Pay down higher interest loan or pay down largest monthly mortgage payment

[Albert Tsang]

Assume you have 10 SFHs with different purchase prices and all of them have different interest rates and monthly mortgage payments. If you are at a stage of consolidation and want to pay off the 10 SFHs as fast as you can, which one do you choose to attack first.

- the property with the highest interest rate
- the property with the lowest balance
- the property with the largest monthly payment
- the property with the largest balance

I know intuitively, it is best address the mortgage with the highest interest rate. But, I also read that if you pay off 1 property, you can use the snowball effect of using that amount and pay off the next property much faster, then repeat and rinse. Also, your DTI will be at a better standing from a financing perspective should you choose to pursue other investments.

Thoughts ?

[Simon Campbell]

Paying the lower balance first will free up cash faster which can be the applied to the next lowest balance.

If you are preparing for retirement, honestly, I am not sure if paying off all the properties is in fact the best course. Leverage actually frees up working capital.

If you spend the next 5 years putting every extra penny into paying off the properties, what will you be able to save for retirement over that 5 years? In the end, you may have 5 paid off properties with a net worth of lets say $1 million (at $200k each). But where is that million dollars? It is not in the bank. It is only accessible through re-mortgage. Yes, the income is free and clear but the wealth is locked.

I advise investors to really look at both scenarios - leveraged and unleveraged. Consider putting all the extra payments into a 401(k) or other type of secure savings and then see where that will put your net worth and cash flow after 5 years. Then you can choose the better situation.