What Would You Do - pay down loan on primary or invest?

Question

Hi All! My husband and I are meeting tomorrow to review family finances as well as discuss our "goals" for the year. Yes, we are treating this like a business appointment. I got the idea after listening to the Jay + Wendy Papasan BP episode. Anywho, I have a question and would love feedback.

I am a Realtor, have been for 6 years. My husband works for a large health insurance company and we bought a home last year (sold last one...I know, I know...maybe should have kept it). Somehow we were able to get a better interest rate on a 30 year loan by only putting 10% down as opposed to the 20% down (which we would have gotten from net proceeds of previous home). In our minds, we thought "let's do the 10% down, get the lower interest rate and then after closing, pay down the other 10% to get 20% equity in the home". Well, we were told after the fact we had to hold off on doing that. So now we have this money and I am questioning if we should apply it to an investment. I am working really hard to make something happen by the end of the year - going to networking events, connecting with investors in the area, reading every BP book, anything I can get my hands on. I am a newbie and he is letting me take the drivers seat on this since I have flexible work and I am in the business already. Oh, and one other thing. He wants to renovate our kitchen...so we could put that money into that. I am okay with putting that on hold and would rather get us going in RE investing before we get TOO priced out of the market. The money we have is not significant by any means and we would still need to potentially partner with someone on a loan depending on the house location and cost. BUT we may be able to go all in ourselves if we venture outside of our busy Raleigh/Durham market and that would be my dream. Anything to get the ball rolling for us.

With all that being said, my hesitation using this money for an investment is "what if"...what if market goes into slump and I am not selling as many homes as I have been the past few years? What if some major changes to health insurance happen and he loses his job? I like knowing that 20% is in the home... I guess that insecurity comes from the recession and people having to short sale their homes when they were underwater.

I know I am letting emotions play a role in this but this is our personal residence and the security on that and for my family is very important. Just curious what others would do or if they have been in a similar scenario....

Thank you for any feedback!

Todd Rasmussen · Answer

@Ashley Rummage

Best to worst in terms of financial return and or savings:

1. Invest it

2. Pay down principal

3. Remodel kitchen

We invest what we can and return more than any of our loans so we don't pay any extra principal down.

You should maintain an ample liquid emergency fund, but the size of that is completely subjective to what makes you two feel secure. The 10% isn't going to do anything for you in a time of financial crisis if you've paid it to the bank early. It will only be of use in your bank account.

Eric Mayer · Answer

I would not do the bank a favor and pay down your loan on a primary residence. Let them eat the inflation. If the market does dip like you said, the bank may not want to give you that money back. Invest the money wisely and use the profit to remodel your kitchen.

Kevin Zimmer · Answer

@Ashley Rummage, I assume this extra 10% you have is over and above the 6 months emergency cash reserve you have to pay bills in the event the RE market slows and/or something were to happen to your husbands employment. If that is the case, when people ask me whether something is a good investment I always say compared to what.  You did not say what the interest on your home loan is, but if your investment will earn you more than what you pay in interest that is what you should do.

I do a lot of short sales and investment properties. As far as having 20% in the home, that typically will not reduce your monthly payment (at this point).  Any prepayment shortens the time of your loan though (i.e. may cut some payments off of the end...depends on your loan).  Also, worst case, if you ever did have to short sell your house, the lender will be taking the hit, not you.

Same thing with the Kitchen upgrade.  If you put money there now, and something were to happen, those are sunk costs.  Better to make an investment, and let the proceeds of the investment help pay the kitchen renovation costs.

I understand you are doing a lot of reading, and there is a lot of free information you can get on BP.  Some of your money  could be spent on education.  Before signing up with a guru, make sure you vet any program on BP.

Hope this helps, I'm happy to give more specific examples.  Good luck

Kevin Zimmer · Answer

Feel free to reach out to me directly at any time.  I have had my RE license since 2004. I have paid for my education with time and money. I have done lots of fix and flips, am a landlord, have bought properties subject to, sold properties with seller financing, and I currently work the paper end (tax liens and distressed mortgage notes).  Good luck

Ashley Rummage · Answer

@Kevin Zimmer thank you SO much for your help and feedback! You have some amazing points. Our loan was 10% down for 3.5 interest rate. I read this out loud to my husband and he seemed to really ponder what was being said so THANK YOU!

I am trying to get my hands on everything I can and hope by continuing to network I can earn the opportunity to work alongside someone who will be kind enough to share their wisdom. :)

Kerry Noble Jr · Answer

Youtube Velocity banking......thatll help you pay down debt faster

What Would You Do - pay down loan on primary or invest?

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