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rated:
Hello all,

I've cruised this site and forum for years and like reading all the advice to the topics on here and have learned a great deal. MY situation, short and sweet:
My wife and I recently purchased a new home, and decided to rent out our old home instead of selling. It is located in a great location in town in a great neighborhood and rented rather quickly. My numbers on that home are:

Bought for $130,000, owe $79300
16 years left on a 30 yr fixed mortgage.@ 5% 
$881.00/month (including insur. and prop. tax)
Rented out for $1100.00/month with 1yr lease but tenants (older retired military couple) are looking for long term.

I'm trying to decide whether or not it makes financial sense to refinance to a lower interest rate with the lower balance to reduce my monthly payments and put the savings toward the principle of the loan each month. I know it will take up to a year to break even on the closing costs.Should I go with another fixed rate mortgage? A 15 year fixed isn't going to save that much more per month, but does refinancing to another 30 year make sense? I just don't know math wise could it be paid off quicker by refinancing and putting that difference toward the principle? Would it be wise to do a 7/1 or 10/1 ARM if I can pay it off before the adjustable rate kicks into place? I hope this makes sense and appreciate any help provided. 

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rated:
1) 5% Heck Yah
2) Look from someone who can give you a zero cost loan.
3) It isn't quicker to refi at 30 and pay off more principle. But it's safer.

rated:
> when did you convert it to rental? and how much is it worth now? the savings from the primary residence capital gains tax exclusion might be very significant, such that selling it might be a better call.
> you really should have refi'd before you moved, as O-O loans have significantly better terms.
> 5% is not a terrible rate for an investment property in your circumstances.
> I vote against an ARM. why bother?
> what are your plans/goals? trying to get debt-free? build a bigger nest egg? you could get cash out of this property to finance other investment property if you wanted to.
> any plans to move or retire soon?
> any chance of moving back into the rental?
> this is an odd statement:

"I'm trying to decide whether or not it makes financial sense to refinance to a lower interest rate with the lower balance to reduce my monthly payments and put the savings toward the principle of the loan each month." then "A 15 year fixed isn't going to save that much more per month..."

why would a 15-year not be an option, if your plan is to aggressively pay down the note? the rate will be much lower. the payment will be higher, but didnt you already plan to pay more?

rated:
forbin4040 said:   1) 5% Heck Yah
 

  Most people forget the first 10 or 15 years of a 30 year mortgage payment goes mostly for interest and little toward principle. Get a new mortgage and you start all over again back at square one, whereas in your current mortgage more of your payment will be going towards principal now. 

rated:
solarUS said:   > when did you convert it to rental? and how much is it worth now? the savings from the primary residence capital gains tax exclusion might be very significant, such that selling it might be a better call.
> you really should have refi'd before you moved, as O-O loans have significantly better terms.
> 5% is not a terrible rate for an investment property in your circumstances.
> I vote against an ARM. why bother?
> what are your plans/goals? trying to get debt-free? build a bigger nest egg? you could get cash out of this property to finance other investment property if you wanted to.
> any plans to move or retire soon?
> any chance of moving back into the rental?
> this is an odd statement:

"I'm trying to decide whether or not it makes financial sense to refinance to a lower interest rate with the lower balance to reduce my monthly payments and put the savings toward the principle of the loan each month." then "A 15 year fixed isn't going to save that much more per month..."

why would a 15-year not be an option, if your plan is to aggressively pay down the note? the rate will be much lower. the payment will be higher, but didnt you already plan to pay more?

  I guess i look at it as I have about 15 years left on the original loan and my plan was to pay it off sooner...

> when did you convert it to rental? and how much is it worth now? the savings from the primary residence capital gains tax exclusion might be very significant, such that selling it might be a better call.
Converted to a rental beginning October. 
> you really should have refi'd before you moved, as O-O loans have significantly better terms.
I don't know what a 0-0 loan is...
> I vote against an ARM. why bother?
The payments looked cheaper (according to all the calculators I've seen...
> what are your plans/goals? trying to get debt-free? build a bigger nest egg? you could get cash out of this property to finance other investment property if you wanted to.
Was looking to be debt free with that property...I guess deep down I just hate debt. I'm thinking long tem this rental income could be supplemental to my retirement
That cash out option to finance another property is something I didn't think about and looking at all angles from this forum. 
> any plans to move or retire soon?
I wish, I'm only 33 (wife is 36) and have 2 kids under 5
> any chance of moving back into the rental?
Not so much, My wife and I have good paying and stable jobs and can afford our new home comfortably. Not to mention we only moved 15 miles away. (Located in the Panhandle of Florida by the way, if that affects anyone's advice)

 

rated:
atikovi said:   
forbin4040 said:   1) 5% Heck Yah
  Most people forget the first 10 or 15 years of a 30 year mortgage payment goes mostly for interest and little toward principle. Get a new mortgage and you start all over again back at square one, whereas in your current mortgage more of your payment will be going towards principal now. 

