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

Question

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.

Wayne Brooks · Answer

I wouldn't. Right now almost 50% of your payments are going to principle. If you refi and start over with a new 30 year loan, less than 30% of your payments will be going to principle.

Zack Karp · Answer

If you are buying another home and want to use your VA benefit again, then it's a no brainer to refi to a conventional now that you have enough equity for no PMI. Even if the rate is a little higher, freeing up the VA benefit is a powerful thing, especially for investors. Best of luck and thank you for your service!

Jeff B. · Answer

OKAY, you increased your equity position and thus the LTV went way down.

So now you have stagnate funds tied up in the property and the new loan payment increases the cash flow.

That may well be a very conservative play if you're positive that rates will go thru the roof, but also may have put you underwater if there's a housing crash and prices go into the toilet.

IMO, staying liquid in times of uncertainty allows more flexibility.

The investors axiom is preserve cash and use OPM whenever possible.

Wayne Brooks · Answer

I'm guessing he's talking about refinancing just the current balance, but his numbers are likely off. At even a 3.5% loan, it would take 7 years to get down to $140k. At exactly 4 years, he'd be down to $160k. Even refinancing at the same rate, for $35k less than the original loan, would save about $170/mo., not considering refi costs.

Jeff B. · Answer

"refinance at a higher rate to make cash flow?" hmm, counter intuitive to me.

A Refi may extract some equity, but will increase your debt on the property and usually increases the mortgage payments. So how does the refi improve cash flow?

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

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