What would be the best use for my cash out refinance?

Have a question about your personal investments? No matter how simple or complex, you can ask it here.
Post Reply
Topic Author
dropdx
Posts: 152
Joined: Thu Jun 06, 2019 9:01 pm

What would be the best use for my cash out refinance?

Post by dropdx »

--------------------------------------------------------------------------------------------

I'd like input on what you think would be the best use for my cash out refinance (30 year).

My current thoughts are:

-Pay off my rental mortgage (currently $78,000 @ 4.25%)
-Buy another rental property
-Invest in Vanguard mutual funds

--------------------------------------------------------------------------------------------

First a little about me:

35, file single, no kids

I work in IT at a public electric utility. I would consider my job very secure, but obviously anything can happen (knock on wood :wink:).

Federal Tax Rate - 22% or 24% (typically has depended on rental deductions)
State Tax Rate - 9%

Current Annual Income
Work Salary - $120,000
Inherited IRA RMD - $5,000
Brokerage Dividends - $8,900
------------------------------Total: $133,900 (Not including rental income, hard to calculate accurately)

Current Savings / Emergency Fund - $75,000

--------------------------------------------------------------------------------------------

Expected Pension @ 58 (current formula is 45% of average salary over 30 years)
$4,200/month - $50,400/year (using a somewhat conservative number for this)

Individual Account Program (IAP) - this is in addition to the Pension
Current balance - $42,000
(employer contributes 6% of my salary into account, invested in Vanguard Target Fund)

Should also have SS @ ~67 if it's still around, estimating @ $2,650/month or $31,800/year.

--------------------------------------------------------------------------------------------

Health Reimbursement Arrangement (HRA)
Current balance - $35,000
(employer contributes $1,400 @ beginning of year and I contribute $325/month, invested in Vanguard S&P 500 Fund)

--------------------------------------------------------------------------------------------

Debt
Primary Residence Mortgage - $247,000 @ 2.875%
Rental Mortgage - $78,000 @ 4.25%

--------------------------------------------------------------------------------------------

Investment Portfolio

Asset Allocation: 100% Stock (70% USA (VTSAX) / 30% International (VFWAX))

Currently, I don't hold any bonds.

Vanguard Brokerage -- $465,000 (contribute $200/week)
Vanguard Inherited IRA -- $280,000
Nationwide 457b -- $45,000 (contribute $1,625/month, max @ $19,500)
Vanguard Roth IRA -- $30,000 (contribute max @ $6,000)
Robinhood Brokerage -- $10,000 (my play money)
VALIC 401k -- $1,000 (contribute minimum to get low company match)
Crypto -- $6,000
------------------------------Total: $837,000

--------------------------------------------------------------------------------------------

Current Situation

I just applied to do a cash out refinance (zero cost, getting $400 back) on my primary residence - 30 year loan. The new loan amount would be $329,000 and the cash out amount would be $80,000 at a rate of 2.75%. My current rate is 2.875%, so there's not really a difference there, but at least it IS less. Currently, I'm conditionally approved.

I initially did this to pay off my rental mortgage, hence the amount, but I don't know if that's the best use of the money now. So, I'm hoping to get some opinions here.

The current rental mortgage payment (mortgage only) is $453 + $89 (MIP) = $542 and my primary mortgage payment is currently $1,040, so a combined total of $1,582.

The new mortgage payment after refinancing would be $1,343, so a monthly savings of $239 or $2,868 annually.

Each side of the duplex currently rents for $1,250, and I pay 10% to my property management company.

The duplex is an FHA loan and that Mortgage Insurance Premium (MIP) is for the life of the loan.

My interest deduction for the rental is pretty low at roughly ~$3,000 annually, so I'm not sure if I'd be losing any tax benefits by not having the mortgage. Most of my deductions for the rental property come from maintenance, repairs, and upgrades.

--------------------------------------------------------------------------------------------

But, now I don't know if that's the best direction to go. I've also thought about buying another rental property, or investing it into my 70% USA (VTSAX) / 30% International (VFWAX) asset allocation.

And please don't just say, "Ahhh nooo, too much risk!" And if you do say that, then please at least say why after reading about my current financial situation. I really look to this place for advice and I hope to get some different viewpoints.

Thanks for any insight!
Last edited by dropdx on Tue Jul 20, 2021 10:06 pm, edited 4 times in total.
Raycpact
Posts: 10
Joined: Thu Jun 24, 2021 9:00 pm

Re: What would be the best use for my cash out refinance?

Post by Raycpact »

Assuming you can get 2% on a no cash out mortgage, you are paying. .75% of 247,000 extra in order to cover 74k cash out. That amounts to about 2.5% on 74k. Adding 2.5 % to 2.75 % , you are paying 4.25 % total on the 74k.
Topic Author
dropdx
Posts: 152
Joined: Thu Jun 06, 2019 9:01 pm

Re: What would be the best use for my cash out refinance?

Post by dropdx »

Raycpact wrote: Tue Jul 20, 2021 8:00 pm Assuming you can get 2% on a no cash out mortgage, you are paying. .75% of 247,000 extra in order to cover 74k cash out. That amounts to about 2.5% on 74k. Adding 2.5 % to 2.75 % , you are paying 4.25 % total on the 74k.
It's a 30 year loan, so I definitely couldn't get a 2% rate -- maybe like 2.50% at minimum or 2.65% more likely for the low’ish loan amount.
Raycpact
Posts: 10
Joined: Thu Jun 24, 2021 9:00 pm

Re: What would be the best use for my cash out refinance?