  Well, yes, if you extend the term of your mortgage.  Doesn't sound like that's what he's talking about doing, though.  

rated:
atikovi said:   
forbin4040 said:   1) 5% Heck Yah
  Most people forget the first 10 or 15 years of a 30 year mortgage payment goes mostly for interest and little toward principle. Get a new mortgage and you start all over again back at square one, whereas in your current mortgage more of your payment will be going towards principal now. 

  That is the biggest reason I have to not refinance. I hate to reset that clock. 

rated:
sladeharrison said:   
atikovi said:   
forbin4040 said:   1) 5% Heck Yah
  Most people forget the first 10 or 15 years of a 30 year mortgage payment goes mostly for interest and little toward principle. Get a new mortgage and you start all over again back at square one, whereas in your current mortgage more of your payment will be going towards principal now. 

  That is the biggest reason I have to not refinance. I hate to reset that clock. 

  Unless you keep paying the same P&I payment that you were paying with the original 30 yr.  For most people, that's easier said than done.  Psychologically why should I pay more than what my mortgage statement said I should be paying?  I had 10 year left on my 15 year mortgage, I refi'd at lower rate for another 15 with the thinking that I'll keep making the same amount of payments I was making before so I can paying off in less than 10 years.  Didn't happen.  The extra cash found a home somewhere else every month.

rated:
sladeharrison said:   
solarUS said:   > when did you convert it to rental? and how much is it worth now? the savings from the primary residence capital gains tax exclusion might be very significant, such that selling it might be a better call.
> you really should have refi'd before you moved, as O-O loans have significantly better terms.
> 5% is not a terrible rate for an investment property in your circumstances.
> I vote against an ARM. why bother?
> what are your plans/goals? trying to get debt-free? build a bigger nest egg? you could get cash out of this property to finance other investment property if you wanted to.
> any plans to move or retire soon?
> any chance of moving back into the rental?
> this is an odd statement:

"I'm trying to decide whether or not it makes financial sense to refinance to a lower interest rate with the lower balance to reduce my monthly payments and put the savings toward the principle of the loan each month." then "A 15 year fixed isn't going to save that much more per month..."

why would a 15-year not be an option, if your plan is to aggressively pay down the note? the rate will be much lower. the payment will be higher, but didnt you already plan to pay more?

  I guess i look at it as I have about 15 years left on the original loan and my plan was to pay it off sooner...

> when did you convert it to rental? and how much is it worth now? the savings from the primary residence capital gains tax exclusion might be very significant, such that selling it might be a better call.
Converted to a rental beginning October. 
> you really should have refi'd before you moved, as O-O loans have significantly better terms.
I don't know what a 0-0 loan is...
> I vote against an ARM. why bother?
The payments looked cheaper (according to all the calculators I've seen...
> what are your plans/goals? trying to get debt-free? build a bigger nest egg? you could get cash out of this property to finance other investment property if you wanted to.
Was looking to be debt free with that property...I guess deep down I just hate debt. I'm thinking long tem this rental income could be supplemental to my retirement
That cash out option to finance another property is something I didn't think about and looking at all angles from this forum. 
> any plans to move or retire soon?
I wish, I'm only 33 (wife is 36) and have 2 kids under 5


 

you bought it when you were 19?? 

ARM may be cheaper, but interest rates can't stay this low forever. if you are thinking long-term, then a fixed rate is the way to go.

what is the house worth now?

O-O = owner occupied.

you really didn't answer the "any plans to move?" question...what are the odds your job(s) will take you away from this area? it's a factor.

OK - getting debt free. hate debt, gotcha. then IMO best option is probably to refi into a 15-year note below 3.75% because your interest expense will be lowest over the life of the loan.

rated:
Refi to a 10 or 15 year loan. Your first month's payment on that will contain less than interest than the current mortgage.

rated:
Refi it to a 30 year and set an autopay to pay whatever you are paying now.

rated:
15 years fixed refi, pay what you pay now or even a bit more.
You will be converting the loan from Principal residence to an Investment property loan. This kind of loan typically requires more down payment or equity in house be 20-25%.

