Refi or Buy a new House???

[Joe Edwards-Hoff]

Here is my scenario-

Before I really "got into" real estate investing, or the theory thereof, I bought a house in college with the help of my parents and some friends. To clarify, my dad bought the house and I have been making the payments ever since. 5 years later, I have a nice house, with a big shop and garage, but I am at 7% interest, paying $1800 a month, and I am renting it to my brother and some college kids for $1500. I get to keep the 1000sqft shop to myself, which is pretty important to me because I am a car enthusiast and make money on the side working on cars. So, I kinda justify the $300 difference by the fact that I'd have to rent a shop otherwise.

I now have a nice 3b 2ba house with my wife and son. This one I bought with some investing knowledge and my payments are less than half of what I could rent it for. Bought it bank owned.

So, my current dilemma- I am trying to decide with my parents whether it would be most wise, for investing in the long run, to refi the first house and drop the payments by about $500 a month or keep my credit open to be able to buy another house. Right now, my dad is unemployed and I would have to cosign on the refi. So basically, I figure I would be using up my purchasing power on the refi and that would probably disable me from getting another house in a year or two. My original plan was to upgrade to a larger house in a year or so and rent the one I currently live in.

What do you guys think the best option is? The first house is upsidedown right now, so selling isn't an option. And I'd still need a shop as well. Personally, I'm ok with eating "some" costs ok that first house because it is a very nice house and in the long run, I'd like keeping it. But I just don't know if it would be better to lower that payment or expand my portfolio.

Thoughts?