Extra Payment on first property or waste of time?

Question

Hello community,The wife and I just purchased our first property that will be our primary for the first year or two on a FHA loan. We do plan on refinancing it after that time due to the ideal interest rate we are probably receiving as well as turning into a rental. My question is should we make extra payments monthly to help reduce the amount of that time or not bother because of the high rate? And just save that money for future investment/property purchases?

Eliott Elias · Answer

Making extra payments towards your mortgage can be a good strategy to pay off your loan faster and reduce the amount of interest you pay over time. It's important to consider your personal financial situation and goals. If you have other debt or savings goals, such as saving for a down payment on another property, it may be more beneficial to prioritize those first before making extra payments towards your mortgage. Ultimately, the decision on whether to make extra payments or not should be based on your individual financial situation and priorities.

Joshua Matthews · Answer

A regular Dave Ramsey out here. Proud of you man. It's a good question and worth talking through in these forums. A ton of great input on this question. For my wife and I we made the emotional decision to not carry any debt over our heads (literally). We paid off our personal residence. But use leverage rentals. Indianapolis is too good of a market to not take advantage. That said, we start safe and will gradually extend leverage as our personal portfolio grows...again, I know the math works and help investors all day long; but at the end of the day it's YOM (your own money) and therefore must be measured against your or risk-meter, to use Ramsey's words.

Patricia Steiner · Answer

The wealth building strategy here would be to pay-off your high-interest debt first (credit cards), followed by other installment debt - all the while saving at least "15% of income per year (including any employer contributions) is an appropriate savings level for many people; having one to one-and-a-half times your income saved for retirement by age 35 is an attainable target for someone who starts saving at age 25." All of this should happen before accelerating the pay-off of your mortgage. And, here's one big reason why: your mortgage interest is tax deductible (specifically: "Any interest that you pay on a mortgage toward a property can be deducted from your tax (up to $750,000), this also includes loans for second homes if it stays within the limits of $750,000 and any home equity loans.” Source: Forbes). So the mortgage interest rate you think you're paying is actually much less when it is adjusted for the tax deductibility. It's important to know that wealthy people do things that others don't. They know that having liquidity is essential - and they don't borrow for consumer goods. But they do borrow a lot - strategically - and are mortgage heavy. The Federal Reserve reports that the top 1% of the population holds 4.6% of all debt - whereas the bottom 50% in the country carries 36% of all debt. The more you know about building and preserving wealth, the path becomes very clear. Hope this helps...

Joe Villeneuve · Answer

If this was going to be your primary, then yes. This isn't your primary. This is a rental property you are temporarily using as your primary. Big difference.

Joe Villeneuve · Answer

If this is truly going to be a rental property in the future, then it's a waste of money to make extra payments. On a primary, your income is responsible for all the mortgage payments, so those extra payments will save you interest. However, on a rental, you are NOT the source of funds for the mortgage payments,...your tenant's rent is. The only cost to a REI is the cash that comes out of their pocket. Making extra payments is just adding to your cost. Your tenant is already paying for it. This means those mortgage payments are free to you..so don't help your tenant out.

Zach Rubin · Answer

I definitely want to build a portfolio and the 401k will not do it. Granted my company matches to a certain percentage so I'll go as high as they match but put the other $$ in other investments.

Zach Rubin · Answer

Very much appreciate it guys. We are living in the Cary, North Carolina area so it’s growing. We will be debt free this April. My priorities were set since last year with how the economy was and where it is heading so I had started implementing what my strategy was before. We've rented for the past 3 years with it being around $1600 for rent and if my calculations are correct, the mortgage will be around $2200 -$2400. It’s not like we can’t afford it but Ik it was time after debt free to truly start strategizing my real estate investments.

Ned J. · Answer

My basic principle is its ok to carry debt on an asset....something that makes you $$ even after paying for holding that debt..... but if the item is actually a liability, that costs you $$ to hold that debt, you want to get rid of that ASAP, so you pay it off as quickly as possible.If your rental investment is making $$ as it should be, there is really no point in paying it off even faster.... you use that $$ for another asset that will make more $$.I paid off my primary residence, but do not pay off my rentals any faster than necessary. Reminds me of the people on here that point out all their "cash flow" on the rental units the own outright...a decent amount of the "cash flow" is just paying back the $$ you deposited in the unit.

V.G Jason · Answer

That's still very material debt. May be less than others or the average, but it's material.

Zach Rubin · Answer

The only debt I have is a truck payment and a credit card balance. Other than that, this property would be a "good" debt. I just wanted to see whether or not making extra payments would help with the principle of the mortgage even with high interest is all. I haven't gotten my rate yet however I presume it'll be in the %6 range.