Author Topic: Refinance to 5/1 ARM on duplex that is primary residence+rental?  (Read 3106 times)

Radagast

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Hey all, relatively new here, but I have read every MMM post and many forum posts as well. I have a question I haven't been able to find an easy answer to. I own a house with the following:
a) $210,000 purchase price, 20% down, 4.875% for 30 years
b) Front half could rent for $950/mo but I am living there, back for $750/mo, for total of $1700/mo.
c) over 2-4 years I hope to fix it up and add bedrooms and bathrooms to unfinished basements, yielding 1400+1000=$2400/mo (if fully rented) on $240,000 total investment including materials and my own labor at apprentice wages.
d) I have had the house for about 10 months.

Having a paid off mortgage would allow financial security, because I would actually get paid to live in the house after expenses. Or, I could leave it completely and get about $1500 per month after expenses. However, I would have to go about 4-5 years with little cash to get it paid off.

I am thinking about refinancing to a 5/1 ARM at approx 3.0-3.5% interest. I calculate that doing this and paying it off ASAP will yield equivalent to 6-8% annually depending on what rate and payoff assumptions I make. The "a" in "ARM" stands for "intriguing". So here are the options as I see them:
1. Keep 30yr 4.875% and pay off over 30 years or a little faster, invest elsewhere hoping to exceed 5%.
2. Refinance to 5/1 ARM at ~3.3% and pay off ASAP, with a few years of scant liquidity accepted (unless I see something that makes more than the ~7%resulting from refi and paying mortgage ASAP).
3. Refinance to 5/1 ARM and invest elsewhere, hope that my investments will beat 3.5% over the first 5 years, and then stay ahead of interest rates.

Any opinions, alternatives, or refinements? I would love to hear anyone's thoughts! I am leaning towards 2, because I don't see reliable returns greater than 1 or 3. Unless it is more real estate, which I might not be able to deal with as I fix my current place up in addition to a full time job.

waltworks

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Re: Refinance to 5/1 ARM on duplex that is primary residence+rental?
« Reply #1 on: July 25, 2014, 11:56:32 AM »
What will the refi cost you? If you are really going to pay it off that fast, saving a point or two on the interest rate isn't going to make much difference anyway.

If I were you, I'd *first* figure out whether you want to commit to paying off the property ASAP. If the answer is yes, then the second question is how long it'll take for the ARM rate reduction to pay for the refi costs. Then you can run the numbers and see whether it's worthwhile.

Honestly, it probably doesn't make a ton of sense.

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Radagast

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Re: Refinance to 5/1 ARM on duplex that is primary residence+rental?
« Reply #2 on: July 25, 2014, 02:06:03 PM »
Thanks for the reply.
Paying an ARM in five years vs. paying off fixed loan in 5 years gives this:

Will pay for $3,000 closing costs in ~16 months.
Will save an additional ~$8,500 in interest by the end of 5 years.

I think the $3,000 closing costs and 3.5% rate will be a little conservative, but I need to talk to some lenders. My personal financial stars for this will align in about 2 weeks, if it happens. Hopefully the interest rate stars will also be in alignment.

waltworks

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Re: Refinance to 5/1 ARM on duplex that is primary residence+rental?
« Reply #3 on: July 25, 2014, 02:23:02 PM »
So the question, then, is whether $5500 is a reasonable amount to compensate for the risk that you won't/can't finish paying off the loan. For $1100/year I'd probably just keep the fixed rate so I could jump on other opportunities if needed and/or delay the payoff schedule but that's just me.

-W

Radagast

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Re: Refinance to 5/1 ARM on duplex that is primary residence+rental?
« Reply #4 on: July 25, 2014, 04:00:22 PM »
I already subtracted it out. $11,500-$3,000=$8,500.

Not like it's earth shattering either way I guess, but it's $8,500 wouldn't otherwise have without effort in another area. I would not pay off in 5 years at 4.875 percent, I would either refinance to a lower rate and shorter term, or hold the 30 year 4.875%mortgage and look into other opportunities.

escolegrove

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Re: Refinance to 5/1 ARM on duplex that is primary residence+rental?
« Reply #5 on: July 26, 2014, 09:36:29 PM »
What are you goals??
How many houses do you have?
How comfortable are you with debt?

I personally LOVE leverage it is free money. If you have to refinance at some point down the road and it is a rental. You will have a higher investment rate. We own 5 houses. My goal is FIRE through REI. Since real estate and mortgage rates are still "on sale" we are personally trying to buying as many houses as we can now. We bought our first investment as a 15 yearn and it hurt us on our ability to buy future houses due to our debt/income ratio. Everything is on a 30 year rate. When we have maxed out our number of mortgages or the market no longer makes sense to invest. We will evaluate what the smartest move to either pay off the houses or reinvest somewhere else.

If you are comfortable in real estate I would recommend reinvesting the extra cash flow after expenses in more houses. Than you can pay it off.


Radagast

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Re: Refinance to 5/1 ARM on duplex that is primary residence+rental?
« Reply #6 on: July 28, 2014, 11:03:07 PM »
Thanks for chiming in! I'm still contemplating.
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What are you goals??
At this point hard to say. I recently got married, and things are up in the air. Move in 2 years, or 5? Stay here? Buy more investment properties? Buy a nice SFR and call it good? Help wife start a business? Kids? Most of the above?
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How many houses do you have?
First one! I am happy my first house is an investment and not a money sink!
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How comfortable are you with debt?
I personally have no problems with it, as long as it has positive cash flow.

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If you are comfortable in real estate I would recommend reinvesting the extra cash flow after expenses in more houses. Than you can pay it off.
Sounds good. My biggest to things are
1) I feel like at 4.875% I have the highest mortgage of anyone (I know - it's not true - but probably above average at this point!)
2) It will be a year or two before I have the means for a second property, real estate might be less rosy then, and harder to beat the 7% I could potentially earn over 5 years through a refi.

escolegrove

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Re: Refinance to 5/1 ARM on duplex that is primary residence+rental?
« Reply #7 on: July 28, 2014, 11:52:52 PM »
Our current house is 4.5%. It is a risk you will have to take to either refinance or buy another house. We personally did a 15 year mortgage for our first house. It was honestly our biggest mistake. It increased our debt to income ratio higher making it hard to qualify for additional mortgages. We are in the acquisition stage. I think things will continue to be okay for a little longer and am therefore buying as much as possible.