Real Estate

Future refinancing question

  • Last Updated:
  • Apr 16th, 2020 10:23 am
[OP]
Newbie
Sep 29, 2019
44 posts
5 upvotes

Future refinancing question

Just wanted to run a scenario by the experts on here to get some advice. For the sake of this discussion, I'm just pretending the huge unknown in the world right now (Covid) won't crash the real estate market. This is our current real estate situation:

Primary Residence
Value: 950k
Remaining mortgage: 740k
Mortgage renewal: 2025
Amortization remaining currently: 30 years (just purchased)

Rental Property 1
Value: 550k
Remaining mortgage: 220k
Mortgage renewal: 2024
Amortization remaining: 15 years
Current cash flow: $330/month

Rental Property 2
Value: 750k
Remaining mortgage: 460k
Mortgage renewal: 2024
Amortization remaining: 19 years
Current cash flow: $1000/month

Thinking 4 years into the future, would it make sense to flip these mortgages around and add years to the rental properties and take off years from the primary residence? I was thinking we could re-amortize the two rental properties at 25 years creating more tax deductible mortgage interest and then re-amortizing the primary residence down to 15 years since interest isn't tax deductible there. Overall it would even out from a cash flow perspective, but my thinking is it would help out a lot more come tax time.

We're both about 40 years old as well and plan on retiring at a pretty standard age (60-65). I've been thinking about other alternatives like the Smith maneuver on the primary residence, but I don't think I have what it takes to pull that off :)

Thanks in advance!
4 replies
Newbie
Jul 24, 2018
41 posts
24 upvotes
Hi Stuntman. Firstly, if you take out equity from your rental properties and use the funds to prepay your principal residence mortgage, you have just created non-deductible debt on your rentals because you borrowed for a non-deductible purpose (prepay your principal residence mortgage). It does not matter that you are adding debt to your business (rental proprietorship), what matters is what did you do with the borrowed money. So now you've mixed non-deductible debt on your rentals (money borrowed to prepay your principal residence) with deductible debt (the money you borrowed (mortgages) to buy your business).

Secondly, with a house value of $950k and mortgage balance of $740k, you theoretically have more than enough equity for a readvanceable mortgage (min equity required 20% whereas you currently have just over 22%). Refi into a readvanceable mortgage and implement the Cash Flow Dam accelerator. www.smithman.net for FAQs, more info and how you can get in touch.
[OP]
Newbie
Sep 29, 2019
44 posts
5 upvotes
rsmiths wrote: Hi Stuntman. Firstly, if you take out equity from your rental properties and use the funds to prepay your principal residence mortgage, you have just created non-deductible debt on your rentals because you borrowed for a non-deductible purpose (prepay your principal residence mortgage). It does not matter that you are adding debt to your business (rental proprietorship), what matters is what did you do with the borrowed money. So now you've mixed non-deductible debt on your rentals (money borrowed to prepay your principal residence) with deductible debt (the money you borrowed (mortgages) to buy your business).

Secondly, with a house value of $950k and mortgage balance of $740k, you theoretically have more than enough equity for a readvanceable mortgage (min equity required 20% whereas you currently have just over 22%). Refi into a readvanceable mortgage and implement the Cash Flow Dam accelerator. www.smithman.net for FAQs, more info and how you can get in touch.
Thanks a lot for the explanation. What I'm not clear on is why I would be taking funds from my rental properties to prepay my principal mortgage in this scenario. If the mortgage on a rental property comes due and I just renew, but with a longer amortization, thus lowering the monthly payments, I'm not really taking equity out of that am I? I would think that's completely unrelated to me shortening the amortization on my principle residence when it comes due a year later. Unless I'm misunderstanding.
Newbie
Jul 24, 2018
41 posts
24 upvotes
Apologies if I misunderstood. The way I read your post was that you were thinking about pulling equity out of your rental properties with refi's and using it to prepay your principal residence mortgage. Glad to hear that's not the plan. In any event, the Cash Flow Dam is certainly available to you to eliminate your non-deductible principal residence mortgage very quickly if you have a readvanceable mortgage.
Deal Addict
Jul 29, 2006
4140 posts
964 upvotes
sure you could do that, or you could refinance to 30 years and put a HELOC on one or both of your rental properties since you're refinancing anyways?

However, before you refinance I would consider doing some smart renovations to raise the value even more.

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