To ReFi or not to ReFi?

August 27, 2010 9:07 AM

Is it smart to refinance my house now? Very Special Snowflake details on the other side.

I own a 3 bedroom, 1.5 bath home on a double lot in a popular, but not upscale, neighborhood in central Denver. I bought it two years ago and paid $288k for it. I have a 5.75% 30 year fixed rate loan on which I owe just over $267k. With taxes, interest, PMI and all my payment is currently $1935/mo. I've a quote/GFE that indicates that I would have a new payment right about $1600/mo and according to my math my break even point is about 18 months.

I am considering a move to another state to be with my significant other. Under normal circumstances I'd ask SO to move here, but there's a pitbull involved and Denver has a very strict pitbull ban. While I feel pretty solid in this relationship (we're talking about getting married) I know all too well that anything can happen. This and the fact that sales in my area have slowed significantly and prices are down has me considering refinancing the house and renting it out.

Without refinancing I would find it difficult to rent it out at a rate that makes it cash flow positive, or even neutral. At $1600 I think I could. If the relationship works out I could sell the house down the road or I could maintain it as a (very) long term investment. If the relationship doesn't I'd have a home to come back to (after whatever lease is in place at the time expires).

I'd appreciate some unbiased feedback on this. Throwaway address: [e-mail]

posted by anonymous to home & garden (6 answers total)

Cash flow positive on a rental is a very tricky situation. You end up paying alot in taxes, which people don't realize until they are landlords. Also, finding good tenants, or tenants at all, can be tough.

If you do go this route, I would suggest using a rental management company.

PMI can be a good amount, do you have enough savings to bring down the percentage so that you aren't paying PMI?
posted by TheBones at 9:20 AM on August 27, 2010

This and the fact that sales in my area have slowed significantly and prices are down has me considering refinancing the house and renting it out.

Are you sure aren't upside down on the house? Has an appraisal been done?

Also consider as a rental you're going to need/want to carry more insurance, likely as a stipulation for your refinance as a non-primary residence.
posted by jerseygirl at 9:44 AM on August 27, 2010

Some mortgages do not allow rentals, or rentals beyond a fairly short period of months.

Given the difficulty of selling any house right now I would assume that any house you own now you will probably own 18 months from now, even with all the other factors in your life.
posted by caddis at 10:41 AM on August 27, 2010

you have not detailed the terms of the refinancing, so how could we offer advice on the process? Do you understand the terms to begin with?
posted by Hurst at 11:05 AM on August 27, 2010

Don't know anything about refinancing, sorry.

But I heartily applaud you and your SO's dedication to your pets -- especially the wonderful and often misunderstood pit bull. ;o)
posted by MeiraV at 3:09 PM on August 27, 2010

If you save $335 a month and it takes you 18 months to break even, it implies that you are paying $6000 for this refinance. That is very high. You should shop for a better deal. You should be able to find a refi that has little or no out of pocket expense. It won't be the lowest possible interest rate, but it won't cost you out of pocket either.

For example, let's say that the best rate is 4.25% but has significant fees. You may be able to find 4.75% with zero fees. It is a no-brainer. It doesn't cost you a dime and your payment is lower than you are paying now.

Don't count on breaking even by renting. Long distance rental management is very difficult if not impossible. You likely will end up having to pay a rental management company 10% of the monthly rent off the top.
posted by JackFlash at 3:16 PM on August 27, 2010