It feels like this is a complicated scenario but maybe it's easy for those on the forum who love to crunch the numbers ... so I'm hoping that you can lend some insight.
I will try to give as much detail as I can but feel free to ask for further clarification as needed. The typical inquiry is whether the interest savings are worth the closing costs, etc. ... but this is not
my question. I want to know whether the HARP2 refinance makes sense based on improved monthly cashflow for an increased overall savings rate (with the goal of a somewhat-extreme early retirement) and
in light of any changes to my resultant tax bracket (since the current losses offset a large chunk of my income and therefore reduce my tax liability).
Primary Residence = owned free & clear with no mortgage
Rental Property = extremely underwater on mortgage (over 200% LTV) and looking at a HARP2 refinance
Gross Income = estimate $52,000
Pre-Tax Deductions = estimate $3,500 (HSA, Limited Purpose FSA, and Medical Insurance ... note: all retirement contributions are post-tax via Roth)
I do not itemize because the standard deduction is higher. Federal taxes only because there is no state income tax in Florida. Single with no dependents. I only have a tiny bit of taxable interest and dividends that get factored in ... this amounts to less than $75 so it's negligible.
Monthly rental income = $800
Mortgage payment ($100,500 @ 6% for 30 years) = $602.55
ACH debit service for rent collection = $3
HOA = ~$237
Property tax = ~$100
Electric = ~$100 (this is the maximum that I will pay per the rental agreement ... usually less but varies by month/tenant and I budget conservatively)
Shortfall = $242.55 where I have to infuse cash every month ... right now I put in $200 and monitor the balance which is usually sufficient although I may adjust as needed
Deductible real estate rental loss would be at least $5,000 ... more if there is a vacancy or upkeep/repairs needed. (It was just over $10,000 in 2011 due to such non-standard items.)
My effective tax rate has hovered around 11% because my taxable income calculates out to barely below the upper threshold of the 15% federal tax bracket ... so these real estate rental losses are offset by the benefit of tax savings.
Also, I am pursuing a goal of early retirement in 2020 (just before my 40th birthday) so I am taking steps to bump up my overall savings rate which is only around 55% right now. Forking out less of my own money toward this rental property will help with that ... but I still can't get it to the point where it's truly self-sustaining without paying off over $10,000 toward the mortgage balance (which would be difficult-to-impossible and I don't even know if that's a good idea).
Right now the mortgage balance is $90,000 and I'm considering whether to roll closing costs into the loan (up to 4% per Freddie Mac guidelines so let's assume $3,600). Since it's a low-rise condo and I don't want to pay any points (too complicated plus I don't have the excess funds to do so), the market rate is 4.125% for a 30-year term as of this writing. I will be required to escrow taxes through the mortgage servicer which decreases flexibility and requires additional money upfront. If I don't pay off any additional principal prior to the refinance, then I might be looking at a new mortgage payment of around $450 which is $150 savings. I would still be on the hook for $50-$100 each month beyond what I can collect in rent (and that's just routine expenses ... not including vacancy or maintenance, etc.).