should I pay off mortgage or save for buying a new property?

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Topic Author
xinqi
Posts: 3
Joined: Thu Oct 01, 2020 8:57 pm

should I pay off mortgage or save for buying a new property?

Post by xinqi »

I am so happy to find this forum.
I currently have a mortgage about 230K, rate is 2.875%, 12 years remaining.
My monthly payment is close to $3600 (including $600 interest, $600 escrow and $2400 towards principle)
We have a proceeds from selling another house, about $280K.

Given such a very low rate currently, I am thinking if we should just pay off our mortgage, save on the interest and increase our cash flow.

But I am not sure if we should keep the cash around. In 2-3 years, we are likely to buy another house in a better school district which might cost over a million. And we intend to make our current house a rental property instead of selling it.
As a rental property, the mortgage interest can be tax deducted as rental expense at that time. That's one benefit I see of keeping the current mortgage. Also with the cash around, maybe it's easier to get another loan when buying that bigger house? Sorry that, I am totally a newbie on this.

Any suggestions are welcome. Thanks!
I am very much invested in my tax-advantaged account.
mortfree
Posts: 2447
Joined: Mon Sep 12, 2016 7:06 pm

Re: should I pay off mortgage or save for buying a new property?

Post by mortfree »

If you pay it off you will have 3000 per month to save. Subtracting the escrow portion since that is still due.

36k per year times 2-3 years doesn’t quite get you to 20% on a million dollar home.

However are you disciplined enough to save that full amount and more?

I would probably set the proceeds aside and use it for the million dollar purchase. I am conservative though.
Topic Author
xinqi
Posts: 3
Joined: Thu Oct 01, 2020 8:57 pm

Re: should I pay off mortgage or save for buying a new property?

Post by xinqi »

mortfree wrote: Fri Oct 02, 2020 6:53 am If you pay it off you will have 3000 per month to save. Subtracting the escrow portion since that is still due.

36k per year times 2-3 years doesn’t quite get you to 20% on a million dollar home.

However are you disciplined enough to save that full amount and more?

I would probably set the proceeds aside and use it for the million dollar purchase. I am conservative though.
Thank you very much for your reply!
If I paid off my current loan, then it might be easier for me to get another loan for the new purchase with better rate, I suppose.
To make 20% down payment for the 1 million house, we would have to sell some of our stocks if needed.

Another thing I am considering is, real estate market here is crazy. We might not able to find an affordable house we like in 2-3 years. I was hoping to buy a house in better school district in 2-3 years , because my kid will be in 2nd grade at that time and I heard people say if you want to move, try move earlier before kids hit 2-3 grade. Our current school district has pretty good K-5 schools, but not as good middle/high schools.
babystep
Posts: 245
Joined: Tue Apr 09, 2019 9:44 am

Re: should I pay off mortgage or save for buying a new property?

Post by babystep »

xinqi wrote: Thu Oct 01, 2020 9:12 pm I am so happy to find this forum.
I currently have a mortgage about 230K, rate is 2.875%, 12 years remaining.
My monthly payment is close to $3600 (including $600 interest, $600 escrow and $2400 towards principle)
We have a proceeds from selling another house, about $280K.

Given such a very low rate currently, I am thinking if we should just pay off our mortgage, save on the interest and increase our cash flow.

But I am not sure if we should keep the cash around. In 2-3 years, we are likely to buy another house in a better school district which might cost over a million. And we intend to make our current house a rental property instead of selling it.
As a rental property, the mortgage interest can be tax deducted as rental expense at that time. That's one benefit I see of keeping the current mortgage. Also with the cash around, maybe it's easier to get another loan when buying that bigger house? Sorry that, I am totally a newbie on this.

Any suggestions are welcome. Thanks!
I am very much invested in my tax-advantaged account.
If you really need cash flow then paying off will be good option. If you want to save taxes by converting into rental then better not pay off right now since you have a pretty good rate. It will be hard to get such low rate on a rental property.

The $280k can be invested in the taxable. In 2-3 years, taxable would very likely have the 20% downpayment to buy and 1st home can be rented. If there is an issue with affording both homes then 1st home can be sold at that time.

Essentially, 2.875% after-tax is the cost of keeping the option to save for taxes later on the rental property plus risk/assumption that taxable returns more than 4% or so to meet the after-tax return.
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BrandonBogle
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Joined: Mon Jan 28, 2013 11:19 pm

Re: should I pay off mortgage or save for buying a new property?

