Pay off home vs rental mortgage first?

Question

I recently saw the light on the whole payoff your mortgage with heloc method. I'm not here to fight or start a heated discussion about that matter, but it does make me think about which I should payoff first - primary home or rental mortgage.

Question:

If you have have excess cash or cash flow. Which one should you pay down first - personal home mortgage or rental home mortgage?

Advantages of paying of primary home mortgage

#1 Ability to borrow on your home in the future increases as your principal decreases

#2 One step closer to financial freedom

Disadvantages of paying off primary home mortgage

#1 Loss of tax savings from mortgage interest. Especially if you are in a high tax bracket

Advantages of paying off rental property first

#1 increase cash flow once paid off the mortgage

#2 Ability accelerate paying of 2nd rental property, once 1st one is done

Disadvantages of paying off rental property

#1 loss of mortgage interest loss (not much of an impact if you already have more losses than you can apply - at higher incomes)

#2 More equity is potential for lawsuits now that there is more money on the table.

Currently i have 3.25 % fixed at 15 year on primary home

and I have mostly 4.25% 30 year mortgages on my rental properties.

Brandon Hicks · Answer

Three investors who all have $100k cash come to a town with 3 identical streets that each have 10 identical duplexes for $100k each. Investor 1 pays cash for one duplex. Investor 2 puts $20k down on 5 of them. Investor 3 puts $10k down on 10 of them. Assuming that they experience a good enough rental market to where the properties all cover their expenses...who has the most money after 20 years? Obviously your goals may be different than mine but I prefer to take any extra cash and leverage it. I actually think all 3 of the above investors are pikers...I'm the guy that swoops in and tries to buy all 30 duplexes with no money down and am successful quite often at just that!

Joe Kim · Answer

At least you didn't say IDC....

Joe Kim · Answer

@David Dye and @Brandon HicksI love leveraging and using leverage for real estate. I've already done that in the way I want to.I've done 6 mortgages in 3 months time this year (3 purchases, 3 refinances).That being said every investor is different.We all have different goals, different financial states, different abilities/limitations.Also, we have different risk tolerances given the current market.Although I'm certainly a believer that you can find deals at any time, any where but each investor has to make a decision on risk/reward and how much time you want to commit to getting a good deal and sometimes depends on what location you live and always depends on what kind of investor you are. http://usat.ly/2dQ30ya "Could auto loans mean a repeat of 2008 crisis?" BUT we are near peak of the market, and so risks are increasing. I predict recession in 0-2 years from now.All of this started because I watched a video on paying off your mortgage significantly faster by leveraging. It only works if you make more income (extra cash flow) than your expenses each month. https://www.youtube.com/watch?v=RvInyQggMXU&feature=youtu.beThe key is amortization- in 30 years, even at historic low rates like 3.25 or 4.25, the amount of interest you end up paying is enormous.Let's take a 150,000 loan at 4.25% for 30 year fixed. In 30 years, you will have paid $115,000 in interest!I'm not going go into the math to explain the video above.(oh what the heck lets's try) So let's start by saying. If you paid off $50,000 upfront now and kept the SAME mortgage payment (which means you pay principal faster), you will now have finish paying the mortgage off in 16 years, not 30 and save $115,000 - $36,000= $79,000 in interest saved! Even at $79,000 saved, it's not much given that you put in $50,000 and waited 16 years. That's an annual return of measly 3%...barely rate of inflation.So I get that brandon and david are so adamant that people don't spend their cash to pay down the mortgage.However if I pay down the mortgage by 50K and get a HELOC for 50K and use the heloc to pay down another for a total of 100K at the same month for total of 100K paydown. Now you paid off the mortgage in 7 years at $7,274 total interest. Also, if you factor in the paying down the 50K heloc (let's say at 5% interest amortized over 20 years) you are now applying your excess cash flow ($500/month) to pay off the HELOC in about 7 years time. Now you saved $115,000 - (7,274 + 7693) = $100,000 in 7 years. That means you just invested 50K and saved $100,000 in interest in 7 years which now is a rate of return of 10% annually. With absolute no risk from the market or external factors. The math does not account for the $500/month x 7 years = $42,000 extra payments. so it's really much less than 10% ROI but math is now way more complicated. The funny thing is what would have done with your extra leftover cash each month? This is a kind of forced savings plan that reaps big benefit of paying off your mortgage super fast.If you don't understand my math, I don't care. Just watch the video, it does it way better than I do.Now apply this logic to 1,000,000 dollar mortgage...imagine finish paying it off in 7 years time instead of 30 years!

David Dye · Answer

@Joe KimGenerally, you pay down secured debt from highest interest to lowest. However, I am confused as to why you want to do this? Being an investor, you should be concerned with the cash flow of your properties. If I were you, I would refi them out to thirty years (every time it makes sense to) and take that extra cash flow to use for another property. There is no way to grow if you are not cash flowing and owning 100% just slows you down. Use the bank's money to make you money. If you can make a higher return than the bank is charging, you should leverage your properties out (safely).Hope this helps! Feel free to PM me if you have any specific questions regarding how I would structure it.Cheers!David

Lane Kawaoka · Answer

IDK?