Author Topic: Which House do we pay off first  (Read 4573 times)

Bärtle

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Which House do we pay off first
« on: August 22, 2014, 06:44:47 PM »
My husband and I have different opinions on which house we should pay of first.
We have a single family house with 120k ,5.5% interest rate and and a duplex with 315k with 3.875%
If we live on a really strict budget,we can pay off the 120k in 2-3 years or the duplex in 5-7 years.
We plan on having kids soon so my thought is to pay of the smaller mortgage first and get the rental income and I can cut down on work hours to be able to stay at home with the baby.He wants to pay of the duplex first.
Any advice?

Thanks

lizzigee

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Re: Which House do we pay off first
« Reply #1 on: August 22, 2014, 07:44:55 PM »
Do you live in either of these?  My initial response would be to pay off the higher interest rate first.  Do you know why your husband favours the reverse?

Bärtle

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Re: Which House do we pay off first
« Reply #2 on: August 22, 2014, 08:56:54 PM »
We live in the duplex.Next year April our part of the mortgage is 500$ the rest is covered by the rental income from the other side (about 1600$)
He says if we pay of the duplex,we will get more rent.Which is true but it will take so much longer to get it it paid of.The single family house is also rented but will be sold at some point(hopefully in the next few years) Any profit we make from the sale we can just put towards the duplex mortgage.

YoungInvestor

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Re: Which House do we pay off first
« Reply #3 on: August 22, 2014, 09:10:19 PM »
Pay the one with the highest interest first as it will reduce your total payment. Unless any (tax or other) advantages that you have not mentioned make it preferable to pay either one.

schnauzbart

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Re: Which House do we pay off first
« Reply #4 on: August 22, 2014, 09:43:33 PM »
... He says if we pay of the duplex,we will get more rent. ...

How so? I have never heard of tenants paying more rent, just because the landlord paid off his/her mortgage.

Unless I misunderstood what situation you are in, the rent you collect is part of your income, and the interest you pay on the mortgage is an expense. Best course of action is usually to minimize the expense, which means pay off the mortgage with the higher interest rate first.

Joel

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Re: Which House do we pay off first
« Reply #5 on: August 22, 2014, 09:47:55 PM »
Why would you not pay off the highest interest rate debt first? Especially since it has a lower balance...

Bärtle

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Re: Which House do we pay off first
« Reply #6 on: August 22, 2014, 10:04:45 PM »
I have a hard time explaining what he is saying since it doesn't make sense to me either.I am the money nerd and he is the free spirit.It is hard to keep him on board already.So to me it makes total sense to pay of the smaller mortgage with the higher interest.
He thinks once the duplex is paid for we have more money,since the rental income is higher than the rental income on the single house.
( sorry,I am bad explaining things in english)

schnauzbart

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Re: Which House do we pay off first
« Reply #7 on: August 23, 2014, 01:16:17 AM »
... He thinks once the duplex is paid for we have more money,since the rental income is higher than the rental income on the single house. ...

I figured that was his thinking. As you probably know, it is an illusion. You said the rent on the duplex is $1600. Let's say the rent on the single house is $1000. Then how much rent are you collecting in total? $2600. If you pay off the duplex right now, how much total rent would you be collecting? Still $2600. If you paid off the house, how much would you be collecting? Again $2600. That money doesn't care which property it comes from. It may feel to him like the money earned from the duplex is different from the one earned from the house, but at the end of the day, dollars are dollars.

If you were able to pay down $100,000 on one of these mortgages right now, which one should you pick? The rent your tenants pay is unaffected by this decision. If you pay down the mortgage on the duplex, you save $3,875 in interest per year. If you pay down the mortgage on the house, you save $5,500. So its better to pay down the mortgage on the house. Another way to look at it is to consider how much time it will take to get rid of both mortgages. If you focus on the mortgage to the house first, you'll be done with your mortgages faster because the saved interest allows you to pay down the other mortgage faster later on.

Gray Matter

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Re: Which House do we pay off first
« Reply #8 on: August 23, 2014, 05:41:14 AM »
I think what your SO is referring to is that you will get to keep more of the rent if the duplex is paid off, because the mortgage payment on the duplex is bigger.  So he's thinking he'd rather not have the duplex payment to worry about every month than the single house payment.  That actually (kind of) makes sense, but he's not thinking of the bigger picture, which is it's one pot of money, and you want to pay off higher interest first unless there are tax advantages.

Basically, it comes down to the fact that he wants to pay off more debt and have fewer financial obligations before you cut back your work hours.  That may result in paying more interest in the long-term, but as it would keep you working longer, it's probably a financial wash or perhaps even net positive (because you're bringing in more income by working).  That's not an unreasonable stance, in my opinion, but something the two of you will need to negotiate.

I know exactly what I'm trying to say, but I'm afraid I'm not being very clear.  :-)

Thegoblinchief

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Re: Which House do we pay off first
« Reply #9 on: August 23, 2014, 05:58:16 AM »
Neither, assuming the SFH with 5.5% cashflows well. If it doesn't, then why do you own it?

Max out your tax advantaged accounts before you do anything. If you're doing that, then take surplus cashflow from the rental to pay down the mortgage, but don't aggressively prepay.

Retired To Win

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Re: Which House do we pay off first
« Reply #10 on: August 23, 2014, 06:17:55 AM »
My husband and I have different opinions on which house we should pay of first.
We have a single family house with 120k ,5.5% interest rate and and a duplex with 315k with 3.875%
If we live on a really strict budget,we can pay off the 120k in 2-3 years or the duplex in 5-7 years.
We plan on having kids soon so my thought is to pay of the smaller mortgage first and get the rental income and I can cut down on work hours to be able to stay at home with the baby.He wants to pay of the duplex first.
Any advice?

Thanks

My reaction would be to definitely go first for the low-hanging fruit.  That would be the single family house.  It is a more interest-expensive mortgage, AND it would be paid off years sooner.  (There's no motivation like  seeing a pay-off goal getting closer and closer, which would be much stronger with the house.)

Anyway, if you changed your mind later you could always refinance the house and then throw the resulting money at the duplex mortgage.

TheSimpleLife

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Re: Which House do we pay off first
« Reply #11 on: August 23, 2014, 06:55:20 AM »
Neither, assuming the SFH with 5.5% cashflows well. If it doesn't, then why do you own it?

Max out your tax advantaged accounts before you do anything. If you're doing that, then take surplus cashflow from the rental to pay down the mortgage, but don't aggressively prepay.

+1

Max out retirement acounts.

Build a bigger emergency fund if planning to go to one income.

Go over budget in detail to.confirm that you have the financial means to stay home. After all of that if you still have extra monthly cash.flow, then pay down the SFH with the higher interest rate.

Based on the tone of your posts, I'm guessing some or all of the rentals do not cash flow properly and.that is why you guys want to pay them off. If so, sell em and chalk it up to a lesson learned.