Mortgage refinancing advice

[Manan Shah]

Hello,

I have a rental property in NJ where majority of the mortgage is paid back and about $35K is pending on a $550K house. 

The problem I have is that I took a 7 year ARM at 3.5% interest which expired last year. The mortgage company increased the rates to 7%. I am paying about $909 a month which includes $63 towards the principal and $192 in interest while the rest go to escrow for taxes.

I feel the principal paydown is minimal at this time. What would you do if you were me? I hesitated refinancing during the covid times when rates were low as the amount left on the mortgage is not big and there would be cost to refinance. Can i look at other financing options that would be friendlier?

Thanks,

Manan

[Mason Liu]

Hey Manan,

First off, congratulations on having a rental property with roughly $515k in equity, that is awesome!

Honestly, I wouldn't be too worried about your higher rate payment as it is only on a 35k balance. I'm sure the cash flow from your home covers the monthly $909 payment and more. You could potentially allocate more of the cash flow towards debt paydown if you had nowhere else to allocate cash to that will yield higher than a 7% rate of return.

Now I think the bigger question you may want to ask if you do decide to do a cash out refinance is where you will invest that capital. If you can find a truly good deal, it would make sense to get a cash out refinance even though you'll have closing costs and pay a higher cost of capital in today's environment. If you can't find that opportunity at the moment, hold on to that cash, pay down your current 35k balance faster, and wait till you are in a position to get a better deal. Hope this helps!