Should I pay off my home and rental mortgages and if so in what order?

Should I pay off my home and rental mortgages and if so in what order?
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#1

Looking for advice… I am dept free except for a home mortgage and 2 rental property mortgages. I have a full time job and am not really looking to purchase more rentals at this time. I love the idea of getting out of dept and paying off the mortgages. I do have a $37k HELOC on or home that I used to purchase one of the rental properties. I have 20k on that right now…
Home Mortgage - in year 2 of 15 and owe $179k. 2.75 interest rate.
Rental #1 - in year 2 of 30 and owe 130k. 3.75 rate
Rental #2 - in year 2 of 30 and owe 195k. 4.25 rate
Rental #1 - cash flows about $200/month
Rental #2 - cash flows about $800/month
Total household cash flow is about $3000/month.
Recently I decided I was going to use a HELOC as a checking account essentially and pay of our mortgages because I want to be debt free and hate giving money to the bank.
Wondering what thoughts are on this. I understand my rates are great…but being debt free is so appealing to me that I feel like I want to get rid of the mortgages rather than invest in mutual funds for greater returns.
Also, if I’m paying the mortgages off like crazy I’m less likely to spend money on other things like I would if I saw it sitting in accounts…
Thanks in advance.


#2

Hello and welcome to the community! Your passion about wanting to be financially independent is awesome. I’d be concerned if you focused all your attention on paying off debt, though, rather than building a diversified set of assets that can grow over time. You don’t want all your eggs in one basket, in other words.

So my first question is: how are you doing on retirement savings? Are you taking full advantage of any workplace retirement plan you have? If you don’t have workplace plan, are you saving in IRAs? We recommend people save about 15% of their income for retirement. The percentage may need to be higher if you got a late start (anytime after about age 35).

You also want to make sure that you have a good-sized emergency fund (3 to 6 months worth of expenses) and don’t have any other debt before you make extra payments on a mortgage. It’s important to have adequate insurance as well. Being a landlord can make you a real lawsuit target.

I’m not a huge fan of using HELOCs instead of mortgages because the rates are variable, so you’re essentially shifting money from your fixed-rate pocket to one where the interest rates could climb into the double digits.

A better way is to make extra principal payments. Typically you target the loan with the highest after-tax rates first.

Does all that make sense? Let us know if you have any follow-up questions.


#3

Thanks!!
I’m a teacher for 15 years so I will have a pension when I retire. I have about $8,000 in Roth IRA s right now.
I have 4 young children that I just started contributing to an 529 for…
I do plan to put a little a way each month to add to my retirement…
Would you consider 3 properties diversified or real estate in general as one point of diversification?
I just keep dreaming of not having mortgages or mortgage interest and how much I could save / invest at that point…
Thanks again!!!


#4

Also… I was looking at the extra amount on my HELOC as my emergency back up in case something happened before we pay off at least one of the mortgages…


#5

It’s hard to diversify with rentals. Typically, they’re all in the same market, so they’re all going to be affected by the local economy. Prices can drop, vacancy rates can tick up, and landlords take it in the chin. Also, most of us have a fairly substantial investment in our homes, so owning more real estate just concentrates the risk rather than diversifying it away.

The pension’s good to have, especially if you’re already vested, but it’s still good to have some retirement funds. Pensions can get frozen or reduced, or you may wind up changing careers (voluntarily or otherwise). You can think of it as your “just in case” fund.

I’m a fan of having a big, unused HELOC as a supplemental emergency fund. I just wouldn’t use it to pay off a low-rate mortgage.


#6

I paid off the mortgage on my rental house and it made my life easier.

I did not need to pay the bank after I sold my house and that put me in a good mood on the day I sold it.


#7

I’ll bet it did! Nothing like being able to hang on to the whole check.