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Should I pay it off? I want to but I keep reading it is not smart to do. I just think it would be nice to own your house free and clear. Burt there is also another wrinkle to this: I also want to buy a second house. My thinking is that I should pay off my current mortgage, which will leave me with $30,000 in the bank, and then save for six months which will leave me with about $50,000 (my Mortgage payment is $3000 a month, currently putting a lot extra on the principal each month) in cash to use for the 20% I want to put down on the new house (property yet to be identified but looking in the 250k range).
OR should I keep my current Mortgage and use my saved $100,000 towards the new house. That would leave me with two mortgages, one for 70000 on my current house and one for 150000 on the new house. I guess I don't know how the bank would feel about this?
Any thoughts? What would you do in my situation.

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I think this whole thread is non-sense. The important thing here is where the h$%% can you buy a $110k home while earnin... (more)

olvrtw (Mar. 10, 2013 @ 2:06p) |

Selfishly, I'm glad I'm not the only one. Seriously, OP, rather than reinvent the wheel, there is some great advice in m... (more)

NikeFace (Mar. 12, 2013 @ 7:21a) |

I would start by looking at the situation differently. Ask yourself 2 questions. First, do you really want to be a landl... (more)

Netguy37 (Mar. 12, 2013 @ 3:27p) |

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The current house and potential 2nd house: What are their intended uses (primary residence, vacation home, rental)

How much are you accelerating your mortgage payment by? Stated another way, of the $3,000/mo you're currently paying, what's your REQUIRED monthly amount?

Another option to consider is pay off first house, then take out a HELOC for (part of?) the second property.

If you plan on having multiple mortgages, keep in mind that lenders will consider your full required monthly payment (on both mortgages) for DTI calculations - and that both required down payment and potentially rate might be higher on the second property, depending on how it's classified. Doesn't look like you'll have problems with the down payment regardless of what you do, but something to keep in mind.

Would be helpful to know required payment on current mortgage, and monthly gross income.

Is the 3000/month the required amount? Or is that how much total you're putting in?

Whats the interest rate?

and take a look at your amortization schedule

You might consider doing a cash-out refi and purchasing the 2nd house in cash, that might get you the best rates and the most negotiating power, assuming you have the equity.

What are the interest rates of the primary and the proposed second house's mortgages?

Cash is King! God forbid something were to go wrong and your houses were worth 50% of what you paid. I'm pretty sure, you'd rather wished you had kept the cash. Worst case i'd at least get HELOC's on them and draw on them when need be.

Cash is king until you get sued or medical bills drive you to file BK.

Here is what I wrote in another thread and just want to quote it to save myself time:
ankitgu said:   BlueSeaLake said:   Unless your property taxes are extremely high or other itemizable items, you probably will take the standard deduction when you do your taxes. If this is true, then you have no benefit (tax wise) from having a mortgage and its basically BAD debt.
Personally I would pay it off, because living debt free is wonderful, and you will save paying 5K per year in interest.
Even if you get to deduct the interest, only the amount of total itemized deduction over the standard deduction counts, meaning your benefit (if any) might only be a $500 deduction not 5K worth.
Others will want you to stay in debt, but what else will you do with your money, as interest rates are practically zero, and the stock market is at a 5 year peak, so good chance it might flatten or even drop down in the next few years.

You raise good points, however the place I would push you is on your description of why others will recommend he stay in debt.

First... the interest rate used to compute what he'll pay in interest ought to be what he could refinance at today, because that's his true opportunity cost. A 15 year fixed mortgage will run you just under 3% interest today, Yahoo Finance says 2.89% this week. So right off the bat, we're at $2,890/year for $100k outstanding, and that will decrease as his principal is reduced.

Assuming the 25% marginal tax bracket, he could reduce that 2890 to under 2200.

Oh, and we should remember he will earn interest on that $100k. Even with the AMEX Personal Savings account, he can pocket nearly 1% - so $1k per year.

Suddenly, even that $2890 gets knocked down because you earn interest on your cash, and you get a tax writeoff.

