Cash out Refi Primary to Pay off Rental?????

[Kelly Kormos]

Hi BP- 

I need some advice.  I have reached out to my CPA and lender but wanted to see if anyone else has done this and if it would a long term smart decision.  or if anyone can offer any insight that might help us make the right decision for our needs and goals.

Primary Residence:  Value- est $400k, owe $150k, Interest rate- 3.65%

Rental Property:  Value- $225k, owe $125k, interest rate 4.2%.  Rental amount monthly $1425

With rates being lower now, about 2.75-3% for what we have discussed with our lender on primary residence, we are thinking about doing a cash out refi on primary to pay off rental and roll it into 1- lowering both interest rates.  (if do not get enough from cash out we will pay the rest with our cash???)

Is this a smart decision?  Concerns are increased income tax on the rental income.  Will that negate a better return/lower interest rate or worsen our cash flow?  

We would like to eventually own a small apartment building as well and have any properties we own paid off so if we are going to try and pay it off early does this lower interest rate help with increased income taxed on rental?

Any thing else we should be considering or looking into to determine best use of funds?

Thank you for your help and advice.  And if additional info is needed to assess this or clarify, please let me know!!  We just want to make a smart decision with this investment.

[Costin I.]

@Kelly Kormos

1. It's not only primary market dropping, but all interest rates are shaking. Ask other lenders.

2. Again, if you pay off the rental, you might get better cash flow, but at the expense of non deductible interest paid from the primary. Plus, you'll loose the protection provided by a mortgage note. Plus, the equity will likely start to work for the government too, since you might end up with positive net income for which you'll have to pay taxes.

That is not the way to go.

If you want to refi the primary to pull money to get another investment property, that might make sense. But to do it to pay off the rental, that is nonsense.