Get Out of Debt Guy

Should I Refinance My Rental Property?

Posted June 4, 2013

WRAL Reader Question

Dear Steve,

I have an adjustable rate mortgage that I owe $80k on. I am debt free except for this mortgage. My monthly payment is $588.70 and I can actually afford the payment, but only $117.00 is going toward the principle with the rest toward interest.

I recently married, but owned this home before marriage and I reside in NC. Also, the house is rented out, so it is not my main home, but the only residence I own.

Should I refinance by myself on my income?

Should I refinance with my husband's income?

Should I just keep this mortgage and make extra payments toward the principle each month? (I can afford $500 extra per month).

Thank You Steve.....

Melinda

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Answer

Dear Melinda,

Thank you for asking your question.

The one critical point you didn't share was what the details about the interest rate and balance.

There are a number of different points to consider here.

For example, if this house is just in your name alone, leaving it that way might help to minimize your joint liability in case of some suit or action directed towards the landlord? It's a consideration but one you'd have to discuss with an asset protection attorney licensed in North Carolina if you decide to leave it in your name alone to manage risk.

It would be helpful to know if this house has been a good investment and is projected to generate a decent return. Just because people hold on to a property does not mean it is either a smart thing to do or will generate a good return. People hold on to bad stocks and ride them down all the time.

Unless the home is building value, the monthly payments you are making are not helping you much.

While interest rates are low, the adjustable rate loans seem extra special. But interest rates will have no choice but to rise as the economy recovers.

At the same time, fixed interest loans are available now for investors at what will be historically low rates. The interest rate is a bit higher on a fixed rate loan but they will give you better forecasting over what your minimum monthly payment will be until the end of the loan. No surprises.

It's great you can pay an extra $500 a month but before you did that I'd want to make sure you and your husband were continually building your emergency fund and you were saving consistently towards retirement. Paying down the mortgage is good but not if it means you are skipping other important financial commitments.

One other option here is you might want to sell the house and not be a landlord anymore. It does not sound like you've had any landlord surprises yet and I certainly hope you don't. All it takes is one bad tenant to cause a lot of damage and expense or a few months of sitting empty to run up the expenses.

If this was just a matter of looking for a better rate I'd suggest you contact a mortgage broker that represents a number of different lines of credit. Based on your individual credit score and income the mortgage broker could help put together the most logical and mathematically sound financing package.

But I sense there is more to the story.

You may want to hold on to the house for emotional reasons. I've seen it before. Sometimes people think if this relationship doesn't workout I'll have a place to go or fall back on.

Maybe you can share some additional details in the comments section below.

Steve Rhode
WRAL Get Out of Debt Guy

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2 Comments

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  • steverhode Jun 5, 2013

    @tarheelfan4life2005 Ahh, I thought so.

    Good job on the emergency fund, keep growing the retirement accounts. The more you invest now the easier it will be for you to retire with millions. To see how the numbers work out read http://getoutofdebt.org/52438/the-saddest-mistake-people-make-when-getting-out-of-debt

    I think if you check with a local mortgage broker you will find investor mortgage fixed rates as low as 5.25% or so.

    Talk to a mortgage broker and shop for some better fixed rates and see what rate you would qualify for and then we could do the math to figure out with the closing costs how long it would take to break even from the cost of financing. But if you are at 7.125% in an ARM the rates are only going to go up in the future.

    It's not going to hurt to check and look for a better deal, then do the math to see if it makes sense.

  • tarheelfan4life2005 Jun 4, 2013

    Thanks Steve for answering my question so quickly. I owe $80k on this home @ 7.125%. The same tenants have been in the home 3 yrs now paying $800/mo. rent. As you stated, I do not want to sell this home, I have owned it since 1995 and paying extra, I could have it paid off early. I don't see moving back there, but if I needed to (for some reason), I would have that as an option.

    I have 30k in retirement funds and my husband and I have 6k in an emergency fund.

    Thanks,
    Melinda

About this Blog:

Steve Rhode has had careers in opthalmology, real estate and as the head of a nonprofit debt counseling firm. On his blog, he offers hard-won, free advice about getting out of debt, consolidation and making the right choices as you manage your money.