Cash Out Refinance - When does it make sense and when doesn't it? (funds, pay)
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I bought a condo over 3.5 years ago. Purchase price was $245K @ 4.65%, 30yr fixed. The interest rate and 20% down was higher than desired, but that was what was needed at the time to secure special financing for it, since there was on-going litigation that was about to wrap up. I looked into the issues under litigation and they were things that could be remedied by the settlement and the area and condition of the condos/buildings was pretty good. The litigation ended in a settlement and the HOA ordered the fixes which were completed about a year or so after purchase.
The property peaked at about $345K ($100K appreciation since date of purchase) during the 2nd half of 2018 and in 2019 has been seeing a bit of a decline. Current Zillow, Trulia values show it at around $322K ($80K appreciation since date of purchase, not counting my 20% deposit).
Current rate for 30 year fixed is about 3.78% (not quite a whole percentage point lower than my current rate), 15 year fixed is at 3.16%.
My question is: When does it make sense to do a cash out refinance and when doesn't it? How about in my particular scenario? Since my condo is out of litigation and there are no rental restrictions or owner/rental occupied ratios in the HOA rules, I think that opens up my financing options considerably compared to when I bought it while under litigation.
I like the condo, it's in one of the more desirable cities in my county. My mortgage (principal and interest), it is just under $900/mo. With insurance and property taxes, my total monthly payment becomes $1290-ish. Finally, with my HOA dues at $166, I'm at $1456 a month total. The going market rate in my area for a comparable 2-bdrm, 2-ba., 1-car garage apartment with about the same square footage is $1800 to as high as mid-$2000's or so. I could probably rent it out for $1700-1800 if I wanted to at some point. It's close to a major employer (walking distance), also walking distance to a local shopping plaza, so it's very convenient.
I was considering selling the condo when it peaked at around $345K, and could have pocketed $100K plus got my 20% down back (about $48K additional). But then I'd either have to buy another house or rent an expensive apartment (if I wish to remain in the same area). I was reluctant to buy a new house because I'd be looking at around $500K or more, which would be about a $400K mortgage. I believe I'd be paying a premium at or near peak, and interest rates were also creeping up to the 4.x% range. Considering the added expense and my desire to retire in 10 years rather than work a additional 7 years on top of that, and desire to pay off any mortgage by the time I retire, that would require double payments. So, it was hard to justify buying an new house to have the luxury of more space that is a "nice to have" even though I can get by alright with my current 2bd/2ba condo. There's also the upkeep considerations of owning a house (more time and money) vs a condo.
Which brings me to considering the viability of a cash out refinance instead. I would get to take out my equity, keep the condo and continue living in it rather than rent it out. Monthly payments would go up somewhat, but maybe the increase in monthly payment wouldn't be so much since I'd be getting into a somewhat lower interest rate? I could then continue to make double payments on the condo (something I likely wouldn't be able to easily do without becoming house poor if I were to sell the condo and buy a new house, taking on a $400K mortgage). As for the cash out proceeds, I could invest that wisely (hopefully) towards my retirement or maybe some solid low-risk opportunities with potential gains to justify pursuing them.
I'd appreciate some input on the pros and cons of a cash out refinance and whether it would make sense in my scenario.
It doesn't make much sense to take a cash out refinance if you are going to invest in low risk or fixed income assets, or a portfolio containing a significant allocation to bonds. It probably makes the most sense to refinance into a 15 or 30 year fixed loan with the same balance as your current one (no cash out). As to whether to choose a 15 year or a 30 year, that depends on the ratio of your income to your loan amount. If your annual income is more than your loan amount, a 15-year loan is probably good (assuming you have a good emergency fund), otherwise you might want to take the longer loan just to give you flexibility in case of a medical or other unanticipated issue.
A condo is perfect for a renter. Very little to budget as far as exterior fixes go. Cash it out and rent it out to cover the mortgage and over time your tenants will buy your house for you.
I bought a condo over 3.5 years ago. Purchase price was $245K @ 4.65%, 30yr fixed. The interest rate and 20% down was higher than desired, but that was what was needed at the time to secure special financing for it, since there was on-going litigation that was about to wrap up. I looked into the issues under litigation and they were things that could be remedied by the settlement and the area and condition of the condos/buildings was pretty good. The litigation ended in a settlement and the HOA ordered the fixes which were completed about a year or so after purchase.
The property peaked at about $345K ($100K appreciation since date of purchase) during the 2nd half of 2018 and in 2019 has been seeing a bit of a decline. Current Zillow, Trulia values show it at around $322K ($80K appreciation since date of purchase, not counting my 20% deposit).
Current rate for 30 year fixed is about 3.78% (not quite a whole percentage point lower than my current rate), 15 year fixed is at 3.16%.
My question is: When does it make sense to do a cash out refinance and when doesn't it? How about in my particular scenario?
If you had some other investment in mind where you were certain that you would be earning something higher than 4%. Then it might make sense to cash-out what you can and put the cash into that other investment.
When I retired, I have a Tri-plex [three apartments in a single building] that was making a reasonable profit, it had paid off most of its mortgage. So I refinanced it, and I used the cash to buy my retirement home [no mortgage]. My plan at that time was to keep the Tri-plex filled and to watch it pay off the new mortgage.
You're not clear on what it is you're trying to accomplish.
If the purpose of the cash out refi is to have funds to invest elsewhere, then why not just stop making double payments to the condo and invest that money instead? It almost sounds like you just feel you need to do something with the equity because it's there. You would probably best suited to take out at HELOC, and if a lucrative investment opportunity presents itself you'll have a quick way to access cash.
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