To cash out refi, or not...

[Russell R.]

The psychology of wanting to own an investment property outright is probably blurring my thinking regarding looking at this situation purely from a cash flow/leveraging equity perspective.  Yes, I want my equity to work for me so that I can grow my net worth through additional investment properties but is this the smartest way to leverage this opportunity.

I have a SFH investment property (appraised at $390k), and would love some perspective from the great minds on BP on this situation:

MORTGAGE: Balance $207k - Currently have ~10 years remaining on a 15-yr mortgage at 3.25% with PITI $2,464.25

HELOC:  $51k at 5.99%

RENTAL INCOME:  $2,680

If you're looking at the numbers, should I cash out refi and consolidate the heloc and mortgage into a new 30-yr mortgage?  

New rate would be around 5.25% for a 30-yr and after costs I'd get $25,588 out with a new PITI of $1,995?

Aside from my own (potentially irrational thinking) is there a reason why you would NOT refinance?

Thanks for helping me consider options here.

[Andrew Postell]

@Russell R. I'm going to answer your question a little more directly: 

"Is there a reason why you would NOT refinance?" - Some reasons to NOT refinance here would be

• You are going backwards on your loan years (10 vs. 30)
• You are losing your HELOC - meaning you won't be able to draw on it anymore
• You will be paying more money over time with a refinance
• You will now have a higher loan amount after your refinance

Those are the main 4 reasons I can see that would be drawbacks to refinancing.  If you don't mind though, I'll make a few cases FOR refinancing:

• HELOC - Two of the common areas of concern for HELOCs I see out there is the 10 year maturity date and the adjustable rate. Since HELOCs have adjustable rates they will often catch people off guard when they adjust. With rates moving higher, it is likely that your rate will increase in the future. The 10 year maturity date is where the HELOC will modify into a different product all together. Meaning after opening the HELOC for 10 years it will cease to be a HELOC. It will "mature" into a 20 year fixed rate mortgage that you can no longer draw on. And when is matures the rate will increase. I've seen typical numbers of 1%-2% higher than your current rate. HELOCs are not designed to be long term finance products.
• 15 year term - you may have gotten this loan when you purchased the property because maybe the strategy was different?  If you are buying and holding an investment property then holding a loan for a longer period of time is preferred.  The reason why is that your mortgage interest is tax deductible and the cash you receive from the cash flow of a 30 year mortgage can be put to better use than to paying off a low rate.  There is an economic term called the "Time Value of Money"...which means receiving $1 today is worth more than receiving $1 10 years from now because of inflation.  So any time I can earn my money now, it has more impact than waiting to receive that money later.  And it's the OPPOSITE with debt....if I can DEFER my debt (or even taxes) then it's better because paying $1 10 years from now is less money than paying $1 now...and that's another reason why we stretch out loans in this fashion.

*WHEW*  I know that's a lot but I do want to bring up one other item:  you are only allowed to take out money if you are using it to earn more money.  I don't mean it's against the law...but with tears in my eyes do NOT take this money and go travel the world or something.  Use it to keep earning more money.  Leverage, that's what we want as investors.  I hope this makes sense.

Tag me with any other questions.  Thanks!