Forum Thread

Refinance my rental? need advice

aaba78 5,121 1,364 September 8, 2015 at 10:12 PM
Deal
Score
0
2,577 Views

Thread Details

Refinance my rental? need advice
long story short...I rented out my 1st home when i bought my 2nd home last year...The 1st home is the rental.

1st home - $49500 balance owed 5.375% -5 years remaining on loan ( i rent this property out $1500 per month and it basically covers the mortgage and HOA fees) im not making any money off of it yet just breakeven

2nd home - $200000 owed 4.50% 29 years remaining. Mortgage is about $1600 all in escrowed.

my initial though thought was in 5 years when 1st home is completely paid off use that rental income to pay my 2nd home mortgage...Essentially giving me no mortgage payment for 2nd house..but i have to wait 5 yrs for this to happen

is there any reason i should refinance 1st home now? more money in my pocket? am i losing money but not refinancing? or is my thinking good on what i was planning in the beginning..

im not up to speed on refinancing so need some input

13 Comments

1

Sign up for a Slickdeals account to remove this ad.

#2
Like anything else, it depends on what rate, what the refinance costs are and how much interest\principal you have left and what you tax bracket is.

You can always pre-pay a mortgage\make extra payments to principal, so if you can get the rate significantly lower on a short term fixed mortgage (10 year fixed for ex) you may save a lot of money in interest\taxes esp since 10 year fixed rates are something like half of what you are paying now. Of course it is also a function of your current mortgage being near the end and payments being largely principal at this point as well, so you really need to run the numbers and consult with a tax pro to see which works better in your situation.
Reply Helpful Comment? 0 0
Joined Aug 2010
L9: Master
5,121 Posts
1,364 Reputation
Original Poster
#3
Quote from YanksIn2009 View Post :
Like anything else, it depends on what rate, what the refinance costs are and how much interest\principal you have left and what you tax bracket is.

You can always pre-pay a mortgage\make extra payments to principal, so if you can get the rate significantly lower on a short term fixed mortgage (10 year fixed for ex) you may save a lot of money in interest\taxes esp since 10 year fixed rates are something like half of what you are paying now. Of course it is also a function of your current mortgage being near the end and payments being largely principal at this point as well, so you really need to run the numbers and consult with a tax pro to see which works better in your situation.
thank you..anyone else
Reply Helpful Comment? 0 0
#4
It's a simple break-even formulation. 5 years isn't a very long time and the benefit for a refinance over 5 years is much lower than refinancing and having 10 years of payments that follow.

I would guess that if you are qualified and receive a low rate, you would be able to come out ahead on a refinance. Just keep in mind it won't be a pile of money saved as you have the closing costs you are trying to make up as well.

Here is a quick and *rough* scenario. At 5.375% you could pay roughly $7k in interest. At 4.375% you could pay roughly $5,700 in interest. That's not a lot of savings in 5 years for the hassle. Also take into consideration the closing costs you might not want to pursue this. Don't take these numbers as gospel, just rough assumptions.

I can't do the math for you because I don't have all of the information. You should be very capable of calculating the break-even point of a refinance and determine whether the money saved is worth the hassle. I would venture to say it won't be worth it although I will guess that you will end up ahead by refinancing assuming you get a good rate -- the fact that you have a 4.5% rate from a year ago makes me think you won't get the lowest rate out there. Rates are < 4% for the most qualified buyers.
Reply Helpful Comment? 0 0
#5
Quote from aaba78 View Post :
thank you..anyone else
are you claiming anything on taxes with the 1st home?
deprecation?
income or loss?
Reply Helpful Comment? 0 0
for those that hate spelling mistakes www.walmarts.comCool

bulb save money by checking your insurance every 2 years (and not every 20)
Joined Jan 2004
L10: Grand Master
14,924 Posts
1,093 Reputation
#6
Quote from aaba78 View Post :
thank you..anyone else
Have you even looked in to refi rates on an investment property? They are significantly worse usually than a primary residence. Not sure what they're at these days but I'd look as it may not even be worth it.
Reply Helpful Comment? 0 0
Joined Aug 2010
L9: Master
5,121 Posts
1,364 Reputation
Original Poster
#7
Quote from stufine View Post :
are you claiming anything on taxes with the 1st home?
deprecation?
income or loss?