Imagine a worst case scenario where you get laid off. Having cash on hand can be very valuable, much more so than equity in your home, because cash can pay the bills - equity in your home, while an asset, cannot pay the bills. The only ways to access the equity value would be to either sell the home (good luck when people are being laid off and asset values fall), get a HELOC, rent out the home (not normally feasible), etc.

While it often sounds good to be debt-free, the reality is that someone who manages their money well is probably going to benefit by having a mortgage right now no matter how much cash they have. Even if you're a millionaire, at today's rock bottom low interest rates, the government is essentially paying you to have one. They want money to be put into the economy and pick up velocity.

Imagine a scenario where inflation picks up even a little bit... by having a loan that has a fixed interest rate, the benefits of inflation potentially accrue to the benefit of the homeowner.

Home value today: $200k
Home value after inflation in 10 years: $300k (hypothetical)

Loan size: $200k
Interest rate: 2.89% fixed

Excess cash: High yield savings account via FW Finance list
Interest rate: Variable, 1%+
Hypothetical future rate: 6%

If interest rates move to 6%, because of inflation, the person who used borrowed money benefited twice. Not only did their home's value increase to adjust for inflation, but their savings account, which has a variable rate, also kicks up, and earns them money.

Under an inflationary scenario, the person who locked in a low interest rate early on will do well.

The challenge is that this requires a prudent individual to manage their finances - I think most people will see the $100k in their account and be compelled to spend it. That's their choice, but not what the OP is likely to do. He's saved it by being prudent, and is likely to hang onto it. He isn't at risk of having a loan, then blowing through his savings, and ending up upside-down with money that he can't pay off.

I think he'll do well with a refinance.


http://www.fatwallet.com/forums/finance/1253631/m17521124/#m1752...

chibimike said:   Cash is king until you get sued or medical bills drive you to file BK.
Insurance.

I'd consider your employment situation in this decision. I've been at the same company for 16+ years and probably will be there for many more (in software no less) and so I was happy to pay off my loan (it was a 5 year ARM @ 3.75%). I think most here frown @ paying off a mortgage at that rate but with liquid investments @ 1% or so & bonds not achieving that without significant principal risk, it was a no brainer for me.

If you're pretty high cash flow positive due to employment/etc and will be accumulating cash, I'd say pay it off. If you've got a less stable career I'd probably keep the cash or do as someone else suggested above (pay off & take out a HELOC).

okashiraaa said:   chibimike said:   Cash is king until you get sued or medical bills drive you to file BK.
Insurance.


apparently you never get sick.

doctor / hospital will still bill you if your insurance dont cover.

Fixed or floating? What rate can you invest at? What are your views on inflation and future interest rates? How long are you going to live in the house?

If you have 30k left over and can save 20k in 6 months... Been putting extra on your current mortgage the answer is clear. In addition its better to have your primary res. F&C...than be obligated on both, imo.

Do you have any other debt?

TravelerMSY said:   Fixed or floating? What rate can you invest at? What are your views on inflation and future interest rates? How long are you going to live in the house? The quandaries of life.

Wow, some excellent feedback. Much appreciated, I have some things to think about.
To answer some of the questions: The plan is to rent out the first property and live in the new one. But that the renting part will happen later, after we purchased and moved to the new property. We have no other debt whatsoever. The current required mortgage payment (it is a 10 year fixed) is 1700 including property tax escrow. Of that 1000 is principal. We also add another 1300 towards the principal each month so total 3000. The current rate is 4.5. Not sure what rate I can get for second property, not there yet. Both our credit ratings are ok, around 790-800 last time I checked. Need to check that again.
Our careers are stable. I have 11 years with the company I work for and my wife has 7 with hers. Together my wife and I make around 200k anually and not seeing our cash flow stopping anytime soon. We have no kids. We have pretty good health insurances. We have a little over 500k in retirement savings, some of it taxed money, so I feel that we have some emergency cushion there even if I spend most of my cash on hand.

