Author Topic: Apply extra payments to which mortgage?  (Read 3048 times)

MoonPilgrim

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Apply extra payments to which mortgage?
« on: July 23, 2012, 12:36:32 PM »
Help!  I'm all turned around around about what will grow my mustache faster.

I have some spare cash I'd like to put towards one of my mortgage payments, but I can't figure out which one to blast away.  It is very tempting to try to knock out the smaller balance on my rental property, and get rid of the debt entirely this year.

But, on the other hand, the mortgage on my residence is pretty new, so just about two-thirds of my payments are just going towards interest.  Not to mention having to carry PMI on it until I get to 78% LTV.

*And just to keep it simple for this exercise, investing is not an option.

Here's the run-down:

Spare cash for one-time principle reduction:  $15,000
Monthly extra payment towards principle:  $3500

Mortgage 1 (Rental Property)
Original amount: $47K in July 2009
Balance: $26,350
Rate: 6.875
Income: $650/month
Taxes:  $2000

Mortgage 2 (Residence)
Original amount: $123,500 in November 2011
Balance: $121,841
Rate: 3.875
PMI = $130/month (will drop off when balance gets under $101,400)
Taxes: $2200


I've tried to run different spreadsheet scenarios to what each option will look like down the road, but I don't trust my own numbers.  Between taxes and interest, I get overwhelmed when I try to compare outcomes and revert back to trying to pay off the rental because it seems like the "cleanest" way to manage things. 

So, which mortgage would you put the extra principle payments towards?  Rental, residence, or both?  (If the answer is both, help with the ratio would be greatly appreciated).

Thank you, Mustachians!

smalllife

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Re: Apply extra payments to which mortgage?
« Reply #1 on: July 23, 2012, 12:39:31 PM »
Personally I would knock out the rental property mortgage.  You'll be done in less than a year and then you can start knocking out the residential mortgage.  Cash flow is a big issue with me and that (losing the mortgage payment for the rental) gives you the most options down the road.

arebelspy

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Re: Apply extra payments to which mortgage?
« Reply #2 on: July 23, 2012, 12:58:09 PM »
The refi is a higher rate AND lower amount, it's by far the better by any measurement. The amount going to principal is irrelevant.

IMO the best would be refi the rental to a lower rate and then invest the money.

If you don't refi, paying down the rental is the best way to go.
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grantmeaname

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Re: Apply extra payments to which mortgage?
« Reply #3 on: July 23, 2012, 01:17:30 PM »
The refi is a higher rate AND lower amount, it's by far the better by any measurement. The amount going to principal is irrelevant.
The rental?

The rental is only the better if the rate is still higher after the effective rate on the residence is considered with PMI added on. In this case even that effective rate is still less than 6.875, so the rental is better, but if the rates were closer that wouldn't necessarily be the case.

MoonPilgrim

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Re: Apply extra payments to which mortgage?
« Reply #4 on: July 23, 2012, 01:52:59 PM »
Thanks, everyone.  FWIW, I tried to refinance last year, but lenders don't seem to want to deal with houses worth less than $50,000.  Hard to believe, since that's pretty common in this part of Michigan, but there we are. 

So, here's to paying off the rental in 2012! 

arebelspy

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Re: Apply extra payments to which mortgage?
« Reply #5 on: July 23, 2012, 05:19:00 PM »
Yeah, that first refi should read rental, sorry.  Was doing something else when writing and got distracted.  Good catch.

I too have run into the lenders don't want to deal with a balance less than 50k (meaning with 25% down, the lowest purchase price would be 66,66.67 - it lead to a funny story about me wanting it INCREASE a purchase price as the buyer).

Okay, so refi is out.

So here are the steps I would take if I were you:
1) determine the effective interest rate between the primary with PMI versus the rental.
2) pay down whichever is more
3) pay down the other

Once the rental is paid off and the PMI is gone on the primary (one of those done in step 2, the other in step 3) so that only the primary mortgage - with no PMI - remains, switch to investing with any spare capital.
We are two former teachers who accumulated a bunch of real estate, retired at 29, and now travel the world full time with two kids.
If you want to know more about me, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
We (rarely) blog at AdventuringAlong.com. Check out our Now page to see what we're up to currently.