Refinance or Pay Off Mortgage?

[Ericka G.]

Hi all,

Need some advice. I moved into one of my rentals full time. It was purchased on a 5/1 ARM at 3.875% about 5 years ago and started out as an accidental house hack due to a temporary out of state work assignment. Our initial plan was to live here for 5 years and then move to a nicer primary residence. But, plans changed and I've decided to stay here. I achieved financial freedom about 4 years ago but still work a W2 that I really like because...why not?

Loan is now due to adjust to 5.125% and my monthly payment would jump up around $100/mos if I stay with current mortgage provider (who I detest).

Details...

3/2.5 townhouse in trendy, walkable class A area

• Original purchase price: $142k
• Current value: ~$300k
• Balance owed/payoff amount: $112k
• Current monthly PITI: $820/mos @ 3.875%
• HOA: $390/mos (includes water, trash, sewer and all exterior maintenance + pool and clubhouse access)

Option 1: refinance with new lender

• 4.375%, APR 4.663% - 30 year fixed
• PITI: $840/mos
• HOA: $390/mos
• Closing costs: $4-6k (lender says these will be rolled into the loan/absorbed by appreciation so my out of pocket will be very little)
• I’d been moving ahead with this option but noticed that I’d be paying $30k in interest over the next 5 years and the total interest percentage over the 30 year loan would be 79.92% :(

Option 2: pay off loan balance of $112k

• Monthly payment: $390/mos HOA + insurance and utilities other than water, trash, sewer
• I’d still have six figures+ of cash reserves after paying off the loan
• Save $30k+ in interest plus $4-6k in closing costs

Option 3: allow loan to adjust to 5.125%

• PITI: $950/mos
• HOA: $390/mos
• No closing costs, still paying principal down at a good clip
• Downside here is that it can keep adjusting up every year and I detest my current loan provider, so I hate to keep giving them my business

I know many will recommend a cash out refi to buy more property or invest, but I already have ample cash from selling a property and my portfolio is in a good place where my rentals cover my monthly expenses if I were to quit my W2. I’m also self-managing 7 units (all but one owned outright). I have been looking to possibly add 1-2 more or a small multi but haven’t seen any deals worth moving on recently.

Any recommendations on the best course of action here? What would you do and why?

[Jerry Padilla]

@Ericka Grant

My suggestion would be option two since you are living in the property now. Once the property is paid off then get a 1st position HELOC on the property. This will allow you to access the money at any point when the next investment property is available. You will have access to the capital at a decent rate and interest is only charged when the credit line has a balance. The HELOC is best done with a local credit union or regional bank as they offer the best rates. Big mortgage companies typically, don't offer the best rates as they put their focus on a standard conventional loan.