790-800 is not OK but excellent credit rating.

do a cash out refi of your current property to get enough money to buy the next home

You want as big a mortgage as possible on your current home now since you can lock in sub 3% owner occupied rates. You won't be able to do that once its a rental

When it comes time to buy the second property you can decide whether to pay cash , get a loan or both (pay cash to buy quick then immediately get a loan )

funny I asked my book keeper exact question. although have a second home already,(used as a rental) 8% interest on rental. 3.6 % on main home. only have 3 yrs left on rental. can easily pay it off. bookkeeper said to not pay off rental, use extra money to add to main home principal . a rental home's interest is 100 % deductible while main home is not. food for thought.

chibimike said:   Cash is king until you get sued or medical bills drive you to file BK.

Exactly. You can't file a homestead exemption on cash.

better to have cash buy real estate with leverage preserve your cash

SUCKISSTAPLES said:   do a cash out refi of your current property to get enough money to buy the next home

You want as big a mortgage as possible on your current home now since you can lock in sub 3% owner occupied rates. You won't be able to do that once its a rental

When it comes time to buy the second property you can decide whether to pay cash , get a loan or both (pay cash to buy quick then immediately get a loan )


This is the smartest advice I've seen on FWF in a while.

If you follow SUCKISSTAPLES's good advice, you could still buy the 2nd property outright, and then rinse and repeat the leverage and acquire a 3rd rental, 4th rental, and possible 5th rental, etc., all the while still owning at least one final property (the last one purchased) outright in full in your name that is free and clear. With $100,000 might only have enough cash to leverage your way to a third, but it's still possible.

This is what I mean:

Say you owe $70,000 at 5.25% on a $250,000 home and have $100,000 cash.

This is how smart people do it. First, they do a cash-out refinance on their $250,000 home and get as large a mortgage as possible. Let's say the bank gives them a $150,000 mortgage on their property at 2.9%. Take that $150,000 you now have in cash and buy ANOTHER $250,000 property.

So, here is the picture now:

Home #1: $220,000 mortgage at 2.9% and in $30,000 equity.

Home #2: $0 mortgage; Free and clear and $250,000 in equity.

You can use the equity in Home #1 and sell it, or you can rent it out. You now have many more options now that you have two homes.

If you want to get even more creative, you can take out ANOTHER $150,000 re-finance mortgage on Home #2 and get a $30,000 home equity loan at 5.9% on Home #1. You pool both loans ($180,000 total) and buy Home #3 for no more than $180,000 cash upfront.

So, here you are:

Home #1 (rental): $220,000 mortgage and $30,000 home equity loan. Weighted average rate of 3.26%. No equity.

Home #2 (rental): $150,000 mortgage at 2.9% and $100,00 in equity.

Home #3 (residence): $0 mortgage; Free and clear and $180,000 in equity.

If you have trouble with the renter in either Home #1 or Home #2, you can either use the profit from the rent from either home to help cover the mortgage payments, or you can temporarily take out an equity loan or line of credit from Home #2. Either way, even if all things go bad, you still own Home #3, no matter what. In fact, at this point, I'd fine for a Homestead protection on Home #3 and get good insurance on both Homes #1 & #2. Congratulations, you now control $680,000 in property, have $280,000 in equity and own your own home outright.

This gets especially good when you involve undervalued foreclosures and REO's that don't need much fixing.

I think the problems with the real estate market began when instead of using leverage to purchase additional homes outright, people were using leverage to merely make the downpayment. In addition to that, they were getting variable rate, interest-only mortgages on their main residence.

exoticimagekk23 said:   funny I asked my book keeper exact question. although have a second home already,(used as a rental) 8% interest on rental. 3.6 % on main home. only have 3 yrs left on rental. can easily pay it off. bookkeeper said to not pay off rental, use extra money to add to main home principal . a rental home's interest is 100 % deductible while main home is not. food for thought.

This is stupid. Even if you were in the top tax bracket, you'd pay more interest on the 8% after tax than the other one.

Losfer said:   Wow, some excellent feedback. Much appreciated, I have some things to think about.
To answer some of the questions: The plan is to rent out the first property and live in the new one. But that the renting part will happen later, after we purchased and moved to the new property. We have no other debt whatsoever. The current required mortgage payment (it is a 10 year fixed) is 1700 including property tax escrow. Of that 1000 is principal. We also add another 1300 towards the principal each month so total 3000. The current rate is 4.5. Not sure what rate I can get for second property, not there yet. Both our credit ratings are ok, around 790-800 last time I checked. Need to check that again.
Our careers are stable. I have 11 years with the company I work for and my wife has 7 with hers. Together my wife and I make around 200k anually and not seeing our cash flow stopping anytime soon. We have no kids. We have pretty good health insurances. We have a little over 500k in retirement savings, some of it taxed money, so I feel that we have some emergency cushion there even if I spend most of my cash on hand.