Post by Raycpact »

15 year might be less than what you are spending now and 2% is likely.
Ron Ronnerson
Posts: 2266
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: What would be the best use for my cash out refinance?

Post by Ron Ronnerson »

I would get rid of the mortgage on the rental. 4.25% is a relatively high rate by today’s standards while 2.75% is pretty good. I personally would not be in any hurry to pay off the new loan.

By the way, I did a cash-out refinance (took out $150k) in January of this year. I got a couple of quotes and found that the rate difference between a regular conventional loan and doing a cash-out was only 0.125%. So it was just a small difference. I took cash out primarily for increased liquidity in my case.

By the way, how many month’s worth of expenses is your $75k emergency fund? If your job is stable and you’re not earning much on that money, an option might be to put a good chunk of the emergency fund toward the mortgage for the rental and do a refinance without taking cash out.

Also, Fannie and Freddy are set to drop the 0.5% fee they’ve tacked on refinance loans for the last 8 months or so. That change occurs on August 1st but I’m not sure if your lender has already factored that into the rate they quoted you or not. If they haven’t, keep in mind that August 1st is just in a week and a half.
Topic Author
dropdx
Posts: 152
Joined: Thu Jun 06, 2019 9:01 pm

Re: What would be the best use for my cash out refinance?

Post by dropdx »

Ron Ronnerson wrote: Tue Jul 20, 2021 9:28 pm By the way, how many month’s worth of expenses is your $75k emergency fund? If your job is stable and you’re not earning much on that money, an option might be to put a good chunk of the emergency fund toward the mortgage for the rental and do a refinance without taking cash out.

Also, Fannie and Freddy are set to drop the 0.5% fee they’ve tacked on refinance loans for the last 8 months or so. That change occurs on August 1st but I’m not sure if your lender has already factored that into the rate they quoted you or not. If they haven’t, keep in mind that August 1st is just in a week and a half.
Yeah, the $75K was part of a recent inheritance. I definitely plan on investing the majority of it. I’m kind of waiting to gauge where the market is going.

Interesting about the refinance fee, I wasn’t aware of that. I’ll ask my lender about it.

Thanks for your input!
Ron Ronnerson
Posts: 2266
Joined: Sat Oct 26, 2013 6:53 pm
Location: Bay Area

Re: What would be the best use for my cash out refinance?

Post by Ron Ronnerson »

dropdx wrote: Wed Jul 21, 2021 11:40 am
Ron Ronnerson wrote: Tue Jul 20, 2021 9:28 pm By the way, how many month’s worth of expenses is your $75k emergency fund? If your job is stable and you’re not earning much on that money, an option might be to put a good chunk of the emergency fund toward the mortgage for the rental and do a refinance without taking cash out.

Also, Fannie and Freddy are set to drop the 0.5% fee they’ve tacked on refinance loans for the last 8 months or so. That change occurs on August 1st but I’m not sure if your lender has already factored that into the rate they quoted you or not. If they haven’t, keep in mind that August 1st is just in a week and a half.
Yeah, the $75K was part of a recent inheritance. I definitely plan on investing the majority of it. I’m kind of waiting to gauge where the market is going.

Interesting about the refinance fee, I wasn’t aware of that. I’ll ask my lender about it.

Thanks for your input!

If you’ve got more in an emergency fund than you need and it’s earning close to nothing while you’re paying 4.25% on a loan, I’d seriously consider directing some of the excess money toward the loan sooner rather than later. If you take cash out during your refinance, you can always invest that instead.

In my view, anything above 4% is way too much interest to be paying these days so I’d want to put an end to that sooner rather than later. In contrast, I’d drag out the payments on sub-3% loans as long as I could.

People’s thoughts and feelings differ on debt. I personally like low-interest debt as I see it as a useful tool rather than an albatross around my neck. Not everyone shares this sentiment.
Topic Author
dropdx
Posts: 152
Joined: Thu Jun 06, 2019 9:01 pm

Re: What would be the best use for my cash out refinance?

Post by dropdx »

Ron Ronnerson wrote: Wed Jul 21, 2021 1:07 pm If you’ve got more in an emergency fund than you need and it’s earning close to nothing while you’re paying 4.25% on a loan, I’d seriously consider directing some of the excess money toward the loan sooner rather than later. If you take cash out during your refinance, you can always invest that instead.

In my view, anything above 4% is way too much interest to be paying these days so I’d want to put an end to that sooner rather than later. In contrast, I’d drag out the payments on sub-3% loans as long as I could.

People’s thoughts and feelings differ on debt. I personally like low-interest debt as I see it as a useful tool rather than an albatross around my neck. Not everyone shares this sentiment.
Yeah, you’re probably right, and I feel the same regarding low interest debt. I just know that some people are against paying off rental mortgages quickly and would say better use of the money would be to use it as a down payment for another rental property 🤷🏼‍♂️ But I suppose that depends on your goals and maybe that’s my problem, I don’t really know what my goals are.
Post Reply