Dear Dr. Don,
We currently own a multifamily unit with two 30-year fixed mortgages. One is for $200,000 at 5.25 percent and the other is for $65,000 at 3 percent. Our home is valued at $280,000. We would like to refinance and have cash to pay down the mortgage so that we will have 5 percent equity in the house to refinance. Do you recommend using the cash to pay down the debt to refinance or waiting until the home value rises? We also want to buy another home in the next few years in addition to the one we have.
— Michelle Myriad
Unless you’re having cash flow problems that you’re trying to resolve by refinancing the two mortgages into one loan, the assumption here is that the lender on the $65,000 mortgage won’t sign off on refinancing the $200,000 loan, which forces you to refinance both loans. Otherwise, you’d hold on to that 3 percent rate.
Bringing cash to closing can get you that new mortgage, but you’ll still wind up paying private mortgage insurance on a conventional mortgage with less than 20 percent down. If you live in the home, an FHA loan requires less money down, but you’ll pay mortgage insurance upfront and in your monthly mortgage payment. An FHA loan requires a 3.6 percent down payment, and you’ve got that much equity in the property now without bringing cash to closing.
I’d lean toward refinancing now versus waiting for home values to rise, just because I don’t think you’ll like where mortgage rates go if you wait. It also makes things easier by having the financing in place before shopping for your next property.
Compare the cost of a cash-in closing on a conventional mortgage with the cost of closing an FHA loan. Private mortgage insurance doesn’t last forever with a conventional loan, but the mortgage insurance premium is permanent on an FHA financing. The difference in interest rates between the two loans should be small, but that’s also important in determining which loan is right for you.
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