Am I on the right track with this house payoff plan?

[MoonPilgrim]

Okay, so...my first stop on the way to mustachian bliss was paying off the mortgage on my first home (now a rental property), that I mortgaged (pre-crash) for $47K at 6.875%.  Refinancing was not an option, since most lenders won't touch properties worth less than $50K, and to top it off, foreclosures on the street are going for less than what I paid. 

So things being what they were, I took my savings bonds from when I was a kid, and made a big payment towards the principle, leaving me with $27K left on the mortgage.

I got a 0% balance transfer credit card, and took advantage of a deal on an existing card, and threw another $17K at the mortgage, leaving me with about $10K left to pay off on the mortgage.  (And $17K of debt at 0% interest until August 2013.)

I *could* put $3500/month towards the principle, and have the place paid off in the next few months.  But I'm starting to second-guess my plan.


So, the questions:

When would you apply for a HELOC against the rental property (this will be my emergency fund); should I wait until I pay off the house entirely? 

Or, should I get a HELOC now, even though the line won't be as large?  Because my emergency plan, were a true emergency to arise, would have to be asking my parents for help since my credit cards are just about maxed (at 0%, though, remember).

Should I start investing the extra $3500/month I have available for savings (instead of paying down the mortgage), now that the amount of interest I'm paying on the mortgage is down around $50/month?  Or put a part of that towards the credit cards now, even though they're at 0%, just to get some head room?

I would like to purchase another income property in 2013, so some options impact my ability to do that more than others.

My goal is to build my stash as fast as possible; I'm uncomfortable with a lot of risk, but I'll ignore my discomfort (obviously) and do something rash like use up 90% of my available credit to pay down the mortgage, if the numbers make sense.   :)

Thanks in advance!

[totoro]

How are you going to pay off the credit card?  Can you save enough each month to pay it off by August?

[Another Reader]

Have you talked to lenders about putting a HELOC on a rental property?  Do you know if they will do this and what the interest rate would be?  The Pentagon CU HELOC at 1.99 percent for 5 years is a good deal, but I don't think the rate is applicable to non-owner occupied properties.

As a long time investor and landlord, I don't feel comfortable without several months of CASH reserves.  Wait until you have a tenant go bankrupt without warning and you get no rent for 9 months plus you can't evict.  That happened to a friend of mine.  HELOCs can be cancelled at the whim of the bank, and I do not agree with MMM they are a good emergency fund.

In your shoes, after I put away a couple of months of the $3,500 into cash reserves, I would hit the zero percent cards.  Paying off the mortgage at zero percent interest at an accelerated rate was the point of using them, right?  That should take 5 months.  The $10,000 at the high interest rate is not much of a concern to me because the amount is small and the interest is written off.  Once the cards were paid off, I would start socking away cash for other real estate acquisitions and into paper assets.

You had a good plan, just stick with it and don't get distracted.  Deals are like buses, if you miss one, another will be along in a few minutes.

[Catbert]

I agree with Another Reader...save several months of that $3500 as an emergency fund for both you and the rental house.  Then hit that 0% credit card.  The reason credit cards give those deals is that people let the balance ride and then end up paying an exorbitant rate when the 0% period expires.  Some people tried the game of moving the balance from one 0% card to another and then back again.  But those 0% transfer offers can dry up or suddenly come with additional costs that make them less attractive.

Unlike Another Reader, however, after than I'd pay off the 10k remaining on the mortgage.  The tax write-off is pretty minimal at this point.  To me it's easier/better to have the property free and clear before buying another property.

[Another Reader]

Since the OP wants to pay cash for the next property and the $10,000 is incidental, I would start on the cash stash as soon as I polished off the cards.  With an emergency fund of $7,000, and a mortgage of $10,000, I think she's in pretty good shape.  She will be done with her reserves and the cards at the end of April, and can save at least another $3,500 x 8, or $28,000, by the end of 2013.  Plus whatever she saves on the mortgage can be added to that.

The deals may not be as good then, but she's in a much stronger (less risky) position to pick one up when she finds it.

[AJ]

How about refinancing the 10k mortgage into the ELOC? You would take out the ELOC for the full amount (I'm guessing about $35k at 75% LTV with a value of $47k), and immediately (as part of the transaction) advance off the $10k to pay off the mortgage (yes, banks do that). Then you would have an available balance as you pay it down.

