Should I REFI or Not?

Question

Hello, I'm looking for advice on a possible REFI and if it makes sense. I'll try to keep it short. :-)

I purchased a SFH and used a HELOC I had on another property to pay for the rehab. The rehab came out to be about $28,000. The rehab cost ended up being about $10,000 more than I thought it would be. My first thought was to just pay the HELOC down so I could use it again. After doing the math, it looks like it would take me about 2, 2 1/2 years to make that happen. I'm fairly sure there's not enough equity in the SFH to do a BRRR. The HELOC property has a 15 year loan on it so, I was thinking of refinancing the HELOC property and paying the HELOC off while turning the 15 year into a 30 year. I believe this would still be a much lower payment then I'm currently paying on the 15 year loan. Some of this would also for personal interest because it would make me feel better to not have the extra HELOC to worry about.

I'd really like to see if anyone has any ideas I haven't thought of before I contact the credit union for a REFI.

Thanks for your input!

Chris

Nate Sanow · Answer

Personally, I would do the refi.

My opinion: 15 year loans are only good for those that can afford NOT to have cash flow, or for deals that are below the minimum threshold that most 30 year lenders require. I had a 15 year once and wish I had researched my 30 year options, it would’ve helped me out.

If you’re goal is financial freedom, smart leverage is the way to go and refi’s are a huge part of that.

Eduardo Bilbao · Answer

I don't know if this will help but for example: I have a house with a 2.75% interest and was trying to re-fi to get some equity out of it and my mortgage broker pretty much told me that it might not be worth it because my interest will go up to the 4% or so. I don't know what your interest rate is but if it goes up like mine it might not be worth it. Just make sure to put all your numbers together taking into account all the costs of the refi.

Joe Villeneuve · Answer

In theory this should work out for the best.  However, you left out the most important numbers.  After the smoke clears, what do you end up with as far as positive CF on both of the properties?

Chris Coffman · Answer

@Axel Meierhoefer That's a great point and was the reason I moved the mortgage to a 15 year in the first place. Thanks for your detailed reply!

Axel Meierhoefer · Answer

@Chris Coffman As others have suggested, you want to really run the numbers and see how the comparison comes out. For your investment properties, you have to accept higher interest rates these days and they will probably climb further. I have seen 5%+ lately, even on 30 years for investment properties. Both properties are now investments and do not qualify as owner-occupied, which means higher interest rates.

The other part that should guide you comes from your goals. If you say you want to keep the properties 20-30, I suspect you are building a passive income portfolio. If that is the case, what I call the "Ideal Investor Journey" should determine how you purchase all the properties you need to reach your passive income number. Many people look at that number as if it is the end of the journey. I rather see it as a milestone. It's the point on the calendar where your passive income reaches your goal number for the first time. With that in mind, you will have to wait a long time before your 30-year mortgages are paid off and you will enjoy the jump from paying the monthly mortgage to not having to do that anymore. Obviously with a 15-year mortgage that happens much sooner and will significantly improve your quality of life.

I know this is a very long-term perspective that many people these days have no patience for, but I saw you mentioned 2-3 decades, so you might be interested.

Just imagine you can buy a property each year in addition to the two you have now. You said you make $400 positive cash flow each month right now. Let's just assume you have a goal to get $4800/month in today's $$$ as your financial freedom, or as I call it, Time Freedom Number. That means 12 properties total @ $400/month each. You have 2 already, so 10 more to go for another 10 years (just hypothetical). In 2031 you will reach your number the first time. Maybe you decide to quit your job to do stuff that does not pay much. If you wonder why you reach nur number in 9 years, it's because your rents will increase but your costs (property taxes/insurance/property management) won't at the same rate, so cash flow is slightly increasing over time.

Still, in 2032, a year after you reach your number, you will probably only have 3 years left until your current 15-year mortgage will be fully paid. Let's say that's in 2035. By now your cash flow is a bit above $5000month. As soon as your 15-year mortgage is paid off, your passive income just from that one property will probably jump up by about $1200/month (you still have to pay insurance and property taxes) That jumps you probably to $6500/month or more. Yes, your tenants paid more into your 15-year mortgage but if you had a 30-year mortgage, you would have to wait at least 15 more years to reach that jump. If the numbers in your comparative calculation for switching form 15 years to 30 years are not really a lot better  (which I suspect is the case due to the recent increase in rates), I believe the long view would suggest keeping the 15 year mortgage. You are probably not consuming the positive cash flow right now or anytime soon anyway.

A little icing on the cake: When you have paid back the HELOC in 30 months from now, you can maybe buy 2 properties that year and get to your time freedom number even sooner :-)

Chris Coffman · Answer

Thanks!

Chris Coffman · Answer

Thanks for the input. I'm at 3.625% right now. I think it might go up a bit. I don't have this one with my credit union and I believe I'm going to go to them for this one.

Chris Coffman · Answer

I plan on keeping it for the next 20-30 years. The interest rates were my concern also but, I thought this would be the time to do it, before rates start to rise.

Should I REFI or Not?

Most Popular Reply