Have the bigger mortgage on the rental property in case it goes bad.

greling said:   If you follow SUCKISSTAPLES's good advice, you could still buy the 2nd property outright, and then rinse and repeat the leverage and acquire a 3rd rental, 4th rental, and possible 5th rental, etc., all the while still owning at least one final property (the last one purchased) outright in full in your name that is free and clear. With $100,000 might only have enough cash to leverage your way to a third, but it's still possible.

This is what I mean:

Say you owe $70,000 at 5.25% on a $250,000 home and have $100,000 cash.

This is how smart people do it. First, they do a cash-out refinance on their $250,000 home and get as large a mortgage as possible. Let's say the bank gives them a $150,000 mortgage on their property at 2.9%. Take that $150,000 you now have in cash and buy ANOTHER $250,000 property.

...


This plan won't work unless you can find a lender that will give you money without having an LTV<=80.
OP didn't say how much the current house is worth, but even with your assumption of $250K, you are proprosing that a lender will give him a $150K loan on a house that he owe $70K.
The LTV would be 88.

zoeyfactor said:   790-800 is not OK but excellent credit rating.

Yeah, like in the year 2007.

SUCKISSTAPLES said:   do a cash out refi of your current property to get enough money to buy the next home

You want as big a mortgage as possible on your current home now since you can lock in sub 3% owner occupied rates. You won't be able to do that once its a rental

When it comes time to buy the second property you can decide whether to pay cash , get a loan or both (pay cash to buy quick then immediately get a loan )


^^^ All that needs to be said! Anybody that is telling you that paying off owner occupied interest rates to buy a second property is just giving you terrible advice.

Instead you're in the ideal position to have lower cost of ownership on both your rental and your next home. It doesn't get better than that.


People who think it's smart to pay off a very low interest rate mortgage out of safety are thinking in terms of owners prior to the crash. Those owners didn't have countervailing cash positions to offset that risk which you do.

Having $100k in cash and $70k in mortgage is actually *higher risk* than $30k in cash and 0 mortgage because of liquidity risk. The only question whether a person should pay off a mortgage is based on interest rate and whether you think you'll do better. If you refi'ed today you would get probably ~3.7%. If you can't beat a 3.7% interest rate on cash you have no business being a landlord.

Here is another wrinkle. Our current property that we purchased for 240k is now worth around 110k. We bought it new at the absolute peak in 2006 and it has crashed by more than 50%. So this is actually the biggest reason we don't want to sell. We have to believe there will some level of recovery within the next 5-10 years and we want to rent it out while at the same time take advantage of the low prices to purchase a new house.
Anyway, this means that a cash out refinance will not do much good. I mean we have a 70k mortgage on 110k house so how much more is the bank going to loan us?
Now, we currently have a 10 year loan at 4.5% so refinancing it to a 30 year at under 4% should bring the monthy cost with escrow to about $800, from 1700 today. That would leave us with the 100k to use towards the new house. And I think we'd be easily able to recoup 800 in rent money. It is a two story 1500+ sq feet townhouse built in 2006 with a walkout basement and I see nothing advertised for rent (townhouse) under 1100 in our zip code.

But it still would be nice to own something free and clear...

I think I have to set up a meeting with the bank and go over the options.

I will say that I did not expect this much feedback, thank you all!

Losfer said:   Here is another wrinkle. Our current property that we purchased for 240k is now worth around 110k. We bought it new at the absolute peak in 2006 and it has crashed by more than 50%. So this is actually the biggest reason we don't want to sell. We have to believe there will some level of recovery within the next 5-10 years and we want to rent it out while at the same time take advantage of the low prices to purchase a new house.
Anyway, this means that a cash out refinance will not do much good. I mean we have a 70k mortgage on 110k house so how much more is the bank going to loan us?

