Pay off home mortgage or pay off investment property?
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Anonymous
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My primary residence is a house I bought for $500k and is now worth $400k (mortgage is $350k).
My investment property was bought for $500k and is now worth about $450 (mortgage is $250k). I've been a prolific saver based on a temporary higher income (contract will end soon) and have saved up about $350k. My income will decrease to a point where I will not be able to save money like I have in the past but it will still be enough to get by (a comfortable pay check to pay check scenario). With my income decreasing in the foreseeable future, I wanted to see what you would do. Would you pay off the investment property to generate an income of about $2k/month or would you pay off your mortgage which would reduce your expenses by $2500/month? If I pay down my investment property to generate income, I will be making a profit on it every year (right now, I make a paper loss with the depreciation) and will have to pay taxes on it. But if I pay down my mortgage, I will be reducing my expenses by about $2500 every month which will not incur any additional taxes. In the mortgage scenario, I would not have any savings/cash cushion left which would leave me exposed if something bad were to happen (car accident, medical emergency, etc). What would you do? |
Anonymous
| Definitely pay down your investment property to start generating income. Then you can use the extra income to pay extra on your mortgage. Win-win and you need to keep your emergency savings at all times, IMO. |
Anonymous
^ I'm sure you know this, but make sure you stipulate that extra payments on your mortgage will be applied to the principal instead of interest. |
Anonymous
| Whats the interest rates on your mortgages? |
Anonymous
| I think it depends on our interest rates. I would be more inclined to pay for the higher interest rate. However, if the interest rates for both are pretty low, I would seriously think about investing the $350k. This will be liquid cash that you can use when needed. When you pay off one of the properties, you are locking the money to it. The only way to get it would be to sell or refinance. Neither of which is fast. We ended up paying off our investment property because it had a much higher interest rate and it was much lower in the mortgage. One was for 6.5% and the other was 2.75%. Now I am not prepaying my mortgage because I would rather use the money to invest in mutual funds. |
Anonymous
| I'd pay off the investment first if the interest rates on both loans are equal. The chances of losing the interest tax deduction on investment mortgages due to the direction of the political wind is greater than the chance of losing it on your primary mortgage. |
Anonymous
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OP here. Both interest rates are around 3% but they are ARM's so they change from year to year. As logical as it is, I did not even consider investing it to earn more than 3% which I guess I could do. But the more I think about investing it, the more my stomach starts to churn because I could lose principal. That worry doesn't help me sleep at night because I don't know if I'll ever be put on a contract like this again where I can make this type of money.
Also, I'm a little surprise at how many of you would pay off the investment property. Is there no consideration for the additional taxes that you'd have to pay since the investment property is turning a profit every year? Isn't there value in paying off your home and eliminating that expense which would have no tax impact at all? |
Anonymous
| I would pay off neither and invest. |
Anonymous
| Consider the relevant tax consequences -- would it be better to pay off one over the other in terms of deductions, etc.?? |
Anonymous
| You could also invest some, say 100k, and use the rest to pay down a mortgage. I would pay down the rental if you are at all attached to your primary residence. I would want the freedom to unload the rental if need be w/o much impact to my day-to-day life. |
Anonymous
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I would pay of the house my family lives in. If I lost my job, I would at least have bricks over my head.
There is a chance of having a vacancy with your rental. |
Anonymous
NP here. But OP could unload it whether the mortgage is paid off or not. The way I see it, both houses are probably worth more than the mortgages. If OP wants to pay down a mortgage, it should be on his primary residence -- but not all the way. Maintain an emergency fund and keep some interest to deduct on your taxes. That brings peace of mind as well as reduces some debt. But, really, I'd probably just keep paying on the mortgages and invest the money. |
Anonymous
This makes no sense on several levels. To start with, OP's mortgage payment won't change unless OP sells or refinances, so there is no extra net income. And, the net income you show when you subtract the mortgage from the rent on an investment property is just a figment of accounting. You could just as easily pay down the primary residence, re-finance that, and pretend the difference between the old and new montly payment is net income. Which one OP should pay down (assuming OP should pay either down at all) turns on which has a higher interest rate and how paying down each alters OP's tax return. |
Anonymous
| I totally disagree with most PPs. If you like your home and want to keep living there, I'd pay that off immediately so that you had no mortgage and no risk. If things go south, you can always sell the investment property and then live in your home with no payment. If I had that choice, I'd make the safest decision. And not paying off either and investing is CRAZY risky. No way would I do that ever. |
Anonymous
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Do you have any other debt? What other emergency savings do you have?
From the $350k, I would set aside 6-12 months expenses (normally I'd say 3-6 months, but with the investment property, I would want a higher emergency fund). Then take the remainder and pay down your residence mortgage. Next, I'd refinance the balance of your home mortgage to a fixed rate 15 yr mortgage - will be a much lower principle and payment which you should be able to manage on the lower income. You also might look into refinancing your investment mortgage to a fixed rate loan now before your income goes down. |