$100,000 Cash Out on first deal, is it worth it?

[Josephine Breign]

Hi BP!

I have a deal to share with you that's not as obvious as it seems, I'm hoping to get some thoughts on it. This is a multi-family property that currently has a mortgage of 500k, with an interest free hud partial claim of 150k. This means that 150k doesn't have to be paid until the property is either sold or refinanced, after which it will need to be paid in full. The current mortgage terms are really great, allowing 50k per year of cash flow after all expenses and pm fees are paid. 

The property has appraised at 1M, allowing for a cash out refi of 100k at the new terms (see below). This ends up costing about 10k of cash flow per year. What it also does is effectively wrap that interest free partial claim into the new mortgage at a higher interest rate. Over the life of the loan, that's over 90k more interest on what could have been an interest free loan. 

It seems to only make sense if the 100k cash out could be invested to return that 10k back and then some. And even then it seems a shame to lose a 150k interest free loan from the hud gods. What's an investor to do?  What would you do, BP?

Current Terms:

Loan: $500,000
Interest Free Partial Claim: $150,000
Total to Refi: $650,000

Terms: 3.15%, 30 yr fixed
Current monthly mortgage: $3800

Cash Flow: $50,000 per year

After Cash Out Refi:

Loan: $750,000
Terms: 3.5%, 30 year fixed
Cash out: $100,000
Mortgage payment: $4700

Cash Flow: $40,000 per year