A little while ago I mentioned that I was looking into refinancing some of my rental property. I figured that interest rates had gotten so low it was worth looking into and seeing what might happen. I think there is only one way for rates to go and that is up. Well, life got in the way and I had to get some other things done first as I am sure that most of you know. But now, I have been able to begin looking into the refi again.
It turns out that the mortgage guy at the bank left so I am with a new guy. I have only spoken with him on the phone, but I think I like him better. He is fairly responsive, and I think we can get this done.
I made myself a spreadsheet at the end of October with the data from all 6 of my rental houses. One is the place we used to live in before moving 12 years ago. We have a second mortgage on it so there is not a lot of equity. But the other 5 are the ones that I will be able to refinance. I figured that while I was decreasing the interest rate, I would also look into decreasing the term.
Currently, my rates run from 6.38% to 7% with remaining terms of 21 to 23 years. I had him look at 20 year and 15 year numbers, and I am liking what I see.
For the 20 year term, the interest rate would be 4.25% and I would have to bring just over $13,000 to closing. The payments would decline by about $948 per month. It would take about 14 months to break even and get my cash back.
For the 15 year term, the interest rate would be 3.125% and I would have to bring $10,500 to closing with payments being reduced by $659 per month. It would take me 16 months to get the cash expense back. But I would save 5 full years of payments at the back end compared to the 20 year mortgage. And I will definitely save a bundle compared to my current situation.
The savings could be used to pay some of my other debts which I am working aggressively to get under control. Right now, that seems like the best use of cash right now. I would prefer not to bring that much cash to closing, but consider the return on investment, and it is a great deal. If over the first year, I save $7908 in cash on my $10,500 investment now, my cash on cash return is just over 75%. Who wouldn’t take that kind of return on investment? So it makes abundant sense to get this thing done.
Which is why I hoping the refinancing on the rental houses all works out.
Since I am having to liquidate my retirement portfolio to pay for some tax debt, I want to have something financial that I can focus on and consider a project. So I am spending the next 3 years really focused on maximizing monthly cash flow and paying off debt. If I can pay off just the debts that I have listed in my spreadsheet, I can cut about 30% out of my monthly budget and free up cash for other purposes. Besides, paying off debt is a great way to improve my net worth without having to pay taxes on the gains.
Refinancing the Rental Property
I met with a banker yesterday to look at doing a refinance on 4 of my rental houses. I have anywhere from 20-29% equity in the properties with 20 years 10 months to 22 years 11 months left on a 30 year fixed rate mortgage. The interest rates range from 6.375% to 7%.
Even though I am unable to get the best deal due to my credit score (I have a lot of debt relative to the credit lines), it does seem worth it and is consistent with my goal of decreasing expenses and improving cash flow in order to pay off as much debt as possible in the next 36 months. This includes rolling some closing costs into the mortgage. Of course, I will have to see the final deal but the initial numbers looked reasonable.
Assuming everything continues as expected, I would only be saving from $60-70 per month, but multiplied across several houses, the savings will add up and allow me to use the money for paying off higher interest rate debt. I will also be able to eliminate PMI on the one property on which I only put 10% down.
Decreasing the Term
The best part of the deal, though, is that I will not only save a bit of money each month, but I will be saving anywhere from 10 months to 2 years and 11 months on the mortgages since they will all be 20 year loans with a fixed interest rate. This will add up to some additional savings on the back end.
When I add it all up, it looks like I will end up saving $132,000 over the next 20 years which works out to be a decent return on about $10,000 in total closing costs. I will report actual numbers after the closing.
This is just one of the steps that will help me pay off a lot of debt over the next 36 months and free up some cash flow that can be put to better use besides lining the pockets of the bankers.
Here are the carnivals that had articles from my blogs in them this past week:
I read this article earlier today stating that in 98 of 100 of the top housing markets, buying is cheaper than renting. I remember when buying was incredibly expensive in many cities compared to the median income of the area. That signaled the top of the market. It wasn’t long before the bottom fell out and there was no demand. Now I have to wonder if the bottom of the real estate market is near. Of course it could be another year or two before there is an increase in housing prices, but if it doesn’t make financial sense to rent, then that says something.
If nothing else, it means that investing in real estate makes sense for investors who have the money and can turn around and charge rent to those who are unable to get mortgages. Mortgage rates are near record lows which is another good reason to purchase a home.
I remember growing up listening to my dad mention the mortgage rate of 12% that he was paying on the house where we lived. From there I remember interest rates increasing into the late 70’s when you could get up to 8% on a passbook savings account. As a result, I considered myself quite fortunate to get a mortgage for less than double digits when it came time to purchase my first house.
I also remember those days as being before the internet. In order to see the impact of interest rate changes, you had to have a book and look at tables unless you were a financial professional with the nifty financial calculator. But now, there are awesome mortgage calculators online that can be used to run all sorts of down payment and interest rate scenarios instantly.
With interest rates so low, this could be considered a once in a lifetime opportunity to purchase some real estate. I wouldn’t worry about trying to time the market since the fact that renting is more expensive would suggest to me that renters will start looking at ways to get away from that option. There is still a substantial portion of the population that desires to own a home.
In fact, I have a long term renter (about 3 years) that informed me earlier this month he had purchased a home and would be moving out. Of course, I am not excited about losing a tenant and having to rent the place again. But I am happy for him that he can finally afford to get his own place. Besides, we always have someone looking to rent from us and have a few prospects already. I bet that it can be rented without having to run an advertisement in the local paper.
One of the great things about the internet and Facebook is that my wife is able to keep tabs on lots of friends or acquaintances that might be looking for a place to stay. We are often contacted about openings that we might have. Unfortunately, we are not in a position to purchase ourselves and take advantage of the low interest rates.
Instead, we are working at paying off debt and are hoping that while the housing market is bottoming out, it takes several years to really pick up steam so we can buy low and eventually sell high.
- Existing home sales signal rebound that is real (zerohedge.com)
- Mortgage Rates are Near a 60-Year Low (brendanfrey.wordpress.com)