What would BP do? Paying off vs other options

[Joe M.]

What would Bigger Pockets do?

I currently have some options (which are a good thing). I am trying to figure out the best one to choose, hopefully you can help give me some things to think about and choose the right one.

If all goes as planned, which who knows if it will, but the current plan is in a few months move into the fiance house. Within 6 months to a year of living there, buy a home for ourselves, family all that.

Now, I am trying to figure out the best option for my current house. I believe I found a good candidate to be a renter I have known many years. We have not sat down yet to iron out details, but she has expressed either just renting, or rent to buy. (This would be my first rental, one I could test the waters with to see if I am cut out for it or not) 

The 4 options that I can think of for my current house

1. Pay it off completely. 

-I have about 55-60k to pay off, but if I do pay it off, I save about 75k over the course of the 30 year mortgage( about 20 years left). If paid off and rent, I would cash flow about 850 a month, and for the time being erase any significant debt (will change when buy a family house). However, if paid off, it would significantly dig into my savings, to the point it may or may not effect the upcoming primary residence purchase.

2. Refinance.

-Id imagine this is a "middle ground" option. However, I dont know much about it. Would I do a 10 year, 20 year, 30 year? Not sure what this would do both long and short term. I am currently paying 5% for my interest rate. The fees would be a killer if I did the rent to buy option. Not sure if this would be good if I were to keep the house long term as a rental to cut back on interest, as well as keep my savings for a house in the near future.

3. Status Quo

-If I kept my status quo mortgage, I would cash flow about $150 a month. Knowing the most of my payments are doing nothing but to pay interest bothers me. If the renter and I decide the rent to buy option is the best, I would think this would be the best option, but could be wrong.

4. Sell the house

-Would be able to keep my savings in tact and use the equity in my current house for a down payment on the next one. Currently I do not think I like this option because I wanted to open up another income stream. 

WWBPD? What are some things I should consider when making this decision? Thanks in advance

[Joe Villeneuve]

Option 1:  NO.  First, read what you wrote and see if the answer is right before your eyes.

Option 2:  Maybe.  If you do, please don't go for the short term (10,20 years).  Max it out.  You are not the one paying the interest...your tenant is...as long as you keep it as a positive Cash Flow.  Follow the money.

Option 3:  This is your best option...again, as long as you have positive CF, your tenant is making the payments...not you...and this includes both the principle and the interest.

Option 4:  This may be the best option.  $150k/month isn't that great of a CF.  However, if the tenant wants to buy it (lease/option), that would be the best choice of all.

Option 1 (revisited):  Why is the answer in what you wrote?  Simple, the savings you get from no interest payments (which isn't a savings to begin with), would have only happened if you reach the end of the mortgage...20 years from now...and, you only get that savings in increments...not in one lump sum.

Besides that, it's in the math...you are not saving anything.  If you make the payments out of your money, you are simply moving your cash to another location...and burying it.  You get it back, in small trickles (cash flow).

Let the Tenant pay the mortgage for you (rent).  That's their job.  Use your cash to invest in a different property and increase your cash flow and assets.