Like Another Reader said, the 1.99% penfed thing isn't available for non-owner occupied homes, but the rate for a non-owner ELOC is 4.75% - so a bit less than you're paying now. I imagine other lenders would be similar...

[MoonPilgrim]

Totoro - I'm able to put at least $3500 towards the credit cards each month; my original plan was to keep paying down the mortgage and get the HELOC in January.  The HELOC would serve as a backup just in case something goes wrong and I end up with a balance still on the cards--but I believe it will only take five months to have the cards paid off.

AR - I have talked with lenders about the HELOC on non-owner occupied properties.  The rates definitely aren't as good, but there is a credit union affiliated with my employer that offers them (4.0%).  I'll think more about establishing a cash emergency fund, there are probably some ways to earn a little interest but still maintain liquidity.  And you confirmed what I was thinking--that the psychological benefit of paying off the mortgage in a few months may be clouding my judgement when the better option is to use my extra pennies to take care of the cards and the stash.

Mary - I was initially really hesitant to use the cards, and I did a lot of research, because I know that credit card companies do it because it makes THEM money.  I went through the agreements and terms with a fine toothed comb, and just decided to just go for it, as an experiment.  But now I'm as eager to pay them off as I was to pay off the mortgage.   

AJ - I really like the idea of using the LOC to get rid of the mortgage--but doesn't that reset the principle/interest ratio? 

I can't wait to start actually saving, instead of paying down debt.  I've seen my net worth increasing, and it is rewarding to know that I minimized the impact of that 6.875% rate, but I want to start seeing an account grow.  :)

[Another Reader]

What's the LTV on the property you occupy?  Could you get a HELOC on that property, pay off the mortgage, and then save up some reserves and pay off the cards? 

[MoonPilgrim]

I've only been in my current home for a year--so it's ugly.  $122K owed on a $130K farmhouse (93% LTV), and still paying PMI (around $80/mo).  :P 

I had thought about using the HELOC on my rental property to pay down to 80% LTV, but the numbers were too close to justify the effort.  So plan B was to wait a year, see what the stash looks like, and possibly put a chunk of that towards the mortgage of the home I live in--if it makes sense at that point.

I bought the farm (dream house, forever house) before I found MMM.  I love our house and would never leave it or sell it, but if I knew then what I know now...

[Another Reader]

I re-read your posts and it looks like you are in the Detroit area. Things are improving, but not at the rate they are in the Bay Area or Phoenix.  You may still have a window of opportunity for awhile.  If that's your opinion as well, I think my approach makes sense.  Deals should still be around next year.  If they suddenly evaporate, you have the option of paying down the mortgage on your house to drop the PMI or even refinancing, if rates are still really low.

Financially, you appear to be in really good shape going forward.  Balance the real estate with some paper assets and you will be set.

[fidgiegirl]

Ugh.  Just reading your posts stresses me out - with all that to remember and take care of and all those do-or-die deadlines, I'd be so anxious.  If I were so close, especially with the $3500 coming in, I'd get it taken care of.  You've minimized the interest.  That's good.  Now just blow that sucker up and move on to the good stuff.  One wrong move and all your shuffling around will have been for nothing.  Just get rid of the mortgage on that house.  Then you can save or get paid down on your current place to get out from underneath the PMI.

[Able was I ERE]

I've only been in my current home for a year--so it's ugly.  $122K owed on a $130K farmhouse (93% LTV), and still paying PMI (around $80/mo).  :P

You've probably already done the calculations on your PMI, but just in case you haven't thought about it this way, here is how much extra you're paying for PMI compared to an interest rate on the same amount of money.

The equivalent interest rate can be calculated by:
  (PMI / year) / (amount you owe before getting rid of PMI)
Using your numbers:
 $960 = PMI /year = $80 / month * 12 months / year
 $18k = amount you owe before getting rid of PMI = $122k - $130k * 80%
That means you pay $960 / year for a $18,000 loan.  Which is an extra:
  ~5.3% = $960 / $18000

And it just gets worse the more you pay the loan down, bordering on usury.  For example:
  $960 / $10000 => 9.6% extra

My advice:
  - Pay off your current home loan ASAP to 80% LTV and get rid of PMI (how you do it is largely irrelevant, due to the next step)
  - Take out a 100% LTV (or as high as makes sense) HELOC or HEL on your current home and use to pay off your rental home mortgage or purchase your next rental.