A Story of Refinances

Our first debt as a couple was purchasing our house. We wanted payments to stay the same or lower than what we had been paying for rent, $765/mo from 2010-2012. With an FHA loan and negotiations/inspection that led to the sellers paying closing costs, we ended up purchasing a 875 sq. ft. house for $93.5k and a mortgage payment of $650. We immediately began paying an additional $100 toward principal every month since that’s what we’d budgeted for rent (not that we had a real budget to speak of yet…). Baby #1 came that fall.

Refinance #1

In 2015, we had baby #2 and had started keeping our budget (by hand was the only way I learned to take it seriously! But that’s a story for another day). As our budgeting philosophy followed what we’d been learning from Dave Ramsey, we decided to refinance to a 15-year mortgage and were grateful to get rid of the mortgage insurance we’d been paying since we’d had no down payment initially and now had 20% equity built up.

Our payments went up to $790. We had already been paying almost that amount, so it didn’t make much of a difference and we had the satisfaction of knowing our mortgage would be paid off in our early 40s.

Refinance #2: Cash out

The real estate market finally got hot in our area in 2018, and we’d begin real estate investing in 2017 (two months after baby #3 was born). We bought our second investment property early in 2019 after saving more than 40% of our income between 2017-2019.

Our properties were both consistently bringing in the cash flow we wanted. Rental #2 was making $14%+ cash on cash (almost 17% now after a refinance for that property!). We were on fire with the possibilities of real estate investing and the rental niche we’d picked to focus on. Rather than wait two more years to save up a down payment for a next property (and not wanting to take private money loans), we started researching HELOCs and refinance options for our primary residence.

We decided against a HELOC because we were concerned about the adjustable rates and possibility of the balance being called in.

Then we strongly considered simply refinancing to a 30 year mortgage with no cash out. Our payments would have dropped by $200/month allowing us to save for that next property faster.

But then we decided on a middle road (maybe we were wrong, but it felt like the answer we needed):

We took a cash out refinance, in addition to our rental property acquired in early 2019, we’d also turned our 2-bed home into a 3-bed, and we had a lot of sweat equity that added up to the 20% to stay in as down payment and leave us with $31,000 cash out at closing. We stayed with a 15 year mortgage. So we had the cash up front to invest, but we still are on track to pay off our residence in our 40s. This meant a lower rate, but also a higher mortgage payment (payments at $933) which we budgeted in so that it wouldn’t alter our rate of savings for future investments!

In the fall of 2019, we found that third rental property and invested the cash out from our home. While we’re paying 3.75% interest on the cash out, it’s making 12% for us.

Paying off the mortgage

Do we plan to wait 15 years to pay off that mortgage? No. But we do want the money to invest and work for us now. After we’ve acquired 8-9 rental properties (hopefully at a rate of 2/year or faster), we’ll use all the money we’ve been saving/investing to pay off our primary mortgage. And then? Then we’re set to retire (with work managing our rentals to keep us busy).

Our FIRE journey has already led us through a lot of changes and growth in our mindset, our outlook on debt, on cash on hand, on our willingness to learn and jump in to new things, projects, and ideas. Hopefully that lifetime of learning never ends and we’re always ready to change when we learn something new!