losses ive had some repairs to do over $1100 .the 1st year for tenant....i should clarify its not exatcly breakeven...rent is $1450 and the mortgage plus HOA is $1491..so out of my pocket every month is $41 dollars

my tax accountant said i could offset any losses from the the HOA every month plus any expenses i incurred for tax year 2014...i didint really understand what he meant but he said it was a good thing ...like i said need advice
Reply Helpful Comment? 0 0
Last edited by aaba78 September 9, 2015 at 01:01 PM
#8
Quote from aaba78 View Post :
losses ive had some repairs to do over $1100 .the 1st year for tenant....i should clarify its not exatcly breakeven...rent is $1450 and the mortgage plus HOA is $1491..so out of my pocket every month is $41 dollars

my tax accountant said i could offset any losses from the the HOA every month plus any expenses i incurred for tax year 2014...i didint really understand what he meant but he said it was a good thing ...like i said need advice

You also get to take off depreciation and any other legit expenses for running the business (insurance, prop taxes, etc). I would advise doing so under an LLC corporate shield and not as a sole proprietorship, but that is another subject. Your accountant should be able to run the numbers for you and give you various scenarios based on the current state of the property, your outstanding loan and your personal income. Imo, it is compete madness to try to do such without professional help as it gets way too complicated to run those scenarios yourself.
Reply Helpful Comment? 0 0

Sign up for a Slickdeals account to remove this ad.

#9
In my opinion, I wouldn't bother with an LLC. When you transfer title to an LLC you lose any title insurance protection that was in effect when you bought the house. Instead, just buy an umbrella policy that will kick-in for any potential claims above your property insurance policy limits.
Reply Helpful Comment? 0 0
#10
Where do you buy umbrella policy from? GEICO?
Reply Helpful Comment? 0 0
#11
Quote from stubbornboy View Post :
Where do you buy umbrella policy from? GEICO?
You could Google: "umbrella policy". Almost all insurance providers offer these policies. And yes, GEICO is one of them.
Reply Helpful Comment? 0 0
Joined Feb 2004
L10: Grand Master
6,953 Posts
944 Reputation
#12
Quote from stubbornboy View Post :
Where do you buy umbrella policy from? GEICO?
Yeah, most insurance companies will sell them, and they're relatively cheap (I got a quote for a $1M umbrella for ~$150/yr with Amica). They may require certain minimums on liability limits for your other insurances (for me, Amica requires $250k/$500k on auto, and $300k on home), so keep that in mind if your limits for your other insurance policies are lower.
Reply Helpful Comment? 0 0
Marshall: Have the rest of you guys figured out by now that mmathis is the smartest guy on SlickDeals?
Joined Jan 2004
L10: Grand Master
14,924 Posts
1,093 Reputation
#13
Quote from aaba78 View Post :
losses ive had some repairs to do over $1100 .the 1st year for tenant....i should clarify its not exatcly breakeven...rent is $1450 and the mortgage plus HOA is $1491..so out of my pocket every month is $41 dollars

my tax accountant said i could offset any losses from the the HOA every month plus any expenses i incurred for tax year 2014...i didint really understand what he meant but he said it was a good thing ...like i said need advice
Just to add you know you don't get to deduct the full value of the mortgage payment right? You only get to deduct the interest portion, just like your primary residence EEK!

then you've got depreciation like someone else said, insurance, property taxes, etc.. I'd seriously talk to your tax guy or get a new one. Depending on how much $ you make you can offset your losses (on paper) against your income so you have to pay even less in taxes.
Reply Helpful Comment? 0 0
#14
In my opinion, your balance is too low and your remaining term is too short on the rental to make it worth refinancing. Besides, you will likely find that the rate on an investment property loan will be 100 basis points (1%) higher than the rate on owner-occupied property so you probably can't get a much better rate anyway. I advise people thinking about renting out the house they live in to refi it BEFORE they move, otherwise the rate will be much higher.

BTW - The IRS requires you to take depreciation (on the building only, not the land) every year. Don't think that is a true tax saver for you. While you will pay less tax up front, it's really just a way to defer tax because you will have too recapture all of the depreciation when you sell the property unless you swap it for another investment property, which most people who rent out their prior residence don't do.

Also note that work you have to do on the property may not be considered repairs if it improves the value of the property. If it does you have to capitalize the expense and can only deduct it over the life of the improvement, not all at once when you spend the money.
Reply Helpful Comment? 0 0
Last edited by goirish September 17, 2015 at 03:45 PM
Page 1 of 1
1
Join the Conversation
Add a Comment
 
Copyright 1999 - 2016. Slickdeals, LLC. All Rights Reserved. Copyright / Infringement Policy  •  Privacy Policy  •  Terms of Service  •  Acceptable Use Policy (Rules)  •  Interest-Based Ads
Link Copied to Clipboard