mortgage and home equity loan, pay off or invest?

[lollipop_hurricane]

I see everyone has this question.  So to start off, I am in Canada, where my home equity loan  interest is tax deductible but not my mortgage interest.  Also, in 5 more years, December 2028 to be exact, we will renew our interest rate on our mortgage, so if interest rates go up to 10%, the best we get might be 8.75% or thereabouts. 

Currently have $72,916 outstanding on a mortgage, with a 5.64% interest rate.
Also have $50,916 out on the home equity loan with 7.8% interest.  payment is currently at $363.09 per month.  We only have to pay the interest, which is tax deductible. 

And, while we're at it, we also own a rental house, with a mortgage of $96,765.41 at 4.125%  -this one is in US dollars. 

Someone mentioned paying off at the beginning of the mortgage is more advantageous, and I'd really like to know more about that.  Right now the break down of the two mortgages are:

for the $72,916 @5.64%:  $1200 per month, $353.39 to interest, the rest, $846.61 to principal.  No escrow with this one. 

and for the $96,765 @ 4.125%:  $1232.62 per month, $543.43 to escrow, $354.09 to principal, and $335.07 to interest. 

I'm still making fine tuning my budget but I'd say we have about $1000-$1500 to play around with to either invest or pay down the mortgage, or also to improve upon our house, which is also something we are considering. 

[jrhampt]

I am not Canadian, but I can speak to your question about why paying down the mortgage at the beginning is advantageous vs paying it down at the end.  This is easily illustrated by playing around with an amortization calculator (I like this one: https://www.calculator.net/amortization-calculator.html).  You can see how applying a large lump sum payment on the principal at the beginning of a loan greatly reduces the amount of interest paid over the life of the loan vs doing the same thing closer to the end.  Once you make that lump sum payment, a much larger percentage of the monthly payment starts going to principal vs just servicing interest.

[lollipop_hurricane]

I am not Canadian, but I can speak to your question about why paying down the mortgage at the beginning is advantageous vs paying it down at the end.  This is easily illustrated by playing around with an amortization calculator (I like this one: https://www.calculator.net/amortization-calculator.html).  You can see how applying a large lump sum payment on the principal at the beginning of a loan greatly reduces the amount of interest paid over the life of the loan vs doing the same thing closer to the end.  Once you make that lump sum payment, a much larger percentage of the monthly payment starts going to principal vs just servicing interest.

Oh thank you for this link to the calculator!  I'm going to have fun running scenarios in here. 

[Laura33]

I am not Canadian, but I can speak to your question about why paying down the mortgage at the beginning is advantageous vs paying it down at the end.  This is easily illustrated by playing around with an amortization calculator (I like this one: https://www.calculator.net/amortization-calculator.html).  You can see how applying a large lump sum payment on the principal at the beginning of a loan greatly reduces the amount of interest paid over the life of the loan vs doing the same thing closer to the end.  Once you make that lump sum payment, a much larger percentage of the monthly payment starts going to principal vs just servicing interest.

Oh thank you for this link to the calculator!  I'm going to have fun running scenarios in here.

The only thing to keep in mind when doing this is that it also works the same way when calculating the opportunity costs.  Putting money toward something is always going to pay off more the earlier you do it; that's the way compounding works.  You can save a shit-ton in interest if you plow $100K into paying off a loan.  OTOH, you can also make a shit-ton of money investing that same $100K into the stock market -- money you forego if you use the $$ to pay down the loan instead.  Which is why the analysis should be less about the "when" and more about comparing the pros and cons of each option. 

The standard analysis is that paying off a loan gives you a guaranteed return, but often at a lower interest rate, whereas investing in the market will probably get you higher returns, but with more variability and the possibility of losses.  In your scenario, that almost 8% interest rate is high enough I'd be paying it off quickly; my own future plans assume about 8% market returns, so there's no real premium to merit taking the risk of investing that money instead of taking the guaranteed 7 3/4%.  The mortage is a closer call.

[Freedomin5]

I would keep it simple and pay off the HELOC. Also, keep in mind your HELOC is callable at any time. Highly unlikely to happen, I know, but it is a risk to be aware of. Be careful not to overextend yourself just to make a few more dollars.

When it comes to anything that affects my housing and whether I might end up homeless, I tend to be a bit more risk averse, but you will have to evaluate for yourself where your risk tolerance lies.

[lollipop_hurricane]

I would keep it simple and pay off the HELOC. Also, keep in mind your HELOC is callable at any time. Highly unlikely to happen, I know, but it is a risk to be aware of. Be careful not to overextend yourself just to make a few more dollars.

When it comes to anything that affects my housing and whether I might end up homeless, I tend to be a bit more risk averse, but you will have to evaluate for yourself where your risk tolerance lies.

Callable at any time?  I guess technically the mortgage is too.  Why would they call the home equity loan?  I recently heard about some people in California, who couldn't renew their homeowner's insurance due to being in a fire zone, and their mortgage got called. 

I am tending to agree with this paying off the home equity loan.  We recently purchased a car and bought it with funds from the home equity loan and it's been a much better deal than a car loan. 

[Freedomin5]

Callable at any time?  I guess technically the mortgage is too.  Why would they call the home equity loan?

Shrug. That’s why I said it’s highly unlikely to happen. Then again, the major banks (ahem…TD) has made decisions that I never expected, like suddenly deciding not to allow Canadian citizens to purchase stocks and ETFs on their investing platform, simply because our income comes from abroad, even though we have all the documentation proving it is legally earned income.

So yes, technically anything can happen. The point is to make sure you’re not overextended and you’re aware of and prepared for anything that might happen, however slight the possibility.

ETA: I think you're wise to pay off the HELOC.