Should I refinance?

[ebugayong]

Hello all,



I purchased a condo for $143,000 in Surrey and put a 25% down payment of $35,750 using a HELOC.



I am currently renovating it and have used the HELOC to do the renovations. Once the renovations are finished I will have about $55,000 of debt on the HELOC ($35,750 downpayment, $4,000 in closing costs, and around $14,000 in renovations).



So in total I have...



1) a $107,250 mortgage which is a 5 year Closed variable at 2.45%.



2) $55,000 HELOC at 4%



I got the condo below market value and have renovated it completely. After renovations a conservative guess would be that the condo would be appraised around $175-185k (based on comparables from my realtor)



My question is should I do a "cash out refinance" and put the extra money towards the HELOC to decrease the amount of money owing on my HELOC to a lower rate on a new mortgage?



I understand there are lawyer fees, and mortgage penalties (3 months interest I believe) but I'm still not quite sure what I should do?



I also have about 10k in Credit Card debt as I wasn't able to work for over 3 months (luckily I'm back to work!). Should I refinance to pay off this debt as well?



Your thoughts are greatly appreciated!



Emmanuel

 

[Matt Crowley]

Hi Emmanuel,



If you are considering to refinance, make sure the property will still cash flow after the refinancing.



3 month interest penalty on the $107,250 balance sounds like about $700 to me. This is before lawyer fees which you mention above.



Monthly interest on the CC at 24% sounds like about $200 to me (in the first month). If you are able to pay off the CC in 6 months (five $2000 payments & one $1355.62 payment), you will pay a total of ~ $660 in interest. (Due to declining principal balance).



I think it really depends on your investment objectives. If you want to buy more property you need cash + income space. If there is a current cash problem, then the income space may be valuable to market to a JV partner who has the cash to purchase another property. If you prefer to own everything entirely yourself, then the income space that is being crowded by the CC payments may be a lot less important right now to get rid of.



For me personally, I don't use my properties to finance my living expenses. The equity in them is solely for the purchase of more properties (and necessary upgrades / repairs to the properties).

 

[kfort]

Good answer above. All I would add is consider timeline for goals as well as return on your time (for refi). I refi'd once for ~30k and in retrospect I would wait an extra year (~$10k). If your plan is to JV, consider pros and cons of completing that both after and before tefi

 

[Thomas Beyer]

If 5 year closed the penalty would be HUGE, roughly 3% on the remaining balance for almost 5 years ! Why 3% ? It is the differential to the rack rate of 5.5% vs. your rate. So 3% of $108,000 is about $3000/year. Times 5 years: penalty is about $15,000 ! Why did you get a 5 year mortgage ? That was not all that smart if the plan was to refi all along.



Pay CC ASAP.



Eliminate the word Credit in CC from your vocabulary. It is NOT a CREDIT card .. it is either a debt card or convenience card !



Book the $15,000 penalty in the asset column of the balance sheet of life under "lessons learned". Oops. But, all part of learning: better next time !