Should I drop $40,000 to refinance my rental house now so I can save about $400-500 a month in mortgage costs? We currently owe $220,000 and the home just appraised for $200,000. We would need to put $40,000 in to be able to go from a 6% mortgage to a 4.5% rate. We have about $250,000 in savings and retirement plans and about $30,000 of that is in cash or fairly liquid accounts. This rental house is our only debt right now, so we can afford the difference between the rent we receive and our monthly mortgage payments, and still manage to save and pay off a few extra hundred dollars on principal. However, in the next year we may be starting a family and we will have to live on one income and that extra $400-500 a month may come in handy. -- Name withheld
Before writing checks to pay the substantial fees of refinancing and throwing more cash into the mortgage on a rental home that has declined in value, resolve that you will hold onto the house for at least five years and preferably 10. Then swallow hard as you invest. Your plan makes sense, given the interest rate environment and the healthy state of your finances, planners say.
Part of the extra investment the lender is requiring will raise your equity stake in the home to 10%, so that's certainly palatable. Even more attractive, the plunge in mortgage rates is a bonanza for borrowers like you. By paying down an extra $20,000 of principal and lowering your mortgage rate to 4.5% from 6%, you'll be saving nearly $450 a month. If you move quickly, you may be able to find an even lower rate.Â Within two years, such substantial savings should make up for the multiple expenses associated with refinancing. The extra monthly savings will also come in handy if you become a single income family after having a child.
Ameriprise financial planner David Tysk, says this move makes sense because of your healthy habit of saving. "They have proven they're financially responsible," he said. "It would appear they're going to be motivated to replenish savings."
-- Allan Chernoff