Is it worth refinancing a long-term rental to gain a point on the interest rate?

[Brandon Burch]

I currently have one investment property in Fort Wayne, IN. This is a single family home and was originally a primary residence before turning it into an long-term rental.

Some strategies I'm considering to grow my portfolio are using a HELOC/1039 tax exchange to purchase a second investment property/multi-family property or refinancing my current investment property into a conventional loan to utilize another FHA loan for a primary residence (with the idea of eventually turning that into another long-term rental).

I currently have a 7% interest rate, and am considering refinancing in the coming months if/when the rates drop. Would refinancing now to simply gain a point (if that) on my current rate affect my ability to carry out one of these other strategies in the next year?

Any discussion would be a huge help!

[Zack Karp]

@Brandon Burch it's funny how people don't actually answer the question you were asking...

The answer is no, refinancing will not negatively affect your ability to sell, refinance, get a heloc, or anything in the future. At least with a Conventional loan, where there will not be any prepayment penalty, or any issue with having a 2nd lien behind it.

Strategically, if you are going to keep this property and want to get a heloc, then ideally you should refinance BEFORE getting the heloc. This is because once there is a 2nd lien heloc, they will need to subordinate to a refinance of the 1st lien, and sometimes that can be a messy experience, depending on the heloc lender and their guidelines.

Obviously the cost of refinancing matters too. Investment property Conventional rates are NOT 6% at par right now (no points). So to save 1% from your 7% rate with a Conventional loan, there will be some hefty cost, and it's not worth it right now, and there's no crystal ball as to when a refi might make sense financially.

However, if your current loan is FHA, FHA does allow a streamline refinance as an investment property, and the rate will be based on a primary residence rate. So you could get a 1% lower rate, but only to another FHA loan, which will also still have MIP (PMI). And you won't be able to buy another property with FHA. If that's not what your desired outcome is, do not get suckered into doing the FHA streamline refi.

So at the end of the day, you have options, but if your goal is to buy another property, it's best to walk through all your options with a loan officer who specializes in working with investors and these exact scenarios, and map out a gameplan not only for your current property and next property, but getting to property 3,4,5 etc so that you don't get stuck on your journey.

Hope that helps and best of luck!