Refinance Owner-Occupied, 2-Unit Abode?

By Dr. Don Taylor, Ph.D., CFA, CFP Features

SAN BERNARDINO, CA - MAY 15: Recently built homes are seen in suburban neighborhoods under construction on top of the San Andreas Rift Zone, the system of depressions in the ground between the parallel faults of the San Andreas earthquake fault, on ... May 15, 2008 in the community of Highland, east of San Bernardino, California. New calculations reveal a 99.7 percent chance that a magnitude 6.7 quake or larger will strike by 2037, according to the first-ever statewide temblor forecast released by the scientists of the United States Geological (USGS), Southern California Earthquake Center and California Geological Survey last month. Scientists have particular concern for the people living along the southern portion of the 800-mile-long San Andreas Fault east of Los Angeles. This section of the fault has had very little slippage for more than 300 years and has built up immense pressure that could release an earthquake of historic proportions at any time. Such a quake could produce a sudden lateral movement of 23 to 32 feet and be would be among the largest ever recorded. Experts have predicted that a quake of magnitude-7.6 or greater on the southern San Andreas would kill thousands of people and cause many billions of dollars in damages, dwarfing the 1994 Northridge disaster near Los Angeles that killed 72 people, injured more than 9,000 and caused $25 billion in damage. (Photo by David McNew/Getty Images) (2008 Getty Images)

Dear Dr. Don,

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Please help me decide whether I should refinance my mortgage. My principal balance is $106,000 on a 30-year fixed-rate mortgage at 5.875% with a monthly payment of $721.68. I make payments of $750 per month. The property is a two-unit dwelling. I live in one of the units and rent the other one for $1,800 per month. I have low income but good credit. I'm looking for a 15-year fixed-rate mortgage with the same monthly payment with no cash-out. Do you think I should refinance?

- Pam Ponders

Dear Pam,

First you have to see if the stars align to refinance and answer these questions. How much equity do you have in the property? How's the lease income history? How long do you plan to own the property? Can you qualify for the loan? What are the closing costs?

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You know the type of loan you want. You know what you want the payment to be.

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I estimated the remaining life of your current loan at 21.67 years or about 20 years if you keep making the additional principal payment of $28.32 per month.

For you to borrow $106,000 over 15 years and keep the same payment of roughly $750, you will need to get a mortgage rate of 3.5%. As fate would have it, that's the Bankrate national average for a 15-year fixed-rate loan as I write this column in early November. That also means you're coming up with the closing costs.

Unfortunately, risk-based pricing on a two-unit property with your low income but good credit may place you at a higher interest rate than 3.5%. At that point, you have to decide if you can stretch to make that higher payment and what the estimated interest savings would be from refinancing. You might want to drag your accountant into the discussion to see what she says about the resulting lost income tax deductions on the rental unit and how that impacts the cash flow from the unit.

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