Get Out of Debt Guy

Should We Refinance Our Rented Home?

Posted October 24, 2013

WRAL Reader Question

Dear Steve,

We recently relocated for work, but still own the property that was our primary residence. We are using a property management company and renting it out. We are losing a little bit of money every month on it, $115ish, but are unsure if we should re-finance the mortgage.

We have a product being offered to us with a lower interest rate (currently paying 5.8%) and the new mortgage would be 4.75%, and a lower monthly payment, but i's a 30 yr mortgage. We would save a little over 250 a month, but would add another 10 years to our mortgage. We will very likely sell this property within the next couple of years tho.

Should we refinance and pay the approx $3500 closing costs, but save $250 in out-going, and actually make a little bit on it, or eat the monthly loss of $115 a month since we plan to sell within the next couple of years. We are unsure what would be the best option as it feels like we are spending money to save money.


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Dear Carrie,

Two issues jump out at me. The first is I want you to make sure the quote you got was for an investor mortgage and not an owner-occupied mortgage. Typically the investor rates are a bit higher.

Since this seems to be an investor property it is important to make sure the property is setup correctly, including having landlord insurance on the property instead of just general homeowner insurance. 

If the quote you did get was for an investor or non-owner-occupied mortgage then the math says with a savings of $250 per month you'd pay off the cost of the refinance in 14 months from the monthly savings. But if we only use your positive cash flow after the refinance it would take 26 months. 

Second big issue is to keep in mind that the proposed new mortgage would actually reduce the amount you are paying off each month since more would be going towards interest and less towards reducing the balance. 

It seems to me you have to decide if your goal is to reduce your monthly payment or increase your profit when you do sell in two years. With the current mortgage you could be easily reducing the balance more than $115 per month than with the extended mortgage.

I'd suggest you ask your mortgage broker run the numbers showing you the proposed balance at the end of two years with your current mortgage and with your new mortgage. That and the break even point are the two critical items you need to make a fully informed decision. 

Steve Rhode
WRAL Get Out of Debt Guy

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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.