Pay down traditional mortgage or HELOC

[Kevin Hunter]

I am focusing on two of my properties in this question. In property #1, the house is worth 180K, I owe 125K. I have a 15 year fixed rate of 3.625%. In property #2, the house is worth 375K. I have two loans on it, from the days of no money down, a traditional mortgage for 336K and a HELOC(the 80-20-0 days of the mid 2000s). The HELOC is at 77K, with a 5.75 ARM, and is past the borrow against period.

I am cash flow positive in both properties.  Property #1 I clear about $100 a month and Property #2 I cash flow just under $200 a month.  

At the end of each year I get a bonus, lump sum. Should I use the money to pay down mortgage #1 or #2 (HELOC)?

I know there are other options, such as holding the bonus for future down payments to acquire more properties etc... but I am specifically curious about this particular question. I also know basic economics says pay down the HELOC due to the drastically different interest rate. This would also allow me to get the property back above water. Not a huge concern because of the cashflow, and my hold strategy, but still something that would be nice to see. If I apply it to property #1, I will be able to pay that property off in a couple of years and then enjoy the greater cash flow or use that position to acquire another HELOC that I can actually leverage.

Any creative perspectives would be greatly appreciated.

[Ian G.]

it depends upon your goals. I would personally pay down the HELOC first due to the rate.