Should I mortgage my primary residence to pay off an underwater mortgage on a rental property? The current mortgage has 15 years left. I currently do not have a mortgage on my primary residence.

By Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience

Edited by Michael Jensen, Mortgage and Finance Guru

Updated October 20, 2020

The answer to your question depends on your financial objectives. If you are looking to maximize your cash flow then it probably makes sense to get a mortgage on your primary residence to pay off the loan on your rental property.

I only recommend that you do this if the mortgage rate on your new loan is lower than the rate on your rental property. The rate for a mortgage on your primary residence is usually 0.250% to 0.500% lower than the mortgage rate for a rental property so you may be able to take advantage of this rate difference to lower your monthly mortgage cost and boost your cash flow from the investment property.

If you cannot lower your mortgage rate and monthly payment then you are unlikely to improve your cash flow, so taking out a new mortgage on your primary home makes little financial sense in this scenario.

There are several points to keep in mind if you decide to move forward with the mortgage on your primary residence. First, I recommend that your new mortgage is as small as possible which means your loan amount should only be large enough to pay off the current rental property mortgage plus closing costs potentially. Minimizing your mortgage amount lowers your monthly payment and maximizes your cash flow.

Second, even though you are using the mortgage on your primary residence to pay-off another loan and you are not personally receiving any loan proceeds, your new mortgage is technically a cash out refinance. Any time you access the equity in your home when you take out a mortgage, lenders consider this a cash out refinance regardless of how the loan proceeds are used.

Review How a Cash Out Refinance Works

The mortgage rate on a cash out refinance is typically higher than the rate on home purchase mortgage so you should keep this in mind when you evaluate your monthly loan payment and potential savings. The table below shows mortgage refinance terms for leading lenders in your area. We recommend that you shop multiple lenders to find the lowest mortgage rate and closing costs.

Another point to consider is that the length of your new mortgage should match the remaining term of the rental property loan you payoff, if possible. For example, if you have 15 years left on the rental property mortgage, we recommend that you take out a 15 year mortgage on your primary residence.

If you take out a new 30 year mortgage, it effectively turns your original rental property loan into a 45 year mortgage by adding 30 years of new payments to the 15 years of payments you have already made. The additional 15 years of payments adds up to a lot of extra interest cost, even if you are able to lower your mortgage rate.

The mortgage rate on a shorter loan is also lower, which saves you thousands of dollars in total interest expense over the life of your loan. For example, the rate on a 15 year fixed rate mortgage is usually .375% to .750% lower than the rate on a 30 year loan.

The downside to a shorter mortgage is that your monthly payment is higher, because you are repaying the loan over a shorter time period. Although a higher monthly payment impacts your cash flow, we recommend a smaller and shorter mortgage, if it is financially feasible.

To summarize our recommendation, we advise you to compare the mortgage rate and monthly payment for a new mortgage on your primary residence to your current investment property loan rate and payment. In an ideal scenario, your new mortgage amount matches your current rental property loan balance and your new mortgage term is as short as possible.

If you are able to increase your monthly cash flow from the rental property then move forward with the new mortgage. If not, stay the course and consider overpaying, or accelerating, the rental property mortgage so you can pay it off as soon as possible.

Sources

"Cash-out Refinance."  Origination & Underwriting.  Freddie Mac, 2020.  Web.