I haven’t talked about debt in a while. The reason is that we paid off our car notes and student loans over a year ago. Additionally, the extra money we earned this past year went towards a down payment on a new house.
We ended up keeping our old house as a rental property, so our current debt load is these two mortgages:
- Rental Unit – $150,000 – 4.875% – 29 Years
- Home – $200,000 – 4.375% – 30 Years
Now that we’ve got some extra money rolling in again, I’m considering taking some of it and paying off our mortgages early. A couple of questions naturally arise:
- Should we pay off our mortgage early?
- If so, which one should we pay off first?
I’m not going to try to completely tackle these two questions, but I will explain how I think about them and give you some perspective if you’re making a similar decision.
Before I take on these two questions, I should note that we have an adequate emergency fund (i.e. money saved for a major medical issue that my high deductible plan can’t handle, or colossal business failure), we are maxing out my company’s Solo 401(K), and we’ve got some money saved for property and income taxes.
So our extra funds could be used for taxable investing, more cash savings, more real estate investing, or, to pay off this mortgage debt.
Should We Pay Off Our Mortgage(s) Early?
My gut tells me we should. When I look at the combined mortgage debt above I get a little unsettled feeling. I know Mrs. PT does as well. Taking on more debt for another real estate property is out of the question too, even if we “cash flowed” like we are on our rental property.
More cash savings seems ridiculous at this point with interest rates the way they are and with our cash savings goals (emergency and taxes) met.
That leaves taxable investing. This is a tough one. I offer two different trains of thought on this issue:
- Dave Ramsey is famous for saying “would you take out a home equity loan against a paid off house to invest in the stock market?” When you say it like this, I agree with Dave, I would not.
- But Warren Buffet said he’d “invest” in a couple hundred thousand mortgaged single-family houses if he could figure out a way to do the maintenance. Warren is a smart guy and I should respect this advice, but I think it may come into play more when I have at least one of the mortgages paid off and some more money saved for retirement.
For more reading on this topic, see this epic guide on paying off the mortgage vs investing.
Being completely debt free including the houses would give us a huge sense of freedom and security, and I think that’s ultimately going to drive our decision. Not numbers.
Which Mortgage Should We Pay Off First?
If we decide to tackle the mortgage debt, which should we pay off first? Our home or the rental property?
Dave Ramsey’s snowball method (and the debt avalanche method) says we should pay off the rental unit first. It’s got the lowest balance and the highest interest rate.
Mrs. PT likes the idea of being debt free on the home we live in.
I like this idea too. Especially after you factor in the home mortgage interest deduction. Normally we should be able to deduct both the mortgage interest on the home loan (Schedule A) and the rental property loan (Schedule E). However, in 2012 we probably will reach the phase-out limit on the home mortgage interest deduction. So we could lose most of this deduction, which gives the rental property interest rate an advantage (i.e. we should keep it because we can fully deduct the interest on the Schedule E).
It looks like we’ll start throwing extra dollars at the home mortgage first, and then reconsider things at that point.
Are you paying off your home mortgage early vs investing? Do you have two mortgages? If so, how did you decide which one to pay off first? If you plan to keep your mortgage debt for the life of the loan, how did you get comfortable with the risk and burden of debt?
Image by Dougtone