pay down my current mortgage first or invest?

Question

Hello, I need to hear your opinions on this. My situation is: I have a steady job and a steady income which allows me to pay my current mortage on a biweekly basis but I still have 15 years to go pay off my current mortgage. If I will have an extra $50k-60k cash income every year for some years, should I use the money to pay down my current mortgage first or should I start investing rental properties? My current mortgage rate for my home is 4.375. Thank you for your input in advance.

Gina Chang · Answer

Really appreciate your inputs Casey, Travis, Mark, Tom, and David! Yes, it is a 30 year mortgage and it's the only debt I have right now. I am really looking forward to investing but just want to be very careful. Your opinions really help me thinking through the decision. Okay, I will go with your advice and invest! Thanks a lot!!

Gina Chang · Answer

Hi Kevin, thanks for your comment. So true: keyword being "responsible leverage". I totally agree!

Kevin Cardinale · Answer

Oh well everyone beat me to it. You always calculate the cost of money. If the cost of the mortgage is less than (i'm about to mess this up, i'm sure) the cost of your outlay on your investment, then keep that mortgage. (that probably made no sense, but I actually know what I mean.)

Leverage isn't the boogie man that the economic gurus say it is. Responsible leverage takes a small fry from a nobody to a pain in the side of the big boys. Keyword being "responsible leverage". Math isn't hard.

(this is why i'm not a teacher)

David Ackerman · Answer

Definitely do NOT pay down your mortgage.  Mortgage debt (at current interest rates) is some of the cheapest money in the world.  Plus, you can write-off the interest.  Only ignorant people pay-off their mortgages early (Now, if your interest rate on your mortgage was 7-9% and you couldn't refinance, then paying down your mortgage isn't too bad).

I am amazed how many people still don't understand how awesome a 30 year fixed rate mortgage at 4-5% really is.  It's the best type of financing in the world.  Don't screw it up by paying it off early

Tom V. · Answer

@Gina Chang

Do you have any other debts?  Student loans, credit cards etc.?  If so, you should pay down these 'other debts' and make sure you have strong credit profile and an emergency fund saved up.  At least that is my take on the best way for people to start investing in real estate.

If the current mortgage on your primary residence is your only debt, then I would not hurry to pay down a 4.375% loan.  Is it a 30 Year fixed loan?

Mark Ferguson · Answer

I would invest the money in real estate and not pay down your mortgage.  I am assuming it is a 30 year fixed rate loan?

Travis Sperr · Answer

Opportunity cost comes in to play, no doubt about it. But also you have to consider risk tolerance. Based on the description you provided, you will get a better return buying more real estate, if you are not comfortable owning investment property, evicting tenants, carrying debt, etc then the opportunity cost is negated. Alternatively if you are prepared to take it on then you might get a few deals that cash-flow a few hundred dollars a month. use the cash flow to pay down the rentals and find a few paid for properties in 15 years rather than just 1. Further more there are tax advantages, the appreciation, principal pay down. I think it was T. Harv Eker that said "don't wait to buy real estate buy real estate and wait"

Casey Carroll · Answer

This falls under the category of "opportunity costs." If you can deploy your capital in an investment which offers you a higher return than the interest rate you can pay down, then absolutely you should be investing it. Since mortgage interest rates compound on a daily computation, your actual basis for comparison is actually between 5.5-5.6%, which most real estate investments will outperform (you make money in 3 ways from real estate: appreciation, depreciation on a 30 year schedule, and cash flows). If your combined return on all three offer a better return than paying your mortgage, then it's a no brainer (and I can guarantee that you will earn more on that money by deploying it into real estate).