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.