Assessing the Value of a Cash Out Refi

[Ryan H.]

I need a little help thinking through the value of refinancing.  Let's say I have 50% equity in one of my rental properties, and I have desirable financing on that property (30-year fixed @ 2.75%).   If I do a cash out refinance I can use that money to invest in another rental, but I'd be losing the current financing and be stuck with a higher interest rate.  How do I assess whether this is worth doing?

[Sergey A. Petrov]

A full cash out refi likely won't get you more than 80% LTV so let's keep it at 80% for the purposes of my logic.

Scenario 1 - currently 50% at 2.75%. A full cash out refi puts you at say 6.75%. You just added new debt (30%) at 6.75 plus lost 4% in savings on the old debt (50%)

Scenario 2 - keep 50% at 2.75. Get new debt (30%) at 6.75. Your overall total blended rate is 4.25 (vs 6.75).

Additionally with a HELOC, it is a line of credit so you pay interest only when you draw on it. So if today you need to draw only 10% of the equity (out of the 30% available) you still pay 2.75 on your existing 50% and 6.75% on just the 10% you drew. Your overall total blended rate is under 3.5%

Hope that helps!