Uh yeah you probably shouldn't have left that little detail out

Losfer said:   Here is another wrinkle. Our current property that we purchased for 240k is now worth around 110k. We bought it new at the absolute peak in 2006 and it has crashed by more than 50%. So this is actually the biggest reason we don't want to sell. We have to believe there will some level of recovery within the next 5-10 years and we want to rent it out while at the same time take advantage of the low prices to purchase a new house.
Anyway, this means that a cash out refinance will not do much good. I mean we have a 70k mortgage on 110k house so how much more is the bank going to loan us?
Now, we currently have a 10 year loan at 4.5% so refinancing it to a 30 year at under 4% should bring the monthy cost with escrow to about $800, from 1700 today. That would leave us with the 100k to use towards the new house. And I think we'd be easily able to recoup 800 in rent money. It is a two story 1500+ sq feet townhouse built in 2006 with a walkout basement and I see nothing advertised for rent (townhouse) under 1100 in our zip code.

But it still would be nice to own something free and clear...

I think I have to set up a meeting with the bank and go over the options.

I will say that I did not expect this much feedback, thank you all!


Yeah no kidding you shouldn't have left that detail out.

First of all, the decision to rent out your property should have *nothing* to do with your desire to rent out said property and should rest entirely on the mathematics of landlording that property vs. taking a lump sum to rid yourself of that liability(assuming your prepared to do the work of being a prudent landlord). Is $110k legitimately what you can sell your property for or is it some inflated appraised value? What do you actually think is the real rent number? $800 you say is overly conservative and if that was the number you probably wouldn't want to landlord it out because $800 against $110k is not terrible at best and clearly cash flow negative for a rental property based on mortgage financed at 30 years for 3.75% not 10 years at 4.5%(in which case it will be way cash flow negative). If that is the true numbers the math tells me that you should probably look at selling. If instead "nothing advertised for under $1100 in rent in your zip code" means that you can rent this place for $1k+ then your probably sitting on a good rental property and it makes sense to rent it out instead of selling.

If you do decide that it makes sense to rent it out it is an obvious move to refinance the property to 30 years at 3.7%. A) because that is a cheap interest rate. B) Because one you move out of it you'll never be able to get owner occupied rates on it again which improves your cash flow numbers.

"Still would be nice to own something free and clear" is emotional language predicated on a person being a non sophisticated investor. Scrap it from your lexicon especially when talking about *investment* property. I might emotionally enjoy not having to feel the swings of the stock market, but I would financially stupid to just keep all of my money in cash all of the time. Emotional ideas shouldn't play a role in your decision making.



The rule of thumb target for rental property is monthly rent at 1%+ the current value of the property. $1100 rent on $110k property is traditionally a good deal as a property to rent out; any higher rent on a property valued at that much is a great deal. If that is what you can do with it then by all means rent it out, but do yourself a favor and lower the cost of ownership on the property by refi'ing over 30 years at ~3.7%

Losfer said:   Here is another wrinkle. Our current property that we purchased for 240k is now worth around 110k. We bought it new at the absolute peak in 2006 and it has crashed by more than 50%. So this is actually the biggest reason we don't want to sell. We have to believe there will some level of recovery within the next 5-10 years and we want to rent it out while at the same time take advantage of the low prices to purchase a new house.
Anyway, this means that a cash out refinance will not do much good. I mean we have a 70k mortgage on 110k house so how much more is the bank going to loan us?
Now, we currently have a 10 year loan at 4.5% so refinancing it to a 30 year at under 4% should bring the monthy cost with escrow to about $800, from 1700 today. That would leave us with the 100k to use towards the new house. And I think we'd be easily able to recoup 800 in rent money. It is a two story 1500+ sq feet townhouse built in 2006 with a walkout basement and I see nothing advertised for rent (townhouse) under 1100 in our zip code.

But it still would be nice to own something free and clear...

I think I have to set up a meeting with the bank and go over the options.

I will say that I did not expect this much feedback, thank you all!

