refinance two properties into one mortgage?

[dpmd]

I am lucky in that I have a spouse with a good job and a partial scholarship when I was going through med school. We were able to purchase a condo during school that has increased in value. Because of an Army deployment during med school and a gap between school and residency I was able to pay off some debt starting with school loans at a higher interest rate than my mortgage, then some paying down my mortgage. During residency I made a choice to purchase a house for mostly non-financial reasons (wanted a yard and house rentals were a little more than a mortgage would be, had gotten used to being able to change walls, flooring, etc without asking permission, had success renting out the condo and figured I could do the same with the house when I finished). The situation with that house is not as good (dropped in value some but not less than our outstanding mortgage value) but I recently accepted an offer to stay on as faculty at the institution where I am in residency. So now I am trying to figure out the best financial move to make. My choices (feel free to add other options)

Refinance both mortgages separately (the condo is 5.875% and the house is 5.375 but it is FHA so there is PMI). Two mortgage refinances means two sets of fees though.

Refinance the condo for as much as possible. This way I take the money I can get out of it and pay down the house (plus some of the bump in pay can go to this as well). The condo is a rental property now so the interest deduction comes off my rental income (so more is ok). And we just take the standard deduction once the house mortgage interest isn't enough to make itemizing better. Not sure if doing this would change the interest rate I would get though.

Refinance the condo just for that balance. Use some of my bump in pay to pay down the house over time (probably not very long unless I get extravagant with my spending-it is a hefty increase)

Screw the refinancing and just finish paying off the condo and the house using the bump in pay (If I took half the difference in pay and paid down the mortgages it would take about 2 yrs but I am not actually trying to figure out how taxes would factor in so maybe it would be longer). I would want to make sure I max out the retirement plan at my new job and IRA's for my husband and I. Once you do that do you just use a taxable investment account for retirement saving-I want to be able to retire as early as possible even if I decide to keep working. My thought is that two paid off properties would be good to have and rent out (probably would get management companies if I move later just to reduce the hassle, even if they charge a lot the rest is mostly profit after you take out taxes, etc)

We have no credit card debt, car loans, and the only student loans I have left are at 5% (which I would start paying off after the mortgage unless someone has a good rational to do otherwise-it is only about 6 K) and 2.875% (which I will just keep paying my required payments on-no need to pay that off early).

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[The White Coat Investor]

I am lucky in that I have a spouse with a good job and a partial scholarship when I was going through med school. We were able to purchase a condo during school that has increased in value. Because of an Army deployment during med school and a gap between school and residency I was able to pay off some debt starting with school loans at a higher interest rate than my mortgage, then some paying down my mortgage. During residency I made a choice to purchase a house for mostly non-financial reasons (wanted a yard and house rentals were a little more than a mortgage would be, had gotten used to being able to change walls, flooring, etc without asking permission, had success renting out the condo and figured I could do the same with the house when I finished). The situation with that house is not as good (dropped in value some but not less than our outstanding mortgage value) but I recently accepted an offer to stay on as faculty at the institution where I am in residency. So now I am trying to figure out the best financial move to make. My choices (feel free to add other options)

Refinance both mortgages separately (the condo is 5.875% and the house is 5.375 but it is FHA so there is PMI). Two mortgage refinances means two sets of fees though.

Refinance the condo for as much as possible. This way I take the money I can get out of it and pay down the house (plus some of the bump in pay can go to this as well). The condo is a rental property now so the interest deduction comes off my rental income (so more is ok). And we just take the standard deduction once the house mortgage interest isn't enough to make itemizing better. Not sure if doing this would change the interest rate I would get though.

Refinance the condo just for that balance. Use some of my bump in pay to pay down the house over time (probably not very long unless I get extravagant with my spending-it is a hefty increase)

Screw the refinancing and just finish paying off the condo and the house using the bump in pay (If I took half the difference in pay and paid down the mortgages it would take about 2 yrs but I am not actually trying to figure out how taxes would factor in so maybe it would be longer). I would want to make sure I max out the retirement plan at my new job and IRA's for my husband and I. Once you do that do you just use a taxable investment account for retirement saving-I want to be able to retire as early as possible even if I decide to keep working. My thought is that two paid off properties would be good to have and rent out (probably would get management companies if I move later just to reduce the hassle, even if they charge a lot the rest is mostly profit after you take out taxes, etc)

We have no credit card debt, car loans, and the only student loans I have left are at 5% (which I would start paying off after the mortgage unless someone has a good rational to do otherwise-it is only about 6 K) and 2.875% (which I will just keep paying my required payments on-no need to pay that off early).

That's a little combobulated. Let me see if I get this:

Condo
Rental Property
Small balance on loan
5.875%

House
Current Residence
Large Balance on loan
5.375%

Student Loans
5%
2.875%

Roth IRAs and retirement plan available
Large income relative to expenses

Here's what I'd do.

