Does this refinance make sense?

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Topic Author
IADFlyer
Posts: 72
Joined: Sun Feb 26, 2012 8:54 pm

Does this refinance make sense?

Post by IADFlyer » Thu Dec 05, 2019 12:42 am

Hello Folks:

Looking for a sanity check on refinancing. We are considering consolidating our primary residence mortgage and a HELOC we used as a down payment on a rental. In addition, we want to replace the windows and renovate a bath in the primary and wonder if wrapping them all together in a refinance would make sense. My thought was to refinance at $290,000 and pay off the HELOC and use ~$27,000 for the home improvements. Since we have about 9 years left on our current mortgage, I don’t want to extend the term of a refinance too much. In exchange for paying a slightly higher rate on the current primary residence debt, this seems like an opportunity to lock in a lower rate for the outstanding HELOC debt and cheap way to finance the home improvement.

What I’ve found so far:

Option 1: 10 year at 3% or 3.125% which produces a monthly payment of around $2800. (preferred for duration)

Option 2: 15 year at 3.25% for about $2,040 per month (easier on the wallet and can easily keep paying our current amount to expedite payoff)

Option 3: Any ideas that do NOT include paying cash for the HELOC and the home improvement???

*******************************************************
Primary Residence Details:
Market Value: $600K
Original Balance: $373,500
Current Balance: $229,500
Term: 15 years @ 2.75%
Payment: $2,535
Loan Start: August 2013
Loan Payoff: July 2028

Current HELOC Details:
Line Amount: $125,000
Current Balance: $33,400
Term: 10 year draw (interest only), 20 year repayment
Current Rate: 5% (prime +.25%)
Interest Only Payment: $135

In case it helps, the rental details:
Rental Value: $385,000
Rental Mortgage Balance: $246,000

Goal33
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Joined: Sun Apr 12, 2015 12:30 pm

Re: Does this refinance make sense?

Post by Goal33 » Thu Dec 05, 2019 1:06 am

What’s the rental situation? Maybe you should take more cash out while you’re at it and just pay off the rental?
A man with one watch always knows what time it is; a man with two watches is never sure.

fyre4ce
Posts: 704
Joined: Sun Aug 06, 2017 11:29 am

Re: Does this refinance make sense?

Post by fyre4ce » Thu Dec 05, 2019 2:00 am

How much are you currently paying on the HELOC? How much cash flow do you have available each month to put toward the two loans and remodeling?

Topic Author
IADFlyer
Posts: 72
Joined: Sun Feb 26, 2012 8:54 pm

Re: Does this refinance make sense?

Post by IADFlyer » Thu Dec 05, 2019 2:05 am

Goal33 wrote:
Thu Dec 05, 2019 1:06 am
What’s the rental situation? Maybe you should take more cash out while you’re at it and just pay off the rental?
No significant situation other than the mortgage rate on the rental is fairly low.

Rental Market Value: $385,000
Original Mortgage balance: $260,000
Rental Mortgage Balance: $246,000
Term: 30 years @ 3.875 started in November 2016
Monthly Rent: $1800

Based on your comment, I ran a 15 year refinance scenario of $500,000 at 3.25% which equals approximately $3500. That’s probably manageable when combining my current payment with the rental income. In fact, combining the two equals $800 more that could be used to pay off quicker.

A couple of other thoughts:

-Such a large refinance would result in a high loan to value, therefore possibly making it undoable, right?

-I wonder if there are any tax disadvantages since the rental would have far less expenses to offset rental income.

Topic Author
IADFlyer
Posts: 72
Joined: Sun Feb 26, 2012 8:54 pm

Re: Does this refinance make sense?

Post by IADFlyer » Thu Dec 05, 2019 2:12 am

fyre4ce wrote:
Thu Dec 05, 2019 2:00 am
How much are you currently paying on the HELOC?
Regularly pay the interest only payment of <$150 and throw a few thousand at it a few times a year.
fyre4ce wrote:
Thu Dec 05, 2019 2:00 am
How much cash flow do you have available each month to put toward the two loans and remodeling?
Sorry, I don’t quite understand this question.

fyre4ce
Posts: 704
Joined: Sun Aug 06, 2017 11:29 am

Re: Does this refinance make sense?

