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Refinance, see if you agree or am I missing something
Old 02-11-2012, 12:26 PM   #1
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Refinance, see if you agree or am I missing something

Our personal residence has a $186K, 5.5% loan. Our rental property has a $95K, 7.5% loan. Our monthly payments are $1210 & $900, respectively. No PMI or insurance. Values are $400-$450K each. I am thinking of refinancing our residence, taking out enough to pay off the rental property. Total refi would be $290K, with a payment of around $1200-$1300. I am sure someone has done this before or has thoughts on it. Let me know good, bad, something I'm missing , tax issues or savings. Also, our current plan is to sell our current home, 2-3 years, move back into the rental, stay two years, then sell. Thanks, Bill Fairfax, VA
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Old 02-11-2012, 12:43 PM   #2
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Probably not so much of an issue if you only plan to use it for a few years.

You would be using the $100k home equity allowance to fund the rental using the personal residence's loan. That just barely covers you for retaining the tax deduction, so maybe it would not be a big deal. Not deductable for AMT though, so you could run into trouble there. Look at the IRS publication for mortgage loans to see how you might be affected.

Not a problem to have no loan on the rental while you are living there? Seems like the current house would pay off everything and you are not concerned with investing any of the loan amount. So I'm guessing no, but just pointing it out.

Seems like a no-cost refi into a short-term loan or ARM would save you money at least. Definitely something you should be looking at, with an eye to your expected scenario and any possible worst-case scenarios in the case of an ARM.
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Old 02-11-2012, 12:44 PM   #3
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Why not the other way around? Refinance the rental to pay off the primary home.
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Old 02-11-2012, 12:50 PM   #4
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I think the rates are higher on rental loans than on residences
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Old 02-11-2012, 09:37 PM   #5
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Quote:
Originally Posted by BillNOVA View Post
Our personal residence has a $186K, 5.5% loan. Our rental property has a $95K, 7.5% loan. Our monthly payments are $1210 & $900, respectively. No PMI or insurance. Values are $400-$450K each. I am thinking of refinancing our residence, taking out enough to pay off the rental property.
Intriguing.

It seems to me that if you pay off the rental mortgage then you'll no longer be able to deduct it on your Schedule E, but you'll still be able to deduct it on your Schedule A. I guess that makes it a wash.

I can't think of any way that your rental losses (if any) or deductions would be limited. You'd need to have way more losses or way more income for that to happen.

If you've been taking a standard deduction instead of itemizing your deductions then you might actually get a bit more of a tax break by itemizing. I'm not sure; I can't look at a mortgage payment and quickly convert that to deductible interest.

You'd have to do some math to see if the lower interest rate is saving you more money than any possible extra taxes. But so far I don't see any extra taxes.

You'd also want to check whether the drop in payments has a realistic payback on the refi closing costs.

Will your lender do a cash-out refi for a lower interest rate at that amount?

One drawback is that right now you have separate mortgage payments. If you sell the rental then those mortgage payments go away and you only have your home mortgage. If you combine them into one mortgage on your primary residence, and then later sell the rental, you'll still be stuck with higher payments on the primary mortgage. Even if you put the rental's after-tax profits to the principal on the primary mortgage, you'd still be locked into higher monthly payments... unless you refi yet again.

But I don't see a problem to having a higher mortgage principal when you're only paying 3.6-4% instead of 5.5-7.5%.

I guess the reason that most of America isn't piling onto this is because we're either not landlords or else we're landlording on a much bigger scale with more properties. I'd never thought of using my homeowner's dead equity to drop my rental expenses. I can't wait to go torture myself with the math and the prospect of yet another refi.
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