Make the best decision possible given your current situation - do as you would if you had never bought that home to begin with. Looking at your cost basis and trying to "recoup" it is not wise. And for the record, I don't consider today's home prices all that cheap anymore. I think they've risen quite a bit and are only attractive because the government is creating very low financing costs. Without debt at such low interest rates, I wouldn't personally bother.

We have been monitoring prices locally for a long time, watching the slide. We are in a four unit townhouse building and the other three units (all similar size) have all sold within the last 24 months. The last one for around $110 six months ago. Not seeing ANY sign of housing price recovery here so far. I actually think $110 may be a little optimistic.
Been reading up on "renting out your house" today and it is not really encouraging. Not sure what to do at this point. I just cannot imagine selling our house at a 130k loss. That would be crazy.

Losfer said:   We have been monitoring prices locally for a long time, watching the slide. We are in a four unit townhouse building and the other three units (all similar size) have all sold within the last 24 months. The last one for around $110 six months ago. Not seeing ANY sign of housing price recovery here so far. I actually think $110 may be a little optimistic.
Been reading up on "renting out your house" today and it is not really encouraging. Not sure what to do at this point. I just cannot imagine selling our house at a 130k loss. That would be crazy.


That loss is sunk. It's gone. You've already lost it by paying down a $240k mortgage to $70k on a property that is now only worth $110k. There is nothing you can say or do to bring that money back...it's gone! And that lost money shouldn't weigh on your decision at all.

Instead what should weigh on your decision is that it appears that you may be sitting on a decent rental property from where it stands today and you have to weigh that against the hassles that come with being a landlord. Now if you don't want to subject yourself of the troubles of being a landlord than fine sell the property and be done with it. If you do you're sitting on likely a good property to landlord out(assuming you can rent it for more than $1k without having too much problem finding renters).

Now it's up to you, but either way $130k is gone. It's only what you do with what you have left that matters.

Wouldn't it be a smart tax move to convert to rental for couple years and then sell at loss.

Losfer said:   We have been monitoring prices locally for a long time, watching the slide. We are in a four unit townhouse building and the other three units (all similar size) have all sold within the last 24 months. The last one for around $110 six months ago. Not seeing ANY sign of housing price recovery here so far. I actually think $110 may be a little optimistic.
Been reading up on "renting out your house" today and it is not really encouraging. Not sure what to do at this point. I just cannot imagine selling our house at a 130k loss. That would be crazy.


I am in the same boat as you, except I would have to bring $80K just to refinance. But the one thing I have going for me is the property's location.

Someone please correct me if I am wrong. If OP were to rent his home, could he write off the difference between the rent amount and the mortgage payment as a loss on his tax return? If so, then would converting to a rental be worth it?

Skipping 10 Messages...
I would start by looking at the situation differently. Ask yourself 2 questions. First, do you really want to be a landload, and not just a landlord by default due to your current situation. If the answer is "yes", then ask yourself "If you didn't own the townhome, would you purchase it at $110k just to rent it to someone else for $1100/month?" If the answer to the second question is "yes", then keep the townhome. If the answer is either question is "no", sell the townhome and move on with your life.

If you decide to sell the townhome, you would have an addition $35k from the equity. Add that $35k to your existing $100k, giving you $135k in cash. You still want to buy a $250k home, so you then need to decide how much of the $135k to use as a downpayment on your new house. Assuming you don't want to spend all $135k as a downpayment, your principle and interest payments would be approximately:
20% down = $50k, leaving a $200k mortgage (15yr @ 3% = $1,381, or 30yr @ 3.75% = $926).
40% down = $100k, leaving a $150k mortgage (15yr @ 3% = $1,036, or 30yr @ 3.75% = $695).
50% down = $125k, leaving a $125k mortgage (15yr @ 3% = $864, or 30yr @ 3.75% = $579).

If the $250k houses you are looking at now suffered a similar fate as your townhome, the $250k house you purchase now probably sold for approximately $500k in 2006. So while you "lost" $130k on your townhome, you are "gaining" about $250k in your new house. Do I think the thought of you selling your townhome and recognizing (mentally and financially) a loss of $130k hurt? You bet! But the thought of buying a previously $500k house for $250k should make you feel awesome! Call it a mind game if you want.



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