Post by fyre4ce » Thu Dec 05, 2019 2:18 am

IADFlyer wrote:
Thu Dec 05, 2019 2:12 am
fyre4ce wrote:
Thu Dec 05, 2019 2:00 am
How much are you currently paying on the HELOC?
Regularly pay the interest only payment of <$150 and throw a few thousand at it a few times a year.
fyre4ce wrote:
Thu Dec 05, 2019 2:00 am
How much cash flow do you have available each month to put toward the two loans and remodeling?
Sorry, I don’t quite understand this question.
Thanks. My second question is asking how much cash each month you can (or are willing to) pay toward the home mortgage, HELOC, and remodeling, or whatever loans you decide to replace them with. I was going to assume a fixed cash flow (say, $3,000 per month) and then run numbers for different options to see what looks best. It sounds like you are somewhat cash flow constrained based on your original post.

1130Super
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Location: Minnesota

Re: Does this refinance make sense?

Post by 1130Super » Thu Dec 05, 2019 2:32 am

Goal33 wrote:
Thu Dec 05, 2019 1:06 am
What’s the rental situation? Maybe you should take more cash out while you’re at it and just pay off the rental?

Do you itemize or take standard deduction, rental interest is deductible against rental income even if you take standard deduction,

fyre4ce
Posts: 704
Joined: Sun Aug 06, 2017 11:29 am

Re: Does this refinance make sense?

Post by fyre4ce » Thu Dec 05, 2019 2:41 am

1130Super wrote:
Thu Dec 05, 2019 2:32 am
Goal33 wrote:
Thu Dec 05, 2019 1:06 am
What’s the rental situation? Maybe you should take more cash out while you’re at it and just pay off the rental?

Do you itemize or take standard deduction, rental interest is deductible against rental income even if you take standard deduction,
I assumed the HELOC would not be deductible because it's against the primary home, not the rental property, regardless of whether the money went to the rental down payment. Am I wrong about this assumption?

1130Super
Posts: 504
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Location: Minnesota

Re: Does this refinance make sense?

Post by 1130Super » Thu Dec 05, 2019 9:59 am

IADFlyer wrote:
Thu Dec 05, 2019 2:05 am
Goal33 wrote:
Thu Dec 05, 2019 1:06 am
What’s the rental situation? Maybe you should take more cash out while you’re at it and just pay off the rental?
No significant situation other than the mortgage rate on the rental is fairly low.

Rental Market Value: $385,000
Original Mortgage balance: $260,000
Rental Mortgage Balance: $246,000
Term: 30 years @ 3.875 started in November 2016
Monthly Rent: $1800

Based on your comment, I ran a 15 year refinance scenario of $500,000 at 3.25% which equals approximately $3500. That’s probably manageable when combining my current payment with the rental income. In fact, combining the two equals $800 more that could be used to pay off quicker.

A couple of other thoughts:

-Such a large refinance would result in a high loan to value, therefore possibly making it undoable, right?

-I wonder if there are any tax disadvantages since the rental would have far less expenses to offset rental income.
Do not even consider paying off the rental for these reasons #1 if anything he would want to cash out refi his Rental NOT his primary (If he could find a bank willing to lend 80% LTV) #2 rental interest is deductible (even if they take standard deduction) #3 on the off chance that they get sued it’s a lot easier to lose the rental property if it’s free and clear or has a lot of equity unlike a primary home is much harder to lose in bankruptcy, lawsuits etc

I’m wondering why you have put yourself in this situation multiple times
2013 get 15 year loan
2016 get HELOC for down payment on rental
2019 cashflow is tight, hasn’t been paying down HELOC quickly BUT WANTS TAKE OUT MORE MONEY

At this point I think a 30 year cash out refi should be on the table to consolidate your remodel, HELOC, and current primary mortgage. Just pay extra as much as you like. Otherwise your one bad tenet away to needing another HELOC after you refinance

Lastly how on earth is are you only getting $1800 rent on a $385,000 home.

