Author Topic: Which mortgage should I pay off??  (Read 6611 times)

KittyWrestler

  • Guest
Which mortgage should I pay off??
« on: May 22, 2012, 11:56:31 AM »
So I have three mortgages on three very different properties. I am having a hard time deciding which one to pay off since I can throw in $2K a month extra. So hear me out and let me know what would you do..

1) A small 1 bedroom condo located in the hip part of the town. The rent is going through the roof. We have $82K left on 5.65% interest rate. I have a positive cash flow of $150 a month and goes up every year. Hard to refi since it's an investment property.

2) A retail commercial building located in a different state. I have positive $3K cash flow a month if all are rented. I still have $500K left on mortgage. 5.35% and I have only 12 years left on it. If this baby gets paid off, the total cash flow can completely replace our entire household income plus benefits.

3) Our own principle residence. It's on a 4% 30 year loan and we just bought it a couple of month ago with $417K mortgage.

My extra $2K a month can knock out #1 in a short a few years and we can snowball all the income to the next mortgage. Paying off our own house obviously will give us peace of mind knowing that we own our house!. But paying off #2 has the biggest payback, yet #2 is also our biggest risk. Since the mortgage amount is so huge each month, if we have less than 50% occupancy, we would be in rice and bean situation trying to stay afloat. If we can knock out this baby say in 7,8 years, we can basically retire. But that's a long 7,8 years...

tooqk4u22

  • Handlebar Stache
  • *****
  • Posts: 2201
Re: Which mortgage should I pay off??
« Reply #1 on: May 22, 2012, 12:45:13 PM »
Money is fungible if you own 100% of all so pay down the one with the highest rate......or buy another property. 

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1181
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: Which mortgage should I pay off??
« Reply #2 on: May 22, 2012, 01:12:44 PM »

Hard to say given the limited info, there's a lot of risk banking so heavily on that leveraged commercial deal, and the personal house seems extravagant,  but it depends on the rest of your portfolio.

The question as posed - I'd pay down the rental mortgage.

KittyWrestler

  • Guest
Re: Which mortgage should I pay off??
« Reply #3 on: May 22, 2012, 02:07:55 PM »
Go give a more perspective, the commercial deal is worth a million. So I have 50% equity in it.
The condo is worth $150K, I am almost at 50% leverage.
The house is indeed extravagant. But I don't believe in private school so we bought the cheapest house in an "extravagant" public school area so my kids can get into the best kindergarden, elementary, middle and high school without moving for the next 18 years. I bought the house for $625K with 35% down. 

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28133
  • Age: -999
  • Location: Seattle, WA
Re: Which mortgage should I pay off??
« Reply #4 on: May 22, 2012, 02:09:41 PM »
Have you looked into refi'ing?  Get cheaper rates and pay down the more expensive ones.  Could be a possibility.

We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, 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.

KittyWrestler

  • Guest
Re: Which mortgage should I pay off??
« Reply #5 on: May 22, 2012, 02:20:12 PM »
The commercial deal is not possible at this stage.  It's not a conventional loan. It's a business loan offered by a local bank. 9 years ago, I had to bring my business plan and pitched to 9 banks before a local bank agreed to loan me the money to buy it. And I have to review my financials with the bank every year. Good thing is they do adjust the rate for me once every 5 years so I am due for another one in less than 3 years.

The condo might be a possibility.. but saving 1% on just $80K doesn't justify the price they charge to refi an investment loan..And plus, refi an investment property is a bitch to deal with..

Mr Mark

  • Handlebar Stache
  • *****
  • Posts: 1181
  • Location: Planet Earth
  • Achieved Financial Independence summer 2014. RE'18
Re: Which mortgage should I pay off??
« Reply #6 on: May 22, 2012, 02:43:12 PM »
So file that under 'nice problem to have' ;-)

Good luck with the commercial property thing - sounds like you're doing OK if you survived the recession with that equity intact and the yield you need.  But it's size and concentration, even relative to the rest of the portfolio I'm sure you have, is high for my tastes.

