With traditional bank savings accounts and other investment vehicles yielding less, many are considering whether they should use that extra cash to pay off their existing mortgages with interest rates higher than they are making on their investments. But is this a good idea?
This was a question I grappled with myself recently when it came to an investment property that I owned with $75,000 remaining on its mortgage. Paying it off would have saved me the mortgage cost of about $950/month, giving me that extra cash in my pocket each month. I decided to hold off making a decision for a bit, waiting to see if I could use that cash towards another investment property or flipping a house.
And luckily, I did wait because a good friend of mine who knew I was looking for another investment opportunity offered me his four-family property for about $30,000 under its appraised value in a private sale.
So instead of using my savings to pay off my mortgage, I took that $75,000 and put it down on a four-family unit that produces a net income of $1,200/month. And now with this extra property in my portfolio, I plan to use the $1,200/month income from my new four-family investment property to make extra principal payments on my original investment property, paying it off in approximately three years. Here’s how these two choices stacked up:
Paying off the existing $75,000 mortgage:
- I would have an extra $950 of cash in my pocket each month
- In three years, if I put all of that $950/month into savings, I would have $34,200
- But I could not have purchased that four-family unit from my friend
Using the $75,000 to buy the new four-family investment property:
- The new property provides net income of $1,200 a month
- By using the $,1200/month to make extra principal payments on my existing property, I can pay off that $75,000 remaining mortgage in just three years that once paid off, will provide an extra $950/month in income beginning in year four.
- In addition, after using that $1,200/month to pay off that mortgage, I can add that original $950/month income from the newer investment property, meaning I’ll be making a total $2,150/month in total income from both properties.
- But there’s more benefit! When you figure in a 2% inflation rate and the loan amortization over the next three years, I’ll also increase my equity in that new four-family to about $140,000 equity beginning in year four.
So, is it a good idea to pay off your mortgage early? The answer is, it depends.
For me, while I could have used the cash flow in the first scenario for other things, choosing to purchase another investment property fits my financial plans and goals better. Whichever route you go, it’s important that you work with an expert mortgage advisor like me who can provide you with the information, calculations, insights, ideas and solid advice so you can make informed and great decisions that align with your own financial goals and situation. So please give me a call if you are refinancing, need debt consolidation, buying a house, paying off a mortgage or just need some advice. Lee Lycan 414-218-9452 NMLS# 337854
The information in this blog is based on my personal opinion and experience. These ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial planning professional.