Should We Take Cash Out from Refinancing?

I was surprised to learn that our house appraised for $18k higher than we purchased it for in Dec 2008 and our refinance lender will let us borrow an additional $20,000 over our current mortgage balance. I thought lending practices were getting tougher?

Now we have to figure out how much we want to borrow. I prefer not to mix personal and investment transactions because its easier to help me establish an accurate rate of return for investments like our rental properties. However, with interest rates so low it pretty compelling to start blurring the lines a bit to help our bottom line - take a look at a current snapshot of our debt (House #1 & #2 are rentals):

Loan	Description	House	Current Balance	Matures
1	5.6% 30yr fixed	House #1	$ 102,360	Aug-31
2	HELOC @ 3.25% var.	House #1	$ 25,500	Aug-23
3	IELOC @ 4.25% var.	House #2	$ 9,479	Jul-29
4	4.875% 30 yr fixed	House #4	$ 235,674	Jan-39
		Total	$ 373,013

Our Recent Focus on Debt Reduction
With our growing family and change to a single income status over the past 2 years we have been focusing on paying down our debt in order to boost our monthly cash flow as living on our single income cuts things too close to comfort for us. We have been able to eliminate the primary mortgage on House #2 by paying it down and transferring the remaining amount of loan to the HELOC and IELOC. Now we are starting to focus our monthly rental runoff to paying down the mortgage on House #1.

Does It Make Sense to Max Out Our Refinanced Mortgage?
If we take the maximum loan amount we'd be able to borrow an additional $20,000 that we could use to paydown some of our higher rate debt. Currently loan #1 is $102k at 5.60%. The new rate on our refinanced mortgage will be 4.375%. We'd cut 1.225% on the interest rate for $20,000. On the downside we wouldn't see but a $2 benefit in a monthly payment reduction on our primary mortgage instead of ~$70/mo drop in our monthly payment if we didn't pull the addtional $20k out.

Bottom line for us though would be to drop the interest rate on the $20k and get the rental mortgage paid off sooner. We really won't see much monthly benefit now from a ~$70/mo payment drop. Once the mortgage is paid off we should see a ~$750/mo improvement to our cash flow.

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Comments (2)

It doesn't make sense to me to borrow more money to pay back another loan. As you said, you'd save a really small percentage over the life of the loan, and it would only change your monthly budget by a paltry $2. Why bother?

Posted by Joe | August 17, 2010 2:29 AM

Given your concerns about cash flow I'd recommend preserving it and not rolling the extra $20k into the refi. Keeping obligated payments low allows you to accelerate payments on #1 with the extra $70 at your discretion. If things get tight with the household budget you can redirect it if needed. The way you are accelerating payments you wouldn't realize the net interest savings you are calculating anyway--unless you factored in the early payoff and didn't mention it perhaps?

Posted by CFP Gal | August 17, 2010 3:18 AM