The house decision I understand, but I hope those are mighty fine schools - even without counting property taxes & maintenance the house is costing you $26k per year...

elysianfields

  • Stubble
  • **
  • Posts: 230
  • Location: Europe
Re: Which mortgage should I pay off??
« Reply #7 on: May 24, 2012, 03:47:49 AM »
Check around on the refi.  I went with Provident Funding (https://www.provident.com/), whom I found through a mortgage broker.  Provident's paperwork requirements are a huge PIA - more than I've ever had with any other lender - but I got a 3.5% rate for 30 years on a $417k loan, with minimal pts. on an investment property.

I personally wouldn't pay down the mortgages because of the deductibility, and because I believe tax rates are on their way up.  If the Congress doesn't act, rates will go up on January 1 in any case; because of the deficits taxes will HAVE to go up in the coming years.  But that's just me.

gooki

  • Handlebar Stache
  • *****
  • Posts: 2393
  • Location: NZ
Re: Which mortgage should I pay off??
« Reply #8 on: May 24, 2012, 04:31:41 AM »
Firstly I'd calculate the actual interest rate your paying on each mortgage and simply pay off the highest one.

Actual interest rate = rate bank is charging less any tax deductible benefits.

I'd refinance the condo, but shop around and make sure you pay minimal fees to do so. Saving 2.5% on $82,000 is still $2,000 per annum.

Hell, I know you said the commercial deal is not possible, but is there a clause stating you can't pay down early? If not I'd be shopping around. 5% plus seems high in this economy.

James

  • Handlebar Stache
  • *****
  • Posts: 1680
  • Age: 47
  • Location: Rice Lake, WI
Re: Which mortgage should I pay off??
« Reply #9 on: May 24, 2012, 10:08:31 AM »
I would consider diversifying and putting that extra $2,000 per month into something other than real estate.

AJ

  • Pencil Stache
  • ****
  • Posts: 906
  • Age: 36
  • Location: Oregon
Re: Which mortgage should I pay off??
« Reply #10 on: May 24, 2012, 01:04:53 PM »
I would consider diversifying and putting that extra $2,000 per month into something other than real estate.

This. Your rates are reasonable and you're cash-flow positive. I would put the money elsewhere. If you're dead set on paying down the mortgages, I would go for the condo.

ShavinItForLater

  • Stubble
  • **
  • Posts: 149
Re: Which mortgage should I pay off??
« Reply #11 on: June 14, 2012, 03:59:53 PM »
With the question as posed, I'd vote for paying off your personal residence first.  You're taking a lot of risk with over $1 million in mortgages.  If all hell broke loose, which property is most important to you?  For me it would be my own house.

Passed Doo

  • 5 O'Clock Shadow
  • *
  • Posts: 9
Re: Which mortgage should I pay off??
« Reply #12 on: June 15, 2012, 11:20:52 AM »
"If this baby gets paid off, the total cash flow can completely replace our entire household income plus benefits."

Change the If to When in the first sentence. Case closed. 

Forget the rest of the posters bullshit.   Cash Flow takes care of everything.

Any other questions, Grasshopper ?

You're doing Great. Congratulations!

You're Welcome.


grantmeaname

  • Magnum Stache
  • ******
  • Posts: 4837
  • Age: 27
  • Location: NYC
  • Cast me away from yesterday's things
Re: Which mortgage should I pay off??
« Reply #13 on: June 15, 2012, 01:24:54 PM »
The poster is gone, for one thing, and not interested in retiring so much as switching to nonprofit work and spending much of her stache creating a foundation, for another.

smedleyb

  • Guest
Re: Which mortgage should I pay off??
« Reply #14 on: June 18, 2012, 02:48:14 PM »
Have you looked into refi'ing?  Get cheaper rates and pay down the more expensive ones.  Could be a possibility.

This was my first thought, too.  I've seen a few commercial loans being handed out at around 4% -- I guess competition among lenders is fierce.  With 50% equity and cash flow positive, I would be inclined to lock in the lowest rate for the longest term and seek to boost the 3k profit.     

arebelspy

  • Administrator
  • Senior Mustachian
  • *****
  • Posts: 28133
  • Age: -999
  • Location: Seattle, WA
Re: Which mortgage should I pay off??
« Reply #15 on: June 18, 2012, 07:38:57 PM »
Haiku time!

The OP* is long gone.
Thread is now irrelevant.
I'm locking it now.


(*This assumes you pronounce OP like the first syllable in "optical" and not as separate letters.  If you do the former, remove the word long. I'm not sure how it should be, but I pronounce it like the former in my head.)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, 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.