Topic Author
IADFlyer
Posts: 72
Joined: Sun Feb 26, 2012 8:54 pm

Re: Does this refinance make sense?

Post by IADFlyer » Thu Dec 05, 2019 11:17 am

fyre4ce wrote:
Thu Dec 05, 2019 2:00 am

Thanks. My second question is asking how much cash each month you can (or are willing to) pay toward the home mortgage, HELOC, and remodeling, or whatever loans you decide to replace them with. I was going to assume a fixed cash flow (say, $3,000 per month) and then run numbers for different options to see what looks best. It sounds like you are somewhat cash flow constrained based on your original post.
Thanks for the clarification. Your assumptions are good. I would rather not have too much of a monthly increase. Could probably live with $3000 or less.

Topic Author
IADFlyer
Posts: 72
Joined: Sun Feb 26, 2012 8:54 pm

Re: Does this refinance make sense?

Post by IADFlyer » Thu Dec 05, 2019 11:23 am

1130Super wrote:
Thu Dec 05, 2019 2:32 am
Goal33 wrote:
Thu Dec 05, 2019 1:06 am
What’s the rental situation? Maybe you should take more cash out while you’re at it and just pay off the rental?

Do you itemize or take standard deduction, rental interest is deductible against rental income even if you take standard deduction,
Prior to last year, we itemized. Last year was the first time we used the standard deduction.

If the rental was paid off, my concern was that I would now have little to no rental expenses (interest) to use against the rental income.

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unclescrooge
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Re: Does this refinance make sense?

Post by unclescrooge » Thu Dec 05, 2019 11:26 am

Why do you need to do anything?

Why do you need to consolidate your bills? Is setting up automated monthly payments from your checking account to much work it too hard to figure out?

If anything, refinance your HELOC using third federal, to get a rate of prime minus 0.5%. You seem to have a large amount of credit available. Why can't you just tap that for remodeling?

Refinancing your primary loan will increase your interest rate on $229k, while lowering it on $33k. This is not the optimal solution.

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Meg77
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Re: Does this refinance make sense?

Post by Meg77 » Thu Dec 05, 2019 11:34 am

I wouldn't refinance your primary home. Your rate is super low and fixed, and the closing costs (and hassle) to refinance are prohibitive. Sure a quarter point increase isn't a big deal, but there is no reason to do it!

You already have a heloc in place for things like buying a rental or doing a major home improvement project. A $60K balance on your HELOC at 5% costs you $3000 in interest a year if you don't reduce the balance at all. At 3% you'd pay $1800 a year. So the refi would only save you $1200 a year in interest on the heloc/improvements - while costing you an additional $573 (in year one) on the existing permeant mortgage balance. So you'd go through all this just to save a net $627 in year one - and less every year afterward as the balance decreases.

Just use the heloc for your improvements and then tackle that balance with extra cash. The other downside of rolling it all together is you'll take 10 years to pay off the improvements because mentally now it's just part of a mortgage - a "good" debt at only 3% and on a relatively short amort! But in reality you can and would probably otherwise pay off the heloc faster than 10 years even after drawing it up for the improvements. Plus you'll have the added benefit of keeping the line open and available for future needs.
"An investment in knowledge pays the best interest." - Benjamin Franklin

fyre4ce
Posts: 704
Joined: Sun Aug 06, 2017 11:29 am

Re: Does this refinance make sense?

Post by fyre4ce » Thu Dec 05, 2019 1:07 pm

Here's my take, although you may not like it. I don't think borrowing money for the renovation is a good idea. This is more of a consumption expense than a necessity, and I don't see why you should be in a big hurry to get it done before you can afford to pay cash. Renovations do increase property value somewhat, but almost never equal to the cost of the renovation.

