Refinance into a higher interest fixed rate mortgage from a yearly variable rate?

Question

I found myself as a reluctant landlord 5 years ago.  I had to move across country from my condominium.  I couldn't afford to sell off the property at a loss and ended up renting it out.  I have a property manager and it's been fairly easy.  I am overall cash flow negative on the property, but the loss is usually around $1000 per year, and we typically pay down about $4500 per year in principal.

I had a 5/1 ARM, but didn't refinance it at the time it changed over to yearly rate change.  The variable rates have been good.  This year we are at 3.5%.  The rate is capped at 6%.  I recently looked into a refinance.  A 30 year mortgage for $145k would have $3k in closing costs rolled into the loan.  PITI would be about $1100 per month.  The rate is 4.625%

My current loan PITI is about $1200 per month.

The condo was appraised at $186k through the HARP process.  Probably more like $170k is what I could sell it for.  I currently owe about $140k on my loan.  20 more years are left on the current payment structure.

Is it worth it to get a fixed rate for an extra $100 per month cash flow, but at the same time know that I am spending more in interest over the long term?  The negative cash flow of about $1000 per year is not really that big of a deal for me.  I make plenty of money with my regular job and don't consider myself to be any sort of real estate professional.

Thanks for any advice.

Account Closed · Answer

Ultimately I would say that your decision should take into account whether that $100 in cash flow at the fixed rate is likely to outweigh the interest you will pay over the course of the loan, divided by the number of years you have the loan, divided by 12 so you can get a direct comparison of that increased cash flow vs the interest accrued monthly over the term of the loan.

That being said, an investment that yields negative cash flow for 20 years will take a LONG time to A. pay back your principal and interest costs over that period, and B. start actually bringing you cash for your two decades long headache.

If you have equity in it, and admittedly don't particularly want it, I would sell it, take the equity and invest it in something closer to home that doesn't suck cash out of your bottom line for the next two decades. If it is already negatively cash flowing, it is already a headache. Add in potential for vacancy and CAPEX over the next twenty years, and it is an even worse headache.

With some good analysis and a little bit of luck, you could take that equity and turn it into best case, a cash flowing, equity building, amortizing property machine, or "worst case" (but still better than your current situation), a property that is cash flow neutral but equity appreciating.

Matthew Christian · Answer

Thanks for the advice @Alexander Bigwood.  After discussing further with the wife, I think we'll probably just ride the variable rate for as long as we can.  If the interest rate goes up too high, we can just sell the property at that time.  We have enough equity in it that we won't have to bring cash with us to closing.  It saves us the $3000 in closing costs.

Matthew Christian · Answer

I don't really have a solid long term plan for the condo.  Part of me would like to sell it and not have to be a landlord anymore.  Having it not hanging over my head is somewhat appealing as we don't live near it anymore.

But, it's been fairly easy the last 5 years.  We haven't gone a month without a tenant.  We had one issue with a water leak, but insurance covered that.  Otherwise, I keep seeing the rent go up each year, and so that's nice.  The property manager takes care of everything.  Sure, I'm paying someone a fair amount of money to do all of this, but it has been pretty much headache free.  If I didn't have the mortgage, I would be getting $9-10k cash flow per year out of it.

Anyway, I appreciate your advice.  I might call a few more lenders and see what other rates might be out there.  Interestingly, I think the rate they are offering me is about a point lower than what I was paying during the 5 years before it became adjustable!

Michael Barbari · Answer

@Bob Jones

What is your end goal for the property? If you plan to keep it long term refi and fix. If you plan to sell it for a profit in a couple years, keep it where its at.

Mark F. · Answer

@Bob Jones If the fixed rate makes it easier to sleep at night knowing the PI payment is never going to increase, it might be worth it. Variable rates have been very good recently, but you are gambling with the future at bit. Ten years down the road, rates could be much higher than they are now. If you plan on having the loan a very long time, it would probably be best to go with the fixed rate since they're at historic lows.