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Refinance or Recast

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  • Refinance or Recast

    I am having a hard time decide whether to Refinance my loan or Recast it.

    My original loan (15 years) was 381K @3.125 originated back in 2014. I refinanced it to a 2.75 rate(15 years) in 2016 , balance at that time was 281k.
    We try to make additional payments towards principal every year. My current balance is 150K. Current M+I is 1950$ and 300$ for escrow.

    We currently live in North Phoenix area and were planning to move to Scottsdale in near future. But given state of Phoenix housing market , we now plan to wait for some more time in a hope of a correction. Initial plan was to sell my current home and put the cash towards the purchase of the new home.

    As we are delaying this decision, we feel like we can keep current home and make it a rental eventually.
    But to make that happen and make it a cash positive proposition we want to reduce monthly payments. We can do that either by doing Recast or Refinance.
    We can expect rental income of around 2200-2500$/ Month on this property.

    Recast Option: With term remaining on the mortgage (11 years), paying additional 15k cash, and 300$ Recast fee, we can bring down monthly Mortgage payment to around 1400.

    Refinance Option: I am also getting 10 year mortgage @2.375 with similar monthly payment in the range of 1300-1400$. Refinance will cost me around 2400$ (Initiation, title , 0 points ) when everything is said and done.

    We do plan to pay out the mortgage in 4/5 years regardless which option we choose.

    Thoughts? I am happy to provide additional information if needed.

  • #2
    You are splitting hairs. Why do you care about having a lower monthly payment when you are already paying extra based on the current payment? I would not pay to refinance a loan to reduce the interest rate by 0.3%, in particular because you won't end up saving any money.

    You do not need a lower monthly payment given your ample cash flow.
    You do not need a marginally lower interest rate when you will pay this off early.
    You do not need to pay closing costs and fees for a new loan when the savings will be marginal to negative. (pay $2400 now to save $1100 over 5 years)
    You do not need the hassle of applying for a new mortgage when the current mortgage meets your needs.

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    • #3
      • My original loan (15 years) was 381K.
      •We can expect rental income of around $2200-2500
      6.9% to 7.9% return gross BEFORE taxes, insurance and maintenance (using $381k original loan as investment. AZ has a “rental tax” in the 2% range and property tax .67%. Cash positive doesn’t tell you the whole picture. Throw in interest, insurance and maintenance and your returns drop and you have liquidity and transaction costs.
      •Suggest you rework the rental analysis before you focus on cash flow. Return is your primary with cash flow being a deal killer. Financing could be all cash. Is it a good rental investment is the first question.

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      • #4
        why are you accelerating mortgage payoff at all at those rates?

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        • #5
          Thank you all! I think consensus seems to be to stay the course.
          I know with interest rates that low, it does not make the most sense to pay off the loan, but I feel like paid off home by 40 gives a sense of freedom for long term financial planning.

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