.

The rate alone, and the rates I've been quoted today (3.25% - 3.50%) make me think I should refinance  just to cut the interest down. My lender says with all fees wrapped in, I could refinance with approximately 82,000 loan, also 30 years, at that rate (he says he always quotes high, so maybe between 80,000 and 82,000). At that mortgage loan and rate, I'd be at $359-$368 per month.

I could also do a 20-year loan, which would be $470, which is advantageous as well.

The property cash flows decently well (approximately $250 per month), so looking for your opinions:

• Should I refinance to a new 30 year and reduce my P+I by $80-$90 per month?
• Should I refinance to a new 20 year and increase my P+I by $26 per month, and shave 8.5 years off my loan?
• Should I stand pat and do nothing because my loan is too small to be worth doing it?

Amelia McGee · Answer

I just secured a loan on a triplex with a 2.85% interest on a 30 year with a local lender. Credit score and cash reserves have a lot to do with it.

I agree with @Kyle Wells on keeping the 30 year for the flexibility.

Amelia McGee · Answer

@Joe P. I think a portion of this depends on your end goal. Do you want to retire with a paid off property (refinance to 20 year and shave off 8.5 years of loan)? Or do you want to reduce your P+I, and in turn, increase your monthly cash flow (refinance to 30 year)?

If it was me, I would refinance on a 30 year amortization and reinvest the money I'm saving in P+I. By paying the mortgage off sooner, your ROI is only as much as the interest that you saved. I think you'd be able to get a better ROI by buying more properties.

Definitely don't stand pat right now with interest rates as low as they are!

Kyle Wells · Answer

Hi Joe, is this a duplex that you live in or purely an investment property? Assuming it's an investment property only, those rates may not hold true for your loan (I would make sure your lender knows it's an investment property if that is the case). The rates you quoted look more like primary residence rates. The spreads between primary and investment property loans can be very significant.

With that said, does the new principal balance include prepaid items such as interest, property taxes, and insurance? If so, I would back those out as you'd be paying those regardless of if you refinance. You want to look at the actual costs to refinance such as origination fees, discount points, appraisal fee, recording fee, title and escrow fee, etc. Then take those total costs divided by your monthly mortgage savings, which appears to be $76-85/month. That result will tell you how many months it would take to break even and fully recover the refinance costs. Everything after that is money back in your pocket. If you know with certainty that you will own the property past the break even point, I would certainly refinance. If you think it's unlikely, I wouldn't refinance.

Rodney Robinson · Answer

@Amelia McGee I agree. I recently locked in 3.5% for my single family rental cash out refi. I am working with a small community bank.

Kyle Wells · Answer

That is an absolutely great rate for non-owner occupied. Most places are between 4.5-5.5% right now. Is it a local lender or a nation wide lender?

Personally, I would keep the 30-year amortization for the flexibility of it, you can always pay down extra principle to pay down the loan sooner.

Amelia McGee · Answer

@Balaji A. @Kyle Wells Midwest Heritage Bank. They are a local lender that I also bank through so they have access to all of my records. I don’t know if they fund out of state deals - they only have locations in Iowa.

Balaji A. · Answer

@Joe P. That sounds great. Please forward lender info. Thanks

@Amelia McGee : 2.85% for 30 yr fixed is fantastic. Agree with reserves and credit score requirements. (Is 794 good enough?) Could you kindly share the lender info?  Thank you

Joe P. · Answer

@Kyle Wells he works for Greentree...I think they can write loans in any state, but the point is he's in NJ, and it's an actual mortgage company.

@Alex Forest good points -- sadly, in this town, single families are worth the same as duplexes. It's great for investors because this is a "2% rule" town, but still very blue-collar and not a lot of influx of investors (other than a core group that we all know each other and try to work together).

I don't think its worth trying for the cash out refi, AND I am finishing up a BRRRR eligible for cash out refinance on December 16th (six months plus one day, but who's counting?) and I don't want this to affect that. I may tap into the equity if it is ever there on this duplex, but I see that coming down the line.

Alex Forest · Answer

Hi Joe, the rates are impressive now aren't they?  I'm in the middle of something very similar.  Dec 2018 duplex purchase at 5.5% with a $90k loan, and doing a refi cash out at 75% ltv at 3.65% 30 yr.  I wanted to suggest, since you mentioned a goal of yours was to scale, have you checked recent sales/comps in the area?  You might be surprised as they've gone up quite a bit in a number of areas and if you purchased at a good price, you might find the appraisal comes in high enabling you to pull out considerable cash for your next investment (much quicker than relying on monthly cash flow).  I'm pulling out $50k (the orginial downpayment plus repairs and then some) and the monthly payment is only increasing something like a little over $130/mo, still leaving cash flow on the property. Just wanted to mention it might be worth taking a look at recent sales if you havent already...I think now is a great time for cash out refi, with the super low rates and low inventory that pushed up prices, whether to bolster cash reserves, or to get ready for the next, while also locking in the better terms.

Kyle Wells · Answer

I am experiencing the same. I'm wondering if the lender was quoting as a primary residence vs. non-owner occupied investment property.

Should I refinance by duplex?

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