paying mortgage

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avran
Posts: 2
Joined: Mon Sep 10, 2018 9:33 pm

paying mortgage

Post by avran » Mon Sep 10, 2018 9:38 pm

My primary residence mortgage balance is $122K with 4.125% and the rental (investment) balance is $37K at 5.5%. This is simple math (not going with higher rate), which one should I pay $20,000 additional ? Not sure how to factor in rental / taxes etc. Help :)

noco-hawkeye
Posts: 331
Joined: Sat Aug 16, 2014 8:20 am

Re: paying mortgage

Post by noco-hawkeye » Mon Sep 10, 2018 11:02 pm

Could you provide more info?

Other debts?
Current emergency fund?
Other savings / investments etc?

mortfree
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Joined: Mon Sep 12, 2016 7:06 pm

Re: paying mortgage

Post by mortfree » Tue Sep 11, 2018 4:44 am

Primary residence

riverguy
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Joined: Sun May 23, 2010 10:33 pm

Re: paying mortgage

Post by riverguy » Tue Sep 11, 2018 11:11 am

Depends on your circumstances but likely a wash due to being able to deduct the rental interest and practically not (unless you are over std deduction, which even then it is a small value) being able to on the home mortgage.

tesuzuki2002
Posts: 509
Joined: Fri Dec 11, 2015 12:40 pm

Re: paying mortgage

Post by tesuzuki2002 » Tue Sep 11, 2018 2:08 pm

avran wrote:
Mon Sep 10, 2018 9:38 pm
My primary residence mortgage balance is $122K with 4.125% and the rental (investment) balance is $37K at 5.5%. This is simple math (not going with higher rate), which one should I pay $20,000 additional ? Not sure how to factor in rental / taxes etc. Help :)
Rental mortgage expenses are a wash since it reduces your income on the rental by the same amount. I would pay primary if it was me.

omgbirdman
Posts: 73
Joined: Tue Aug 01, 2017 3:25 pm

Re: paying mortgage

Post by omgbirdman » Tue Sep 11, 2018 2:11 pm

Doing some potentially flawed math here.. the more intelligent can weigh in whether this works or not. Let's say your overall tax rate is 25% and you don't itemize. So 5.5% x .75 = effectively 4.125% interest after tax on the rental? If my math works, your rates are the same, so primary residence is the way to go due to higher balance.

This feels flawed..but I can't be sure.

riverguy
Posts: 423
Joined: Sun May 23, 2010 10:33 pm

Re: paying mortgage

Post by riverguy » Tue Sep 11, 2018 2:28 pm

omgbirdman wrote:
Tue Sep 11, 2018 2:11 pm
Doing some potentially flawed math here.. the more intelligent can weigh in whether this works or not. Let's say your overall tax rate is 25% and you don't itemize. So 5.5% x .75 = effectively 4.125% interest after tax on the rental? If my math works, your rates are the same, so primary residence is the way to go due to higher balance.

This feels flawed..but I can't be sure.
It doesn't matter what the balance is. You pay the interest rate on whatever amount you have outstanding.

omgbirdman
Posts: 73
Joined: Tue Aug 01, 2017 3:25 pm

Re: paying mortgage

Post by omgbirdman » Tue Sep 11, 2018 2:31 pm

riverguy wrote:
Tue Sep 11, 2018 2:28 pm
omgbirdman wrote:
Tue Sep 11, 2018 2:11 pm
Doing some potentially flawed math here.. the more intelligent can weigh in whether this works or not. Let's say your overall tax rate is 25% and you don't itemize. So 5.5% x .75 = effectively 4.125% interest after tax on the rental? If my math works, your rates are the same, so primary residence is the way to go due to higher balance.

This feels flawed..but I can't be sure.
It doesn't matter what the balance is. You pay the interest rate on whatever amount you have outstanding.
Yes, but since the principal amount is higher on his principal residence, the interest being generated on it is higher.

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Watty
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Joined: Wed Oct 10, 2007 3:55 pm

Re: paying mortgage

Post by Watty » Tue Sep 11, 2018 2:37 pm

avran wrote:
Mon Sep 10, 2018 9:38 pm
Not sure how to factor in rental / taxes etc. Help
If you did your own taxes in tax software you can make a copy of last years tax returns and try out different scenarios to see the after tax impact. This will also show you the impact on your state taxes.

Braje
Posts: 51
Joined: Wed Jun 03, 2015 10:06 pm

Re: paying mortgage

Post by Braje » Tue Sep 11, 2018 3:03 pm

omgbirdman wrote:
Tue Sep 11, 2018 2:11 pm
Doing some potentially flawed math here.. the more intelligent can weigh in whether this works or not. Let's say your overall tax rate is 25% and you don't itemize. So 5.5% x .75 = effectively 4.125% interest after tax on the rental? If my math works, your rates are the same, so primary residence is the way to go due to higher balance.

This feels flawed..but I can't be sure.
Are you factoring in that the interest on the rental is deductible on the Schedule E?

omgbirdman
Posts: 73
Joined: Tue Aug 01, 2017 3:25 pm

Re: paying mortgage

Post by omgbirdman » Tue Sep 11, 2018 3:17 pm

Braje wrote:
Tue Sep 11, 2018 3:03 pm
omgbirdman wrote:
Tue Sep 11, 2018 2:11 pm
Doing some potentially flawed math here.. the more intelligent can weigh in whether this works or not. Let's say your overall tax rate is 25% and you don't itemize. So 5.5% x .75 = effectively 4.125% interest after tax on the rental? If my math works, your rates are the same, so primary residence is the way to go due to higher balance.

This feels flawed..but I can't be sure.
Are you factoring in that the interest on the rental is deductible on the Schedule E?
Yes, that is why I am multiplying the 5.5% by .75 (assuming a tax rate of 25). This should be the the effective amount of interest paid after considering tax savings. Unfortunately, because it also happens to be the rate of the principal residence mortgage, I guess it isn't exactly clear.

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grabiner
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Re: paying mortgage

Post by grabiner » Wed Sep 12, 2018 9:55 pm

Welcome to the forum!
avran wrote:
Mon Sep 10, 2018 9:38 pm
My primary residence mortgage balance is $122K with 4.125% and the rental (investment) balance is $37K at 5.5%. This is simple math (not going with higher rate), which one should I pay $20,000 additional ? Not sure how to factor in rental / taxes etc. Help :)
Paying down an X% loan is a risk-free return of X%; the return is taxable if the loan is tax-deductible,

But even if your primary mortgage is not tax-deductible, it's probably better to pay down the rental. If you are in a 22% bracket, your after-tax return on paying down the rental is 4.29%, which is still higher than the primary mortgage balance.

And if the rates are equal, it is better to pay down the mortgage with the lower balance. The reason is that it gives you more options. Once the rental mortgage is gone, you get back the money you were paying on the rental. If you want to continue to earn that rate, you can use the money to pay down the primary mortgage. But you also have the option of using the money for some other purpose if you have a better use for it, such as contributing more to your IRA or college fund, or just investing it if rates have risen or the mortgage has become deductible.
Wiki David Grabiner

avran
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Joined: Mon Sep 10, 2018 9:33 pm

Re: paying mortgage

Post by avran » Thu Sep 13, 2018 9:10 pm

Thanks all for replying... really to appreciate it. Will go with primary - $122K at 4.125%.

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