Would you refinance NOW or WAIT?

Question

I bought this property with a friend 3 years ago with an FHA loan 4.2% interest rate.

We have been househacking the property for 3 years. I moved out to the DMV area but my friend is still househacking it.

We bought it for 315k and the appraisal would come somewhere between 340k to 350k now. That means we are not still reaching the 20% equity. We would have to bring about 15 -20k each to refinance.

Why it might be a good time to REFI?

1) I want to get rid of the PMI by getting a conventional loan.

2) There are indicators there will be a slowdown on the economy on the near future. (House pricedrop?)

3)This would be the safe option to play in case there is a crisis and rents lower a bit.

Why it might be a better option to wait some months?

1) Interest rates might drop more.

2) There might not be a price drop and the house keeps appreciating so I could use my cash now to invest.

I am going to start to talk to lenders to see how the whole picture would look but wanted to ask for your opinion first.

What would YOU do?

Extra info: Monthly cashflow right now is $400

with a refi I think I would be somewhere around the $800 - $900.

Caleb Heimsoth · Answer

@Joaquin Camarasa. I would Wait the fed just announced there is a rate cut coming

Joaquin Camarasa · Answer

@Andrew Postell very informative. I learned something new. I appreciate it and I agree with your last idea.

I am going to get the numbers done and see if it makes sense now.

Thanks.

Joaquin Camarasa · Answer

@Dave Skow you are so right, I am going to go ahead and clear out all possible variables now to be prepared and try to pull the trigger at the right time.

Thank you!

Andrew Postell · Answer

@Joaquin Camarasa sure thing. Starting in June 2004, the Fed raised the federal funds rate 17 times in two years. And what happened at first? Mortgage rates fell during the summer and fall of 2004. Back then, the Fed’s rate hikes caused investors to become less concerned about inflation, so mortgage rates fell.

Mortgage rates eventually rose, and were higher in June 2006, at the end of the rate-hiking campaign, than they were at the beginning, two years earlier.

In 2017, housing economists predicted mortgage rates would rise. Instead, they remained fairly steady despite three Fed rate hikes. But mortgage rates spent much of 2018 on a steady climb before dipping slightly in December, which shows the central bank’s actions aren’t predictive.

I would still reinforce that "timing" the rate is less important than "what benefits me now".  If the numbers show it makes sense then go for it.  If a .25% rate change will make it not worth it....then it probably wasn't worth it to begin with.

Chris Mantell · Answer

@Joaquin Camarasa the way to make this and any decision for you in the future easier is to weigh your opportunity cost. If you each put in $10-15k your cash total would be $20-30k. From what you stated, this could net you an extra $400-500/month. Have you searched potential deals where you could invest that $20-30k and calculated what your net would be?

I had a townhouse that if I sold, I could have put an extra $90k down on the house I was buying. When I asked my realtor for advice (he had quite a bit of real estate investing experience) he calculated that I would net $600/month renting out that unit. The extra $90k off that loan would save me around $450-500/month. It was an easy decision from there.

Another option would have been trying to reinvest that 90k but I still have that townhouse and it continues to appreciate and I continue to cash flow nicely off it.

Joaquin Camarasa · Answer

@Bryan Devitt I just did some comps on the area and I believe appraisal could come between 355k and 360k. I am surprised since I have not checked prices in the area since I moved about 7 months ago.

If that would be the case we'd be somewhere around 17% equity. We would have to come with 5k each plus closing costs. I am going to go ahead, talk to a lender, pay the appraisal and see where are we at.

Then, I will follow the recommendations here and wait just a bit to see rates drop and pull the trigger.

Thanks for your advise!

Joaquin Camarasa · Answer

@Rick Albert thanks a lot for this one I had not considered this situation.

Dave Skow · Answer

I would  1)  leave rate unlocked    2) get  formally  approved for the  refinance  in order to make sure that all the  details are  acceptable .....once  approved - 3) pay for the  appraisal to  be  done so you know precisely what the value you are working with is  ....once all these  variables are known - watch rates and determine when you want to pull the trigger to lock and close

Bryan Devitt · Answer

@Joaquin Camarasa 6 of 1 half dozen of the other. The property value will probably drop as the market slows more so it will be tough to drop PMI but interest rates are going down (guaranteed) so that can cut your payments too. How much equity do you have? If its possible to take a 10% value drop and still get rid of PMI then I would wait a couple quarters. If it is one or the other than I would see which saves more money, getting rid of PMI or dropping 0.5% - 1.0% off the interest.

Rick Albert · Answer

Another thought is certain lenders will drop the PMI but raised the interest rate.  The payments may be the same, but you can write off the mortgage interest for tax purposes but not the PMI.  This means you have a larger write off (more money in your pocket).  You will need to seek proper tax advice as every situation is different.

Would you refinance NOW or WAIT?

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