1) Pay off the 5% student loan. You probably make too much to deduct the interest. This is your highest interest rate after-tax.
2) Do a no-cost refinance to refinance the home for the going rate for a 10-15 year fixed at around 3.25%. Put down 20% only to get the good rate and avoid PMI.
3) Max out retirement plans, including Backdoor Roth IRAs if needed.
4) Use any equity in the home to pay down the condo mortgage. Then aggressively pay it down. Probably no point in refinancing this as you don't get a very good rate on a rental property.
5) Pay off 2.875% student loans.
6) Pay off mortgage on home.
7) Invest in a taxable account.

That's what I'd do. Your mileage may vary.

 

[dpmd]

That's a little combobulated. Let me see if I get this:

Condo
Rental Property
Small balance on loan
5.875%

House
Current Residence
Large Balance on loan
5.375%

Student Loans
5%
2.875%

Roth IRAs and retirement plan available
Large income relative to expenses

Here's what I'd do.

1) Pay off the 5% student loan. You probably make too much to deduct the interest. This is your highest interest rate after-tax.
2) Do a no-cost refinance to refinance the home for the going rate for a 10-15 year fixed at around 3.25%. Put down 20% only to get the good rate and avoid PMI.
3) Max out retirement plans, including Backdoor Roth IRAs if needed.
4) Use any equity in the home to pay down the condo mortgage. Then aggressively pay it down. Probably no point in refinancing this as you don't get a very good rate on a rental property.
5) Pay off 2.875% student loans.
6) Pay off mortgage on home.
7) Invest in a taxable account.

That's what I'd do. Your mileage may vary.

Absolutely correct (and more clear) with the summary.
1. I had not considered the tax thing since we had so far been able to qualify for the deduction. I guess I could figure out how much our income for this year will be (since I will only get the increased pay for part of the year) but I bet it will too much to qualify.
2. and 4. Illustrates my knowledge deficiency (about refinancing rental properties) and sounds like a good plan.
Would your order for 5. and 6. change if I told you the amount is small enough that the interest we pay now only barely brings all of our itemized expenses above standard deduction (was about 7 K last year), and would that change any of your other suggestions?

Thanks for the help. Sometimes I overthink but end up missing important things because I come up with convoluted plans.

 

[The White Coat Investor]

Absolutely correct (and more clear) with the summary.
1. I had not considered the tax thing since we had so far been able to qualify for the deduction. I guess I could figure out how much our income for this year will be (since I will only get the increased pay for part of the year) but I bet it will too much to qualify.
2. and 4. Illustrates my knowledge deficiency (about refinancing rental properties) and sounds like a good plan.
Would your order for 5. and 6. change if I told you the amount is small enough that the interest we pay now only barely brings all of our itemized expenses above standard deduction (was about 7 K last year), and would that change any of your other suggestions?

Thanks for the help. Sometimes I overthink but end up missing important things because I come up with convoluted plans.

Yes, it would change. Basically most of your interest now isn't really deductible. But that'll probably change as you make more. Remember that state taxes, property taxes, charitable contributions etc all go into your deductions. I give more to charity each year than the standard deduction, so all of my mortgage interest is deductible.

 

[dynx]

Absolutely correct (and more clear) with the summary.
1. I had not considered the tax thing since we had so far been able to qualify for the deduction. I guess I could figure out how much our income for this year will be (since I will only get the increased pay for part of the year) but I bet it will too much to qualify.
2. and 4. Illustrates my knowledge deficiency (about refinancing rental properties) and sounds like a good plan.
Would your order for 5. and 6. change if I told you the amount is small enough that the interest we pay now only barely brings all of our itemized expenses above standard deduction (was about 7 K last year), and would that change any of your other suggestions?

Thanks for the help. Sometimes I overthink but end up missing important things because I come up with convoluted plans.

1. You're doing something wrong if you have two properties, one rental, student loans and your deductions are only 7k.

Are you taking depreciation on your rental condo? if its 150k then that alone should give you 5k+ in deductions. If you haven't been doing this...get an accountant to show you what you need to do to because you don't know what you're doing and you can recapture past depreciation. (not trying to be rude..trying to help)

2. Depending on what your home loan is I would do as another person suggested and refi that with cash out and pay down the condo. You won't get as good of a rate on a rental as you will on your home loan.

Option 3 would be ideal but it assumes you have a lot of cash on hand and equity that will allow you to find a bank that will actually let you do it:

3. If you have enough equity total in the house and condo you might be able to roll your student loan at 5% into your home mortgage, get a mortgage at a lower rate 3.5-4% AND deduct it all vs. capping out your student loan interest deduction. This would save you more money than paying off the condo but it requires you have some significant funding/equity or a bank won't even consider letting you do that. In addition, push comes to shove you can walk away from your mortgage but you can never walk away from student debt.

 

[dpmd]

1. You're doing something wrong if you have two properties, one rental, student loans and your deductions are only 7k.

I meant the mortgage interest was only 7K. I was separating out the rental mortgage since I deduct that off my rental income. I figured with the refinance the interest would be even less so my total deductions wouldn't be above the standard deduction threshold (but I forgot that state taxes are one of the itemized deductions, so never mind about that).

I don't have enough equity for option 3. Looks like refinancing then paying the student loans and condo down first is the best way to go. Will work on it. Thanks.