I also don't like that HELOC; 5% is pretty high and will increase further if/when rates rise. A guaranteed 5% after-tax return is really good. (My understanding is that HELOC interest is not deductible in this circumstance but am happy to be corrected).

I know you said you only want to cash-flow $3k/month, but if you can raise that to $4k/mo, and put the rest after paying the mortgage (~$1500/mo) toward the HELOC, it will be gone in 2 years. Then, put the $1500/mo you were paying toward the HELOC into a savings account, and you'll be able to pay for the renovation in cash in another 18 months. So in 3.5 years, you'll have your renovation paid off, no HELOC, and still have your awesome 2.75% rate on your mortgage.

Topic Author
IADFlyer
Posts: 72
Joined: Sun Feb 26, 2012 8:54 pm

Re: Does this refinance make sense?

Post by IADFlyer » Thu Dec 05, 2019 2:13 pm

1130Super wrote:
Thu Dec 05, 2019 9:59 am
Do not even consider paying off the rental for these reasons #1 if anything he would want to cash out refi his Rental NOT his primary (If he could find a bank willing to lend 80% LTV) #2 rental interest is deductible (even if they take standard deduction) #3 on the off chance that they get sued it’s a lot easier to lose the rental property if it’s free and clear or has a lot of equity unlike a primary home is much harder to lose in bankruptcy, lawsuits etc
1130Super wrote:
Thu Dec 05, 2019 9:59 am
I’m wondering why you have put yourself in this situation multiple times
2013 get 15 year loan
2016 get HELOC for down payment on rental
2019 cashflow is tight, hasn’t been paying down HELOC quickly BUT WANTS TAKE OUT MORE MONEY
The 2013 mortgage was a refinance of the purchase loan at 4.75% 30 year from 2010. The intention of the 2013 refinance was to pay about the same amount monthly but reduce term and rate.

The 2016 HELOC was used in order to not fund the rental out of pocket. Maybe I should have elaborated more on the pay down. We pay the monthly minimum, but send in large sums several times a year as the rental produces it. It's been reduced by about half so far. So, it's not that we struggle to pay it, we just pay it as it cash comes available.

I understand why you would see a concern with cashflow. However, the mortgage on the primary (15 year) represents a little more than 10% of our monthly non-rental income. So, any cashflow issues are self-impose and I acknowledge that might not be the smartest idea.
[/quote]
1130Super wrote:
Thu Dec 05, 2019 9:59 am
At this point I think a 30 year cash out refi should be on the table to consolidate your remodel, HELOC, and current primary mortgage. Just pay extra as much as you like. Otherwise your one bad tenet away to needing another HELOC after you refinance

Lastly how on earth is are you only getting $1800 rent on a $385,000 home.
The rental is a sub-optimal performer (low rent) because a family member lives there, but it has appreciated $75K, since 2016. There are other significant, less tangible benefits that make it worthwhile at the moment (free childcare, low maintenance, proximity to the family). So, I am less worried about the tenet being an issue, but would love to find a way to eliminate the debt on primary and rental as soon as possible. We are the type that value the piece of mind of eliminating mortgage debt. That is what sparked my interest in the refinance to consolidate especially the primary, rental and HELOC. Icing on the cake would be to include the windows and bathroom, but also understand why there inclusion may not make sense.

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Brianmcg321
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Re: Does this refinance make sense?

Post by Brianmcg321 » Thu Dec 05, 2019 2:23 pm

1130Super wrote:
Thu Dec 05, 2019 9:59 am
IADFlyer wrote:
Thu Dec 05, 2019 2:05 am
Goal33 wrote:
Thu Dec 05, 2019 1:06 am
What’s the rental situation? Maybe you should take more cash out while you’re at it and just pay off the rental?
No significant situation other than the mortgage rate on the rental is fairly low.

