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Refinancing Option to Improve Cash Flow
Old 02-17-2015, 05:02 PM   #1
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Refinancing Option to Improve Cash Flow

We've all done a ton of reading trying to determine if we should pay off our residence or invest more in the market. My question is more along the lines of "Should I refinance in order to improve my cash flow?

I currently have a 15 yr. 2.85% loan. Current balance is in the $113k range. I could refinance and probably improve my annual cash flow by approx. $4,000 per year ($335 per month) if I sign the paperwork on a 30 year loan at 4%. I'm trying to figure out if this is a good idea, since I want to FIRE ASAP.

Other details...Investable assets are currently 1.3 million. My pre-tax expenses (post-fire) are estimated at between 55k-65k. Income from my investment properties should cover taxes. My total net is just over 1.5 million.

I would appreciate your thoughts...
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Old 02-17-2015, 05:32 PM   #2
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How is lengthening your mortgage and increasing the interest rate going to help you FIRE sooner? That's the opposite of what you should be doing in most cases. Of course your cash flow will increase. Your mortgage payment will be lower, but what are you planning on doing with that extra money that is going to help you FIRE sooner?
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Old 02-17-2015, 05:54 PM   #3
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well, that's what my MIL did, several times before she passed away


she kept refinancing to lower her payment but her principal never went down
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Old 02-17-2015, 06:23 PM   #4
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No, stay with the lower interest rate and shorter term. Beating 2.85% shouldn't be hard, beating 4% is more challenging but quite doable.
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Old 02-17-2015, 06:30 PM   #5
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If you stick with the excellent rate you now have, in 15 years your mortgage will be gone. If you refinance at 4%, your cash flow 15-30 years from now will be negative. You will be smoothing it over 30 years, but you will pay a lot more interest.
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Old 02-17-2015, 07:09 PM   #6
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I will take the contrarian view. I am a real estate investor and I will take the longest term I can get because it improves my cash flow which I can use to increase my investments. It has worked for me for many years. I have paid off several mortgages but I like to do so on my own terms. I think a longer term mortgage makes sense for most people since most do not hold their mortgages for very long. I think the average length of a mortgage is about 7 years.
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Old 02-17-2015, 07:14 PM   #7
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Originally Posted by Letj View Post
I will take the contrarian view. I am a real estate investor and I will take the longest term I can get because it improves my cash flow which I can use to increase my investments. It has worked for me for many years. I have paid off several mortgages but I like to do so on my own terms. I think a longer term mortgage makes sense for most people since most do not hold their mortgages for very long. I think the average length of a mortgage is about 7 years.
The avg length of mortgage is low because people sell their houses, not because people are paying them off... a huge difference....

Also, on an investment in RE you would want to get a positive cash flow if at all possible even if you pay a bit more in interest... but that is not the same as with a home....
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Old 02-17-2015, 07:18 PM   #8
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It is how you want to look at things... my BIL kept redoing his mortgage and even took out money a few times... living beyond his means...

Now that he has passed... my sister has refied a few times to get lower rates... her thinking is that she will always have a mortgage... I know she wished she did not, but her pension and SS is high enough for her to live on with the mtg.... she just looks at is a rent... she does not have any kids, so any assets left over goes to her siblings... so she really does not care...

If that is your thinking.... then go for it... but I would never give up a 2.85% to move to a 4% loan for any reason...
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Refinancing Option to Improve Cash Flow
Old 02-17-2015, 07:19 PM   #9
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Refinancing Option to Improve Cash Flow

Quote:
Originally Posted by Letj View Post
I think a longer term mortgage makes sense for most people since most do not hold their mortgages for very long. I think the average length of a mortgage is about 7 years.

Isn't that 7 year length because people either sell (and buy a new place, with a new mortgage), or refinance into a new mortgage? In doing so, these folks are primarily paying interest to the bank, while only paying off a relatively small amount of principal.

While this is "normal" US consumer behavior, it doesn't seem like the best way to get ahead financially.

Edit: I see that I was beaten to the punch while replying. Didn't mean to pile on, but I agree with the previous 2 posters.
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Old 02-17-2015, 07:38 PM   #10
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In year one, your interest expense increases $1,300 ($113,000 x .0115) in order to provide additional cash flow of $4,000. Seems to be a rather expensive cash flow loan at 32.5%. That ignores any closing costs. Cheaper in the out years, but still expensive.

I would keep the 2.85% loan and find another source of cash.
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Old 02-17-2015, 08:20 PM   #11
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I can see why someone would want to pay off their home mortgage as soon as possible. While my example was investment properties, I still think one can make a similar argument for home mortgages. Shouldn't the decision really depend on what you plan on doing with the money. In my case, I have 30 year mortgages at under 6% and by the time I factor in tax effect, I can get a much better return in the market or I can add other investments producing a higher return. Having too much equity, at least in my case, is not always desirable.
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Old 02-17-2015, 09:26 PM   #12
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Originally Posted by Letj View Post
I can see why someone would want to pay off their home mortgage as soon as possible. While my example was investment properties, I still think one can make a similar argument for home mortgages. Shouldn't the decision really depend on what you plan on doing with the money. In my case, I have 30 year mortgages at under 6% and by the time I factor in tax effect, I can get a much better return in the market or I can add other investments producing a higher return. Having too much equity, at least in my case, is not always desirable.
This is the argument all the time... and most people are on one side or the other.... do you pay off a mortgage or not... do you borrow the max amount of money and invest or not... you think one way and other people think different...

However, the OP is giving some different facts.... he is going to a much higher interest rate... so he has to at first overcome the cost of the refi... then he has to overcome the more expensive money than what he has now... sure, he might (probably) can do it, but maybe not... the answer to the question is much different if you were in 2008/09 than it is today... you could have lost half the value of your investment and you would have loved not to be leveraged so much....
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