Jimmy:
Throwing away $320 by selling and paying off your mortgage doesn't seem that good an idea. Having a paid-off rent property also makes you a target for lawsuits. Neither of those make sense to me.
I would refinance.
But, my concern is that you are focused on eliminating debt. Refinancing your rent property to pay down your primary mortgage is a really bad idea. Let me explain. The interest rate on your rent property should be higher than your primary residence. So, in this scenario you pay closing costs for the benefit of paying more interest (in total) than you otherwise would pay. I repeat, bad idea. Refinancing to pay off our primary mortgage has no upside.
Refinance to buy another rent property.
Let's do some math. Let's say you get a 50% loan and go buy another property just like this one. At 5% your interest payments on your rental are now $2,375 per year which takes your cash flow down from $770 to about $570 per month. But remember that now you have two of these properties. That means your total cash flow has increased from $770 to $1,140, which is $370 per month better!
But wait, there is more.
Depreciation on your current rent property I estimate at about $250 per month. That means you are paying income tax on $770-$250 = $520 per month. But, in the scenario with two rent properties you would pay income tax on $1,140 - $250 - $250 = $640 per month. So your income went up $370 but the government treats it like your income only went up $120.
Oh, but wait, there is more.
You can do even better if you use accelerated depreciation. You can also do better if you get a bigger loan and buy a third rent property. Also, over time, your tenants are paying down all these mortgages so you are banking equity every month. I could go on and on, but hopefully you get the idea.