Rental Market Value: $385,000
Original Mortgage balance: $260,000
Rental Mortgage Balance: $246,000
Term: 30 years @ 3.875 started in November 2016
Monthly Rent: $1800

Based on your comment, I ran a 15 year refinance scenario of $500,000 at 3.25% which equals approximately $3500. That’s probably manageable when combining my current payment with the rental income. In fact, combining the two equals $800 more that could be used to pay off quicker.

A couple of other thoughts:

-Such a large refinance would result in a high loan to value, therefore possibly making it undoable, right?

-I wonder if there are any tax disadvantages since the rental would have far less expenses to offset rental income.
Do not even consider paying off the rental for these reasons #1 if anything he would want to cash out refi his Rental NOT his primary (If he could find a bank willing to lend 80% LTV) #2 rental interest is deductible (even if they take standard deduction) #3 on the off chance that they get sued it’s a lot easier to lose the rental property if it’s free and clear or has a lot of equity unlike a primary home is much harder to lose in bankruptcy, lawsuits etc

I’m wondering why you have put yourself in this situation multiple times
2013 get 15 year loan
2016 get HELOC for down payment on rental
2019 cashflow is tight, hasn’t been paying down HELOC quickly BUT WANTS TAKE OUT MORE MONEY

At this point I think a 30 year cash out refi should be on the table to consolidate your remodel, HELOC, and current primary mortgage. Just pay extra as much as you like. Otherwise your one bad tenet away to needing another HELOC after you refinance

Lastly how on earth is are you only getting $1800 rent on a $385,000 home.

Yes.

This is a mess that just keeps getting bigger.

OP, you’re circling the drain and don’t even realize it.
Rules to investing: | 1. Don't lose money. | 2. Don't forget rule number 1.

1130Super
Posts: 504
Joined: Thu Nov 07, 2019 8:59 am
Location: Minnesota

Re: Does this refinance make sense?

Post by 1130Super » Thu Dec 05, 2019 6:08 pm

fyre4ce wrote:
Thu Dec 05, 2019 1:07 pm
Here's my take, although you may not like it. I don't think borrowing money for the renovation is a good idea. This is more of a consumption expense than a necessity, and I don't see why you should be in a big hurry to get it done before you can afford to pay cash. Renovations do increase property value somewhat, but almost never equal to the cost of the renovation.

I also don't like that HELOC; 5% is pretty high and will increase further if/when rates rise. A guaranteed 5% after-tax return is really good. (My understanding is that HELOC interest is not deductible in this circumstance but am happy to be corrected).

I know you said you only want to cash-flow $3k/month, but if you can raise that to $4k/mo, and put the rest after paying the mortgage (~$1500/mo) toward the HELOC, it will be gone in 2 years. Then, put the $1500/mo you were paying toward the HELOC into a savings account, and you'll be able to pay for the renovation in cash in another 18 months. So in 3.5 years, you'll have your renovation paid off, no HELOC, and still have your awesome 2.75% rate on your mortgage.
Agreed 100%

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Stinky
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Location: Sweet Home Alabama

Re: Does this refinance make sense?

Post by Stinky » Thu Dec 05, 2019 8:57 pm

Why in the world would you want to refinance to increase your interest rate?

You've currently got a 2.75% fixed rate mortgage. Keep it.
It's a GREAT day to be alive - Travis Tritt

Topic Author
IADFlyer
Posts: 72
Joined: Sun Feb 26, 2012 8:54 pm

Re: Does this refinance make sense?

Post by IADFlyer » Thu Dec 05, 2019 9:19 pm

fyre4ce wrote:
Thu Dec 05, 2019 1:07 pm
Here's my take, although you may not like it. I don't think borrowing money for the renovation is a good idea. This is more of a consumption expense than a necessity, and I don't see why you should be in a big hurry to get it done before you can afford to pay cash. Renovations do increase property value somewhat, but almost never equal to the cost of the renovation.

I also don't like that HELOC; 5% is pretty high and will increase further if/when rates rise. A guaranteed 5% after-tax return is really good. (My understanding is that HELOC interest is not deductible in this circumstance but am happy to be corrected).

