Which mortgage should I pay off first?

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we1
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Which mortgage should I pay off first?

Post by we1 » Thu Sep 05, 2019 8:24 pm

I have an investment property mortgage at a 3.5% rate.
I have my primary home mortgage at 2.75%
The primary home mortgage is about 2x the balance and 2x the monthly payment as the investment home mortgage.

Should I view the two mortgages as fungible and pay off the higher rate one first?

Part of the attractive return on the investment home came from having leverage so it feels weird to get rid of the leverage. OTOH (absent a major natural disaster) there is very little chance I’ll go under water in the future and need to walk away from the loan.

I have a good sized EF and a moderate to slightly aggressive allocation to equities in my AA. So even though I hate to pay off such cheap loans, it’s currently a higher priority for me than adding to my savings.

The smaller mortgage could be paid off in 5-10 years and the larger one in about 15 years but probably not both in those same times.

How would you decide which to pay off first with extra after tax savings?
Last edited by we1 on Fri Sep 06, 2019 11:07 pm, edited 1 time in total.

ivk5
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Re: Which mortgage should I pay off first?

Post by ivk5 » Thu Sep 05, 2019 8:28 pm

Rates need to be compared on a tax-adjusted basis. Is all of the interest in your primary residence deductible (ie you’d be above std deduction without it) or effectively only a portion? What is your marginal rate?

There are certainly other consider but I’d start there.

Topic Author
we1
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Re: Which mortgage should I pay off first?

Post by we1 » Thu Sep 05, 2019 9:28 pm

The primary mortgage is fully deductible (grandfathered) and I also deduct the investment home so both provide me a similar tax benefit.

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oldcomputerguy
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Re: Which mortgage should I pay off first?

Post by oldcomputerguy » Fri Sep 06, 2019 4:46 am

This topic is now in the Personal Finance forum. -- mod oldcomputerguy
"I’ve come around to this: If you’re dumb, surround yourself with smart people; and if you’re smart, surround yourself with smart people who disagree with you." (Aaron Sorkin)

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FiveK
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Re: Which mortgage should I pay off first?

Post by FiveK » Fri Sep 06, 2019 9:24 pm

we1 wrote:
Thu Sep 05, 2019 9:28 pm
The primary mortgage is fully deductible (grandfathered)
By that do you mean the principal is above $750K but below $1 million? If so, that's not what ivk5 asked - the question in other words is "how much do you have in itemized deductions, not counting the primary mortgage interest?"
and I also deduct the investment home so both provide me a similar tax benefit.
If both are fully deductible, it can be a straightforward comparison among the two mortgages and what you expect to earn on other investments. The 3.5% should be paid in preference to the 2.75%. Whether to pay more on the 3.5% or invest depends (among other things) on your expectation for the investment return.

IlliniProgrammer
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Re: Which mortgage should I pay off first?

Post by IlliniProgrammer » Fri Sep 06, 2019 11:33 pm

we1 wrote:
Thu Sep 05, 2019 8:24 pm
I have an investment property mortgage at a 3.5% rate.
I have my primary home mortgage at 2.75%
The primary home mortgage is about 2x the balance and 2x the monthly payment as the investment home mortgage.

Should I view the two mortgages as fungible and pay off the higher rate one first?

Part of the attractive return on the investment home came from having leverage so it feels weird to get rid of the leverage. OTOH (absent a major natural disaster) there is very little chance I’ll go under water in the future and need to walk away from the loan.

I have a good sized EF and a moderate to slightly aggressive allocation to equities in my AA. So even though I hate to pay off such cheap loans, it’s currently a higher priority for me than adding to my savings.

The smaller mortgage could be paid off in 5-10 years and the larger one in about 15 years but probably not both in those same times.

How would you decide which to pay off first with extra after tax savings?
(1) Sometimes investment mortgages are nonrecourse and home mortgages are full-recourse. In the extrema, you want the recourse mortgages paid off first.

(2) 3.5% is a great rate; 2.75% is an even better rate. I'm not a detractor of reducing your leverage, but if you're making money on these investments; if you feel comfortable as a landlord, if you think your leverage is appropriate, I'd almost rather see you buy a third property at a 60% LTV for the lowest rate possible (hopefully not in the exact same neighborhood) than pay off the 3.5% mortgage.

Generally, I'd pay off the higher rate first, but what's the rush? If your interest rate were 5% or 6% I'd give you a different answer, but at 3.5%... if you weren't planning on a refinance... I'd make the minimum payments and invest the money elsewhere.

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