Re-finance for cash flow or less years

[tchandy]

I have a property and contacted my lender who gave me two good offers to refinance a rental property I own. It's a condo in Hawaii.

The current 30 year loan that I refinanced 2-3 years ago has a 5.5% interest. My monthly payment is $1043.97.

These are the two options and I'm trying to think what's the best decision.

• If I refinance it for 30 years for 4.875% the monthly payments would be $829.80. Cashflow would be $214.97 a month. The loan would be paid off in 2041 when I'm in my mid 60s.

• If I refinance it for 15 years for 4.125% the monthly payments would be $1258.62. Cashflow would be negative $214.65 a month. I would pay out of pocket for the additional expense but the payments would end when I'm 53 and then it's all cash flow from that point on. The current rent is $1425 a month. Plus one of my kids would be in college if he went and the other would be a freshman or junior in high school.

What would you do?

 

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[Jeremy]

Cashflow and the 30 year loan.

1. Cashflow is everything in business. In bad economic times, it's usually a short-term cash crunch that bankrupts you, even if you have good medium-long term prospects. In bad economic times, loans are tough to get, so the small additional equity you built on a 15 vs. 30 year loan won't make a difference if lenders aren't lending.

2. Taxes. As you paydown your loan on commercial rental property, you're going to be paying more back in principal. You get to this point faster in a 15 year loan. This causes phantom income, as you cannot deduct principle repayments as a business expense, but have to pay them regardless, further crunching your after-tax cashflow (which is already negative).

While you'll save a less than 1 percent on the interest rate with the 15, you are giving up the flexibility to pay over 30 years vs. 15 (fewer options for weathering bad economic times), there are tax issues you'll face earlier, and you'll be negative cashflow from the beginning.

 

[BeachBoy]

her ein Canada I would've said 15 years without question.

but in the US with different tax rules (deductible interest, etc), maybe it's different

 

[hakrjak]

If you don't need the money, then take the 15 years. Most of of who invest in real estate do it to make money though, and have a positive looking balance sheet if we end up needing to borrow more money down the line (Keep future mortgages in mind, in case you want to buy a primary residence some day, or a new one)... So the cashflow is more attractive to me for that reason.

- Hakrjak

 

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[Runum]

Finance for 30 to preserve cashflow. Pay extra when you can so that it is paid off sooner. Best of both worlds.

 

[Russ H]

Refi for 30 fixed.

Get the cashflow.

If you don't need the cashflow, put it towards the principle.

You'll be shocked at how much faster the loan is paid off: TEN years early, 2031, if you pay $200 extra each month.

PLUS-- you now have wiggle room if the market shifts and your rents go down.

-Russ H.

PS I'd also look into changing the loan (when you refi) into paying bi-weekly (ie, 26 times a year, half the payment). Again, you'll be shocked to see how much faster the loan is paid off, even though you're only doing 1 extra payment per year (13 vs 12).

 

[unicon]

You must understand what profitability really is!

Flexibility is equal to profitability.

A 15 year loan decreases flexibility, you have the same ability to pay down the 30 year loan at any time.

Guard your flexibility.

It should be noted that interest rate is ineffectual on smaller amounts and less meaningful on an already low rate. The priority is to buy time and positive cash flow regardless of interest rate. Leverage is a good thing when controled. Leverage is a bad thing when out of control - negative cash flow.

Leverage is like a snake outside your house playing in the field, once you let it in your house it opens its mouth wide and consumes the whole thing. Positive cash keeps it in the field.

 

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[tchandy]

Great comments from all. Speed +

Refinancing for 30 years makes sense. The hard part is explaining it to my wife since we refinanced it 2-3 years ago and owned the place since 2003. Shouldn't be too hard though. She feels refinancing we're just extending the years we owe on the mortgage.

 

[tchandy]

Refi for 30 fixed.

PS I'd also look into changing the loan (when you refi) into paying bi-weekly (ie, 26 times a year, half the payment). Again, you'll be shocked to see how much faster the loan is paid off, even though you're only doing 1 extra payment per year (13 vs 12).

Russ,
I did have a bi-weekly pament before on a different home but I canceled it. The mortgage company charged me a little extra each payment for the bi-weekly payments. I figured I could send a check for one month's rent and still do the same thing the mortgage company did and save me a few bucks.

Tom

 

[garyfritz]

The hard part is explaining it to my wife since we refinanced it 2-3 years ago and owned the place since 2003. Shouldn't be too hard though. She feels refinancing we're just extending the years we owe on the mortgage.

Going by your numbers, the loan value was a little over $185k. So say you refi it now at 4.875%. That means you're paying about $225-250 principal per month. So refi, drop $5-6k on it, and you've paid 2 years worth of principal. Now it's like you were already 2 years into the loan. Of course that eats up $5-6k of your ready cash...

 

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[tchandy]

That's pretty good number crunching. We paid a little less than $185,000.