?Did I make a mistake by paying off my house?

Question

For the last two year I have been in Afghanistan as a civilian contractor making good money and decided to pay off my house. I paid it off at the end of last year I have been renting it out. I plan to stay here for another year.

My question is, would I have been better served by investing in other properties rather than putting it all in to one property?

Thanks in advance for the help and advice.

Edward Burns · Answer

No.  Paying off the primary residence if possible is never a bad idea.  Especially, IMO when the option considered is long distance investment in real estate.  By paying off the primary residence, you can now save the mortgage payment plus whatever amount you have been savings, so your investment nest-egg will be bigger than what is would be otherwise.  In addition, the primary residence is still there and can be borrowed against if needed.  In short, while I do not know the interest rate for your mortgage I am guessing in the 4-5% range, by paying off the mortgage you got a guarantee return of 4-5%.  Not bad for a hands-off investment.  Could you have done better?  Maybe but not as safely.

Matthew Paul · Answer

With your house paid off , you can sleep well at night , I dont gamble with my primary , if everything goes south , I still have a roof for the family .

Tim Hoffman · Answer

First, I find it interesting that so many IL members have responded.  Maybe a result of the world we live in here.

I have been an investor for 15 yrs, own 65 SFH and the first chance I got to pay off my primary residence, I DID IT.  Nothing beats the feeling of going to bed every night knowing your castle is yours.  Could I have made a few extra $$ by using that money on another rental, sure but money is not everything.  You have the cash now, are managing a rental from long distance and that home will be there when you get back and you can then get a HELOC and start / continue on your RE investing career.

Good luck and stay Safe.

Steve Babiak · Answer

For those suggesting to do a HELOC or refi, keep in mind that the house is now rented - so the lender will only do the loan as non-owner occupied. That means higher interest rates and lower LTV - in other words, a less favorable loan to the borrower.

Now, as to the original question.  IMO, if you could have done something else with that money that could have earned you a higher return on your money (the return you got was the interest rate on the retired loan basically), then maybe not the best use of the money. But in any case, people on this forum can't really know that answer.

Vladimir K. · Answer

Congrats on paying off your house.  I wish I could pay mine off as well, but alas, I'm looking at about 30 more years of payments.

Unfortunately, we live in a world where being responsible can sometimes be a disadvantage.  I know of people who had over extended themselves, borrowed more than they could afford and then ended up having their debts reduced, and loan interest rates lowered.  On the other hand, responsible people with equity in their home were stuck with higher interest rates due to inability to refinance (and get the same lower rate honestly).

Whatever investing you decide to do, consult with an attorney and/or CPA on protecting your assets in case a deal goes south.  If you have a free and clear house, you may be a better target for lawsuits vs. someone who is overextended.

Karen Margrave · Answer

@Ron Boling  First off, welcome to BP! If you haven't already done so, you might want to read the Beginner's Guide to Investing (top of page under Learn) , and listen to some Podcasts.

As to your question, there's still ways to use that property to make yourself money. You can take out a HELOC (Home Equity Line of Credit) and use that to help purchase another property or more, or use it to cross collateralize a loan on another property if you need to, etc.

Enjoy BP, and stay safe!

Duncan Taylor · Answer

@Ron Boling,

You made the right decision. Give it six months, if you don't like it, you can always go back into debt.

The theory behind getting 'higher' returns by taking the money and investing it is fraught with risk. On paper you can convince yourself it is a good plan but in reality it is always, always, 100% of the time, better to have your residence paid for and thoroughly protected.

Generational wealth can only be sustained with a solid, debt free, asset basis. You are on that path. Find a great estate planning attorney who can solidly protect your home from predators and then you will have the confidence to take intelligent risks in your financial future. Whether it is stocks, bonds, mutual funds, etfs, currency exchanges, precious metals and stones,commodities or real estate you make better long term decisions when you have that rock solid foundation to support you and your family.

Lo those many years ago when I first started, my first wife was not on board. She was afraid and very risk averse. We sat down and worked out a plan where I could start buying rentals and part of the proceeds would be used to build the rental portfolio and part would be used to pay off our home in Kent, WA. I did it to get her on board with the rentals. That home is still paid off and she still lives in it. I am happy that even though we could not stay together as a couple, I never had to worry about where my kids would live.

That freed me in ways you can't imagine unless you are in the same place. It let me acquire properties from a big picture perspective instead of being hamstrung with deals others wouldn't touch because they couldn't take the time nor did they have the resources to turn them around. Some of my most profitable deals were like that. While others were having to churn for quick cash, I was able to find those diamonds, polish them and then reap the benefits of their increased value.

Chris K. · Answer

Opinions differ but I think you paying off the house was the best thing you could do. This offers you pretty much eternal security. I paid my first house off and will NEVER...EVER take out any sort of loan against it.

Agreeing with what @Tim Hoffman said, knowing that you always have that one place that nobody (almost nobody) can take away from you lets you sleep at night much better. It's even made me much more confident in doing other things like taking a job offer or investing in other properties cause I know at the end of the day if everything else goes wrong I'll always have that house.

Yes you could have put that money into another property but now you can take the bigger profits  you're getting from the rental and put that toward something else.

J. Martin · Answer

The caveat implicit in  my advice above, is that you need to have something to do with the money to invest to earn a good yield that you are comfortable with the risk of..

J. Martin · Answer

@Ron Boling  All depends on your risk tolerance and your cash flow.. Some people sleep well at night knowing they at least have their primary residence paid off. I have a 3.25% 30yr fixed on my current  primary residence (4plex), and I can't imagine pre-paying a penny for the remainder of my life.. (and that was with FHA @ 96.5% LTV). I know I can make more than that. And the interest is tax deductible. So finding an after-tax return that yields about 1.7% risk free? Or much more by taking on risk..? Absolutely. I will take that all day long. I am young also though, and have a long time to make up any shortfalls..

You can probably get cash out right now for under 5% on 30yr fixed, or lower for HELOC or home equity loan that they can term out over 20yrs or so. I would do it while your income is high and rates are low, if you want to do it. I don't like variable rates when long-term rates are so cheap. Good inflation hedge too..

?Did I make a mistake by paying off my house?

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