Everett, Wash.
Published: Sunday, May 24, 2009

Refinancing? Weigh all the factors

By Steve Tytler

 Question: My husband and I own a home in Everett free and clear. We also own a home we rent out in Richland, which we purchased in November 2005 on a 30-year mortgage at 6.75 percent interest. We owe approximately $167,000 on the rental home. My husband has been to the bank and gotten paperwork drawn up for us to pay off our rental and take out a 30-year mortgage on the home we live in at 4.875 percent interest. I believe I have read that it is never a good idea to refinance a home that you own free and clear and live in. Is that true?



Answer: As I have said in the past, there is no right or wrong answer to this question. It all depends on your personal financial needs and goals, as well as your risk tolerance.

Some people are very conservative and don't want to take any financial risk. For them, owning their home free and clear is the ultimate goal. Other people are more comfortable with financial risk and they use their home mortgage as a financial tool that allows them to use the equity in their home as collateral to secure loans for business purposes and other investments. For them, having a mortgage on their home makes sense, no matter how much money they have in the bank. They will probably never pay off their mortgage.

Again, neither person is right or wrong. They just have different financial needs and goals.

If you are borrowing money against your home to spend on fancy vacations, clothes, jewelry and other expensive things that don't return any value, I do think that is wrong. You should never use your home as an ATM. That's how many people got into financial trouble over the past few years and they are now losing their homes in foreclosure.

Now, let's look at your situation. You own your home free and clear, which would tend to indicate that you are financially conservative and not a risk taker. If your intention is to keep the rental home in Richland long-term, I think it definitely makes sense to refinance your home and pay off the rental house mortgage because as your letter indicates, you can get a much lower interest rate on your primary residence than you can on a rental property.

Just be sure you understand what you are doing.

As it stands today, if you couldn't make the mortgage payments on the rental house, the bank would foreclose on the rental property and sell it at auction. But if you take out a mortgage on your home and can't make the payments, the bank could foreclose and take your home away from you.

I'm not saying you shouldn't proceed with your plan. I just want to make sure you understand the consequences if something goes wrong. If you are not a financial risk-taker, this may make you uncomfortable.

By reducing your mortgage interest rate from 6.75 to 4.875 percent, you will save so much money per month that your break-even point (where the total month savings equal the cost of refinancing) will come very soon, probably in about one year. So even if you plan to sell the rental house in a few years, refinancing would still make sense.

I have seen people make mortgage decisions that might not make the most sense from a purely financial analysis, but it helped them sleep better at night. That is a perfectly valid reason for making a mortgage decision -- as long as you understand what you are doing and why.

Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at economy@heraldnet.com.
© 2009The Daily Herald Co., Everett, WA