Cash-out refi on primary, to pay off/down rental ARM?

Question

This makes sense to me - but would love anyone else's feedback. Thanks in advance!

I am in process to cash-out refi my primary ($850k value, $240k owed, 3 years in on a 30-year fixed at 3.75%) - at a 30yr fixed at 3.4%. Hard to beat a rate like that in 2018.

I have an investment property ($260k value, $105k owed) - on a 3% ARM - (4 years in) and 3 years left before it resets. One can safely predict that rate is going to go up on the reset - 5% to start, and then likely higher each reset annually.

I'm debating about pulling more cash out of the refi to pay down (or potentially off) the investment property. While my overall debt won't change - I can consolidate it all at a much better rate long-term, and increase monthly cash-flow.

Of course, the terms lengthen (to a new, full 30 year) - but I can comfortably pay the difference towards principal-pay down so that the interest over life of the loan comes down. But this scenario also gives me the flexibility to not have to do that in an financial emergency, or sock away more cash flow towards the next investment.

Any pitfalls I am missing here? I realize leveraging your primary is usually not advised - but I have plenty of equity even in a 50% market crash, and am in a strong market (SF Bay Area)

Appreciate any advice!

-Matt

Debra A. · Answer

If that is a true fixed rate....why not just pull the entire amount out and pay off the entire investment property?

Your other thing to evaluate is, taxes and pre-paids usually are the bulk of the "cost" financed into a refi. Closing costs for a refinance are always the same: origination charge if the bank has one, title, appraisal if one is required (usually paid out of pocket by borrower), any points for the rate if it's below par, pre-paids such as taxes and insurance for your escrow account. Like I said usually the charge for the rate and your escrow are going to be the biggest costs rolled into the loan. Depending on where you live of course.

Let's compare:

1. If you cash out enough to pay off entire investment property your balance is estimated $360,000 @ 3.4%.

Estimated P&I = $1600/MO FIXED! No increases

2. Right now your current P&I on the $240k balance = $1112/month (estimated) + $443/month P&I for the investment = $1555/month but could continue to go up once it enters that adjustable phase, so $1555/month could = $1655/month in 3 years, $1700/month in 4 years, etc etc.

3. Just simply refi the investment property...estimated balance with all costs rolled in $110k = $590/month P&I

= $1702/MONTH TOTAL between two mortgages (-$100 in cash-flow compared to option #1) (5% rate for investment property)

Matt Leonard · Answer

Good question - no points. It's through First Republic Bank's Eagle Loan Community program - not offered in all geographies. I was rather surprised by the rate - I wasn't looking to refi, and also figured it was a little too good to be true. But I just got disclosure docs, rate is real, and lender pay all closing costs (other than prepaids, taxes etc).

Tyler Delbert · Answer

@Matt Leonard,

Are you paying any discount points to obtain 3.375% on your cash out? Or are they just adding the cost of buying it down into the loan amount? That rate sounds a little too good to be true...

Max T. · Answer

just pay off that investment property!

Cash-out refi on primary, to pay off/down rental ARM?

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