You wan to minimize the interest cost while keeping the payments affordable, in your case you can most likely pay a bit more than what 15 year fixed would require.
 

rated:
solarUS said:   
sladeharrison said:   
solarUS said:   > when did you convert it to rental? and how much is it worth now? the savings from the primary residence capital gains tax exclusion might be very significant, such that selling it might be a better call.
> you really should have refi'd before you moved, as O-O loans have significantly better terms.
> 5% is not a terrible rate for an investment property in your circumstances.
> I vote against an ARM. why bother?
> what are your plans/goals? trying to get debt-free? build a bigger nest egg? you could get cash out of this property to finance other investment property if you wanted to.
> any plans to move or retire soon?
> any chance of moving back into the rental?
> this is an odd statement:

"I'm trying to decide whether or not it makes financial sense to refinance to a lower interest rate with the lower balance to reduce my monthly payments and put the savings toward the principle of the loan each month." then "A 15 year fixed isn't going to save that much more per month..."

why would a 15-year not be an option, if your plan is to aggressively pay down the note? the rate will be much lower. the payment will be higher, but didnt you already plan to pay more?

  I guess i look at it as I have about 15 years left on the original loan and my plan was to pay it off sooner...

> when did you convert it to rental? and how much is it worth now? the savings from the primary residence capital gains tax exclusion might be very significant, such that selling it might be a better call.
Converted to a rental beginning October. 
> you really should have refi'd before you moved, as O-O loans have significantly better terms.
I don't know what a 0-0 loan is...
> I vote against an ARM. why bother?
The payments looked cheaper (according to all the calculators I've seen...
> what are your plans/goals? trying to get debt-free? build a bigger nest egg? you could get cash out of this property to finance other investment property if you wanted to.
Was looking to be debt free with that property...I guess deep down I just hate debt. I'm thinking long tem this rental income could be supplemental to my retirement
That cash out option to finance another property is something I didn't think about and looking at all angles from this forum. 
> any plans to move or retire soon?
I wish, I'm only 33 (wife is 36) and have 2 kids under 5


 

you bought it when you were 19?? 

ARM may be cheaper, but interest rates can't stay this low forever. if you are thinking long-term, then a fixed rate is the way to go.

what is the house worth now?

O-O = owner occupied.

you really didn't answer the "any plans to move?" question...what are the odds your job(s) will take you away from this area? it's a factor.

OK - getting debt free. hate debt, gotcha. then IMO best option is probably to refi into a 15-year note below 3.75% because your interest expense will be lowest over the life of the loan.

Bought it when I was 20, about to turn 34.
House is worth $140-$145K.

Thanks to everyone for the advice. 
I'm leaning toward the 15 year fixed refinance, if I can find a good rate with low to zero fees and points. I have excellent credit (805) score, so I wouldn't think I should have to pay points. 
 

rated:
ach1199 said:   
sladeharrison said:   
atikovi said:   
forbin4040 said:   1) 5% Heck Yah
  Most people forget the first 10 or 15 years of a 30 year mortgage payment goes mostly for interest and little toward principle. Get a new mortgage and you start all over again back at square one, whereas in your current mortgage more of your payment will be going towards principal now. 

  That is the biggest reason I have to not refinance. I hate to reset that clock. 

  Unless you keep paying the same P&I payment that you were paying with the original 30 yr.  For most people, that's easier said than done.  Psychologically why should I pay more than what my mortgage statement said I should be paying?  I had 10 year left on my 15 year mortgage, I refi'd at lower rate for another 15 with the thinking that I'll keep making the same amount of payments I was making before so I can paying off in less than 10 years.  Didn't happen.  The extra cash found a home somewhere else every month.

That is a concern as well. Can I be as disciplined with that extra cash flow? I'm thinking I can be...but easier said than done. One plus is that once my kids start grade school we'll be saving that $1000/month daycare bill we're paying and that can go towards the principle as well.

rated:
sladeharrison said:   Bought it when I was 20, about to turn 34.
House is worth $140-$145K.

Thanks to everyone for the advice. 
I'm leaning toward the 15 year fixed refinance, if I can find a good rate with low to zero fees and points. I have excellent credit (805) score, so I wouldn't think I should have to pay points. 
 

don't be afraid of points. run the numbers on them. if you plan to keep the place for a long time, then the payback might make sense. 

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