Should I refinance at a higher rate in order to make cash flow?

[Chase Webster]

My wife an I live in a 3 bed 3 bath house in Nebraska. I bought the house for $175K (0 down) on a VA mortgage in 2012 ($178K with the VA funding fee rolled in). We have paid down approximately $35K of the mortgage (still owe just less than $140). It would be reasonable to expect rents anywhere from $1.4K-$1.6K per month in this area, and demand is high because we are near a military base in a location with good schools. Taxes are around 2-2.2%. When I run the numbers it looks like if we refinanced we could get the monthly payment down to where we would be cash flowing about 200-300 bucks a month. If I did not refinance, however, we would be between 0-100 bucks a month.

If I've done the math right, I have paid $29K of $119K in interest so far (so right now I have approximately $90.5 left in interest to pay). If I refinance at 4.2-ish% I can expect a total interest over 30 years of $108K ($17.5K more starting now than I would pay if I did not refinance). Worse case (including low rent and property management totaling $130/month) it would take 14 yrs to recoup the $17.5K. Best case (higher rent and no property management totaling $370/month) it would take 4 years.

Am I thinking of this right, and is it smart for me to refinance at a higher rate now that interest is going up (before it goes up more)? We were thinking of refinancing a couple weeks ago before rates went up, and now I am a bit frustrated that we did not consider this sooner. BAD TIMING.