Should I Refinance? Main House Going To Become My Rental

[freeedom]

My main house is going to become my rental.

I currently pay $1300 a month and have a 30 year at 4.25% interest. With interest rates plummeting I can get a 15 year at about 2.85-3%. After doing the calculation this would raise my mortgage to about $1550.

Here's the interesting part, I am planning on renting this house out in about 6 months. I will be moving for a work opportunity, and will be making 40% more money in a lower cost of living area.

I will be able to rent the house out for $1500. Is this worth it? I'm aware I will not be cash flow positive, but I will be building equity MUCH faster.

[frugaliknowit]

How far away are you planning on moving?  Being a long distance landlord with a new job where you are building credibility can be stressful (locally is tough enough).  We need to see your cashflows which include your income and expenses including the projected rent and expenses from the property (with vacancy allowance).  We need to know your cash reserves.

In general, negative cashflow is a no-no.  What would a sale look like?

[neo von retorch]

You might get better answers in the Real Estate / Landlord forum: http://forum.mrmoneymustache.com/real-estate-and-landlording/

There's probably some math somewhere to answer the refinance question. I'd try to run some numbers but I don't know if the $1300/1550 numbers include tax/insurance or just principal/interest.

How much is your current mortgage?
What is the remaining term of the loan?
Do you have to increase the loan by any amount to refinance?
What are the closing costs?

Assuming a $263,500 mortgage @ 30 years (you just got the mortgage this month) @ 4.25% you're paying over $900 in interest right now. But that would skyrocket to an $1800 payment @ 15 years @ 2.85% so I'm going to have to assume that your numbers include (escrow) tax / insurance of some amount. Maybe PMI?

When I refinanced from 30 year to 15 year it was from 6.375% to 5% and it cost me roughly $1700-2000 in closing costs, which I made up in less than a year in interest savings. What I don't factor into this math is how your decreased payments would affect OTHER debt payments (if any) or money you could invest elsewhere.

[freeedom]

How far away are you planning on moving?  Being a long distance landlord with a new job where you are building credibility can be stressful (locally is tough enough).  We need to see your cashflows which include your income and expenses including the projected rent and expenses from the property (with vacancy allowance).  We need to know your cash reserves.

In general, negative cashflow is a no-no.  What would a sale look like?

I'll be moving far. 1/2 way across the country. Selling is a no go, because with realtor fees I would have to bring cash to the sales table. I figure renting it and having a property management company (found one for $65 a month) would be the best option.

I have cash reserves. I will be getting a large cash bonus to move.

Cash: 10K + (10K bonus when I move)
Current Salary: 65k (high tax area)
New Salary: 90k (no state income tax)
Cost of living adjustment: -20%, the new area is much cheaper

Similar houses are renting for $1500/Mo in this area.
House: Purchased for 185k
Worth: 170k - My area has been hit pretty bad economically
Owe: 155K

Current Mortgage: $1300/mo
Estimated Rental Income: $1500/mo
Management Fee: $65/mo

Rent after move: 1000/Mo (will be splitting this with my SO after she gets a job)

[clarkfan1979]

Congrats on the new job. Based on your situation, I wouldn't do the re-fi. Having the extra monthly cushion is going to help venturing into the unknown. If you have been a landlord for 10 years and know how things are going to go, then a re-fi might make more sense. Give yourself a chance to make a few mistakes and still live to tell the story. 

I bought my first house 7 years ago at 27 along with a lot of my friends. Most of my friends have recently sold their first house, made very little money and upgraded to a larger house with their larger incomes with very little equity.

I feel like a lot of my friends would be a lot less stressed out if they just kept their first house. If they decided to stay in it or rent it out they would have way more equity.

As long as the house is going to be cash flow positive, I would try to hang onto it as long as you can. Being a landlord gets easier over time. Like anything else, better performance comes with more practice and experience over time.   


 

[freeedom]

Congrats on the new job. Based on your situation, I wouldn't do the re-fi. Having the extra monthly cushion is going to help venturing into the unknown. If you have been a landlord for 10 years and know how things are going to go, then a re-fi might make more sense. Give yourself a chance to make a few mistakes and still live to tell the story. 

I bought my first house 7 years ago at 27 along with a lot of my friends. Most of my friends have recently sold their first house, made very little money and upgraded to a larger house with their larger incomes with very little equity.

I feel like a lot of my friends would be a lot less stressed out if they just kept their first house. If they decided to stay in it or rent it out they would have way more equity.

As long as the house is going to be cash flow positive, I would try to hang onto it as long as you can. Being a landlord gets easier over time. Like anything else, better performance comes with more practice and experience over time.

This is sounds advice. Maybe I will revisit this after I get a year under my belt. Hopefully rates stay low until then. I definitely do not want to be paying this loan for 25 more years.

The reason I was considering the refinance is I will be able to cover the mortgage and rent completely with 1 paycheck, and no tenant. I'm fairly mustachian and don't spend much money so it really wouldn't be hard to swing, but having a cushion while building some experience as a landlord sounds good. I'm going with that. Thank you.

[neo von retorch]

For what it's worth, I ran calculations with some new assumptions:
$185,000 loan, 30 years, 4.25%, $383.33 escrow (taxes, insurance, PMI)
$1293.42 payment
At $155,000 left in the loan, probably about $550 - 600 in interest each month currently. Maybe $335 of your payment goes to principal.

$155,000 loan, 15 years, 3%, $383.33 escrow (not sure if PMI would change with a smaller loan but also lower home appraisal)
$1453.73 payment
About $375-400 in interest each month. About $695 of your payment goes to principal.

So refinancing would save you $200 / month in interest. Depending on closing costs, you'd save that back pretty quickly. Not sure why your bank would show $1550 in payments. Personally I'd consider it, because now your rental will be $150 less "cash flow" positive, but you'd be putting a lot more into principal (after escrow and interest) than before.