I know you said you only want to cash-flow $3k/month, but if you can raise that to $4k/mo, and put the rest after paying the mortgage (~$1500/mo) toward the HELOC, it will be gone in 2 years. Then, put the $1500/mo you were paying toward the HELOC into a savings account, and you'll be able to pay for the renovation in cash in another 18 months. So in 3.5 years, you'll have your renovation paid off, no HELOC, and still have your awesome 2.75% rate on your mortgage.
This seems like sage advice. Thank you.

Topic Author
IADFlyer
Posts: 72
Joined: Sun Feb 26, 2012 8:54 pm

Re: Does this refinance make sense?

Post by IADFlyer » Thu Dec 05, 2019 9:29 pm

Meg77 wrote:
Thu Dec 05, 2019 11:34 am

Just use the heloc for your improvements and then tackle that balance with extra cash. The other downside of rolling it all together is you'll take 10 years to pay off the improvements because mentally now it's just part of a mortgage - a "good" debt at only 3% and on a relatively short amort! But in reality you can and would probably otherwise pay off the heloc faster than 10 years even after drawing it up for the improvements. Plus you'll have the added benefit of keeping the line open and available for future needs.
Thank you. Can’t find a reason when this make sense to do.

Topic Author
IADFlyer
Posts: 72
Joined: Sun Feb 26, 2012 8:54 pm

Re: Does this refinance make sense?

Post by IADFlyer » Thu Dec 05, 2019 9:40 pm

Brianmcg321 wrote:
Thu Dec 05, 2019 2:23 pm
1130Super wrote:
Thu Dec 05, 2019 9:59 am
IADFlyer wrote:
Thu Dec 05, 2019 2:05 am
Goal33 wrote:
Thu Dec 05, 2019 1:06 am
What’s the rental situation? Maybe you should take more cash out while you’re at it and just pay off the rental?
No significant situation other than the mortgage rate on the rental is fairly low.

Rental Market Value: $385,000
Original Mortgage balance: $260,000
Rental Mortgage Balance: $246,000
Term: 30 years @ 3.875 started in November 2016
Monthly Rent: $1800

Based on your comment, I ran a 15 year refinance scenario of $500,000 at 3.25% which equals approximately $3500. That’s probably manageable when combining my current payment with the rental income. In fact, combining the two equals $800 more that could be used to pay off quicker.

A couple of other thoughts:

-Such a large refinance would result in a high loan to value, therefore possibly making it undoable, right?

-I wonder if there are any tax disadvantages since the rental would have far less expenses to offset rental income.
Do not even consider paying off the rental for these reasons #1 if anything he would want to cash out refi his Rental NOT his primary (If he could find a bank willing to lend 80% LTV) #2 rental interest is deductible (even if they take standard deduction) #3 on the off chance that they get sued it’s a lot easier to lose the rental property if it’s free and clear or has a lot of equity unlike a primary home is much harder to lose in bankruptcy, lawsuits etc

I’m wondering why you have put yourself in this situation multiple times
2013 get 15 year loan
2016 get HELOC for down payment on rental
2019 cashflow is tight, hasn’t been paying down HELOC quickly BUT WANTS TAKE OUT MORE MONEY

At this point I think a 30 year cash out refi should be on the table to consolidate your remodel, HELOC, and current primary mortgage. Just pay extra as much as you like. Otherwise your one bad tenet away to needing another HELOC after you refinance

Lastly how on earth is are you only getting $1800 rent on a $385,000 home.

Yes.

This is a mess that just keeps getting bigger.

OP, you’re circling the drain and don’t even realize it.
I appreciate this comment, but honestly don’t understand the why you think it’s that bad. Is it that bad? I thought worst case scenario, I have a 2.75% with less than 9 years left on primary and 3.875% on a rental that covers monthly debt service. Sure, the HELOC at 5% is not great. And the renovation was a nice to have.

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