Question about paying down %age of mortgage with investment funds

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Question about paying down %age of mortgage with investment funds

Jay Ipswich
Member since 2018 · 3 posts · 0 votes

Hello all, I'm a newbie who just signed up looking for some financial advice.

I'm a single person, aged 43, who recently bought a new home in the CA Bay Area putting 20% down left with a mortgage of 720K. My mortgage payment is $4500/month which is roughly 60% of my net salaried income. I have a 6 months worth safety net cash put away in my savings for unexpected incidents such as job loss, urgent home maintenance, etc. 

I aggressively contribute the max 17k/year towards my 401k (6% of it is matched by my employer); and the max 6.5k/year towards my roth ira. The remaining 40% of my net income is sufficient for my regular lifestyle expenses.

I also own an investment property which has 140k mortgage; rental income $1700/month; current appraised value 270k.

So, as a single person filing taxes, my total mortgage amount spread across both properties is 860k.

I have a brokerage investment account with a sprinkling of stocks/mutual funds valued at 100k. My roth ira that i've been contributing to for the past several years has funds valued at 75k.

In light of the above --- my question is whether it would make financial sense to liquidate my investment account of 100k (and incur cap gains taxes); and pay down my personal home mortgage so I reduce my total mortgage liability or leave things as is? I would put myself at a 5 on a risk taking scale of 0 to 10.

Appreciate your comments or suggestions. 

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  • Milton RiveraPro Member
    Professional · Atlanta, GA · Member since 2017 · 116 posts · 67 votes
    8y

    @Jay Ipswich

    It depends what your overall goals are.  Based on some the information provided, it sounds like you are concern about the size of your current mortgage.  It does sound there is a bit of over-leverage at 60% of income (banks typically are looking for low 30s).  

    If you contemplating this particular strategy, one way to possibly do it is to stagger your sells by first selling your "losing" stocks/bonds.  Those will not pay any taxes, next, sell the ones that you have held for over a year to pay capital gains in lieu of income taxes.   If the goal is to reduce your mortgage payment, you may need to do a combination of selling stocks to pay down the principal and then re-finance once that capital has been infused.  

    Another idea is to focus on paying the lower debt first (in this case the investment property).  This will increase your overall monthly cash flow and also provide a constant revenue stream.   

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  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    8y

    Burying cash in paying down your mortgage will only place that cash in jeopardy in the event your finances go south. Chances are, in a worse case scenarios, you will lose it all. If you do choose to pay down your home mortgage I would refinance the income property to the max and use that money to pay down your personal home. You need to get the dead equity out of that property regardless. 

    Normally I would advise selling your income property, since it has negative cash flow long term, however if it is also in CA I will assume you are a faith investor relying on appreciation not income.

    Bottom line with a negative cash flow investment property (long term) and a mortgage eating 60% of your income you are a 5 risk taker with a risk more in the range of a 8. Make sure you keep your reserves very high, 6 months is likely not enough. 

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  • Marina Draper
    Accountant · We serve all 50 states · Member since 2015 · 90 posts · 51 votes
    8y
    Hi Jay, Can you please tell more about your short-term and long-term goals? And why do you want to pay off the mortgage on your newly purchased house? Just at the first glance, looks like you are in a good shape except for this new home purchase, looks like it's really eating a lot of your earnings. As a random idea to help you out with that, perhaps you could rent out part of your house? Is this something that crossed your mind? Also, what is the return on your investment property? What are your investment goals?
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  • Jay Ipswich
    OP
    Member since 2018 · 3 posts · 0 votes
    8y

    Thanks all for your suggestions and comments!

    @Milton Rivera
    > It does sound there is a bit of over-leverage at 60% of income (banks typically are looking for low 30s).

    I don't know if I'm miscalculating, but my home mortgage of ~4500/mo is 60% of my net income after my aggressive contribution to my 401k to reach the max of 17.5/year. Once I hit that limit in q3, I tend to see a bit of an increase in my paychecks. In gross terms, my salary is 160k/year so my mortgage is 33% of income. You may still be right in the sense that I'm over leveraged, I didn't think I was (possibly because I was calculating based on my gross rather than net).

    @Thomas S.

    > You need to get the dead equity out of that property regardless.

    > Normally I would advise selling your income property, since it has negative cash flow long term 

    My rental has a mortgage payment of ~1450/mo (including principal/interest/taxes/property-management); while my rental income is $1700/mo and has been fully occupied for the last 4 years ever since I acquired it. I'm curious to know how this could be considered negative cash flow long term so I can adjust my mindset? 

    So far, I've been thinking the rental is paying for itself. Also, I purchased the property at 200k (which is now appraised at 270k) with a current remaining loan amount of 140k. I would like to keep the place as it's in a very nice area of Norcross and relatively new build (2012) and has been generally low maintenance. As you suggest, I will though consider how to avail the dead equity of ~130k in the place! I suspect if I do avail it, I will likely be paying a bit out of pocket (in addition to the rental income) for the loan payment.

    @Marina Draper

    > Can you please tell more about your short-term and long-term goals? And why do you want to pay off the mortgage on your newly purchased house?

    Until I bought my home a couple of months ago, I was feeling very good in the sense that I had literally no debt beyond the 140k on my rental. Now with my new home purchase, I've added another 720k of debt. I feel I've been doing a very good job of saving for retirement so far (200k in my 401k; 100k in my investment a/c; 75k in my roth ira) and with an annual salary of 160k; I still feel good but a bit tense in the sense whether I should juggle some savings to debts to primarily reduce my home payment. I think I can manage 4500/mo but I'd still feel a bit more secure if it was closer to the 2500/mo I was paying while I was renting for years until a couple of months ago. As you suggest, I am thinking of renting one of my bedrooms out after getting some things done so that should cut into my payment...was wondering if there was anything else I could do.

    EDIT: there is the mortgage interest deduction benefit that should bring my effective mortgage to 3500/mo (I think) based on my income bracket so that helps. That essentially leaves my monthly payment at about 50% of my net income. As for my investment goals: I would like to work towards a situation where the cost of mortgages on both my homes equal what I would've otherwise pay to rent a place for 2k-2.5k/mo.

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  • Jay Ipswich
    OP
    Member since 2018 · 3 posts · 0 votes
    7y

    Hi all, I'm bumping this thread after a long time...as I've now locked refi rates for my primary home and rental from a credit union.

    For the cash out refi on my rental - I'm locked at an 4% rate for a fixed 15 yr term with closing costs of $6k. This will up my monthly payment from $1450 to $1850. My current loan that is 5 years old and a 4.375% 30 yr fixed. The town home is currently valued at ~285k and I owe ~145k on it. My rental income that has been steady for the past 5 years is currently $1700/month. Based on the 75% ltv rules the bank has, I believe the net cash out will be 70k at the cost of me having to pay an extra $150/mo to cover the new monthly payment.

    I plan to apply this 70k towards the outstanding loan on my primary home which is currently 700k. So from the same bank, I was able to lock in a 3.625% 30 yr fixed with closing of $1k reducing the loan amount to 630k. This will reduce my mortgage payment from $4500/mo to $3875/mo. My current loan is 1 year old and 4.125% 30 yr fixed.

    My primary goal here is to take advantage of lowered mortgage rates to reduce the interest i'm paying out across both properties but prioritize my primary.

    I would really appreciate any suggestions or advice on this plan I'm on.

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