(Numbers rounded and situation simplified to keep things simple.)
Imagine a property with a loan balance of 280k. 4.5% 30-year fixed, about 27 years left. P&I of $1475/mo.
Has lots of equity, so can be refi'd, but terms are much worse (due to the first parenthetical sentence, assume this is the best possible deal): 5.5%, 25-year amortization with 10 year balloon. New P&I would be $2,285/month (mostly due to the higher loan balance, partly due to 25-year amortization, instead of 30).
Can cash out 93k. Would have to pay 3k in costs.
That 93k can buy 910/mo. net cash flow after expenses, so paying for the higher P&I plus 100/mo. extra cash.
I have no concerns about paying the mortgage when it balloons in 10 years, but is it worth giving up a long term fixed rate loan in order to own a few more properties, and slightly increase my cash flow?
(The higher interest rate doesn't matter, as that's paid for by the investments generated with the cashed out equity.)
Basically trading off long term fixed loan and that awesome inflation hedge for extra houses (and appreciation potential) and a little cash flow.
Would appreciate any thoughts on the scenario.
It amazes me that you can get a 30-year low-rate fixed mortgage in the US.
The fact that you end up covering all costs and having an extra $100 a month in cash flow plus benefiting from additional appreciation (if that is a factor) seems, on the surface, to favour buying the second place.
That said, I would not do anything without filling in detailed analyzer spreadsheets for each scenario.
I would do this for scenario A status quo and project out ten years to point of balloon payment.
Then do the spreadsheet for scenario B using the new mortgage amount & amortization plus costs for the existing property, and the same analyzer spreadsheet for the next property and project out ten years or your window of ownership if it is less.
I would then look at the future and what matches your goals best. More property is better if you are motivated by it and believe in the appreciation potential in whatever window of time you are considering. Keeping what you have is easier and more secure.
Losing your long-term low-rate mortgage with and having a balloon payment means that in ten years you will pay it out or sell. Correct?
Are you planning to sell and, if not, what are your plans to minimize taxable income given that it will be paid off?
Would you refinance again?
If you are planning to sell both properties you will be ahead through the cash flow advantage and potentially appreciation.