Refinance my rental?

[Nick Brubaker]

Hello all,

I am trying to decide if I should jump on the historically low rates currently and refinance my SFH rental. I put financing on it last year (15-year fixed) at a 4.375% interest rate. The rate I currently have locked in (also 15-year fixed) is 3.0%. The closing costs (aside from taxes and insurance) are about $2900, which isn't bad. The problem is the house value is not high - the loan balance is $86k - so it will actually end up taking about 3 years to "pay off" the closing costs with the savings from this lower rate. I'm pretty confident I will be holding the property longer than that if not much longer, but plans could change over 3 years. One reason I don't foresee selling it in the next 3 years is I plan to do a major renovation on the property before I do sell it and I don't see myself taking that on in the next few years. Our next big financial move will be buying a new primary residence in a couple years (while keeping the current residence as an additional rental). I expect I will occupied by that (which may include renovation projects on either of those houses), my young family, and a new career I have recently begun. I don't expect my current tenant to remain for 3 more years, but it's probably more likely I will install a new tenant than decide to go forward with the renovation/flip and sell. Anyway, I think 3 years is a long time just to break even, but I also expect to own the property longer than this and would hate to go forward paying 4.375% when I could be paying 3%.

What do you all think?  Is there anything else I should be considering?

Thank you!

Nick

[Jason Wray]

Nick,  

If you can take cash out of the property and drop the rate by 1.375% from 4.375-3%.  You can save the cash for the renovations and make extra payments every month/year to help reduce the interest and costs associated with the refinance.  If your doing a rate and term reducing from 1.375% on a 15 year that is saving you what around $98 a month.  You can easily throw an extra $100 more a month that accelerates that loan to save over $9K in interest.

I see this every day where a borrower decides to take a 15YR over a 30YR to be on track for an early pay off.  But here is why I disagree for younger buyers.  Rates are the same right now! Biggest point. Why obligate yourself to pay a higher payment if you do not have to but can when you choose?  Young buyers have to plan for the "What if factor" something will eventually come up unexpectedly.  If you can afford to pay more per month but elect a longer term to protect your money, that is smart.  Just force yourself to pay more each month or with a Bi-Weekly or just pay that one extra payment a year.  You can turn a 30YR into a 24YR with little to no extra money.  On top of that if you can afford it pay more turning that 24Yr into a 12-15YR at your own pace.  Others may disagree but when your young its wise to create a fail safe.