Post by BrandonBogle »

Why not see if you can get a $285k 30-year 2.875% refinance at no cost, then have those funds and the cash-flow for the eventual purchase?

Generally, folks prefer 30-year mortgages vs. 15-year mortgages on rentals as it better aligns with the rental cash flow.

Now if you decide to pay off instead, then ignore the above. But if you decide the keep the loan, you might as well position yourself for the long term.
Topic Author
xinqi
Posts: 3
Joined: Thu Oct 01, 2020 8:57 pm

Re: should I pay off mortgage or save for buying a new property?

Post by xinqi »

Thank you so much for the reply!
I am leaning towards paying off, since I am not sure if we can get a new home in 2 years. We will probably stay in my current home for more years than that. The only reason we consider moving is the school district. Our current home is a good size, close to elementary school (good school), and close to work, but not as good high school.

Also, when it's time for purchasing a new home, we won't have 20% cash for down payment, but we can sell our securities in our taxable account for that.
BogleDan
Posts: 28
Joined: Sun Jun 03, 2018 5:49 pm

Re: should I pay off mortgage or save for buying a new property?

Post by BogleDan »

I would not plan to hold your old house as a rental. It will be great if you can purchase your new property without needing to sell your old one; that will give you added leverage in the negotiation. But as for keeping a single family rental... most landlords give up within a few years. You're either in a cashflowing market, where you will probably make some very modest income over the first couple of years, but that won't be enough to offset the headaches of tenant communications and repairs, etc, or you're in a high appreciation market, in which case your gains will be only on paper for a long time. For 9/10 people, putting that chunk of change from your house sale into the market will be much easier and more lucrative (at least in the short term).

Rentals are great if you want to make them your full-time business, or at least a significant side gig, and/or have the ability to scale up and acquire many, many properties. For most others, it's not worth the trouble.

Source: am landlord
tomtoms
Posts: 338
Joined: Wed Mar 06, 2013 11:56 pm

Re: should I pay off mortgage or save for buying a new property?

Post by tomtoms »

xinqi wrote: Thu Oct 01, 2020 9:12 pm But I am not sure if we should keep the cash around. In 2-3 years, we are likely to buy another house in a better school district which might cost over a million. And we intend to make our current house a rental property instead of selling it.
As a rental property, the mortgage interest can be tax deducted as rental expense at that time. That's one benefit I see of keeping the current mortgage. Also with the cash around, maybe it's easier to get another loan when buying that bigger house? Sorry that, I am totally a newbie on this.

Any suggestions are welcome. Thanks!
I am very much invested in my tax-advantaged account.
Do you want to be an “accidental landlord”? Not all houses make a good rental property. Have you done the calculation? What is the projected rent, expenses? Are you planning to manage the property or hire a property manager? I am asking these questions because a good number of accidental landlords end up having a bad experience with being a landlord because they did not due their diligence. I am all for owning rental properties but you have to do it right.

Another question you need to ask is...are you going to be able to qualify for another mortgage if you are not going to sell your current property? Banks typically want to see at least one year of rental income before they count your rent as “income”.
BogleDan
Posts: 28
Joined: Sun Jun 03, 2018 5:49 pm

Re: should I pay off mortgage or save for buying a new property?

Post by BogleDan »

tomtoms wrote: Tue Oct 06, 2020 2:55 pm Another question you need to ask is...are you going to be able to qualify for another mortgage if you are not going to sell your current property? Banks typically want to see at least one year of rental income before they count your rent as “income”.
They can usually look at a lease agreement (although unlikely OP would have a lease by this time) and project pro-forma income based on that. Regardless, they only ever consider 75% of your rental income in their calculations. The other 25% they consider unreliable.
tomtoms
Posts: 338
Joined: Wed Mar 06, 2013 11:56 pm

Re: should I pay off mortgage or save for buying a new property?

Post by tomtoms »

BogleDan wrote: Tue Oct 06, 2020 3:44 pm
tomtoms wrote: Tue Oct 06, 2020 2:55 pm Another question you need to ask is...are you going to be able to qualify for another mortgage if you are not going to sell your current property? Banks typically want to see at least one year of rental income before they count your rent as “income”.
They can usually look at a lease agreement (although unlikely OP would have a lease by this time) and project pro-forma income based on that. Regardless, they only ever consider 75% of your rental income in their calculations. The other 25% they consider unreliable.
The lenders that I have been working with require one year of landlord experience before they count rental income.

Anybody have a different experience?
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