Keep emergency fund or pay off mortgage?

Question

Hi all.  I'm 26 years old and just bought a foreclosure home for $86k.  Fixed up, it's easily worth $120k.  I put a down payment in of 40k and owe 46k on it now.  My monthly payments are roughly $527 a month.  I make somewhere over $2000 a month from my job, and have 31000 sitting in a money market account at 5% that didn't go towards the down payment.  I get $683 a month from a trust fund set up by my grandparents.  Should I just take that 31000 and put it towards my principle so that I only have to pay the bank back $15000, and eventually be debt free so I can take the money I pay on mortgage every month and invest it?

Account Closed · Answer

What's your mortgage rate?

Eric Wang · Answer

Speak with a CPA and find out how much tax you would be saving.  Personally, I always like to have emergency fund, never know what might happen.  The tought of knowing in case of an emergency, I'll be ok for a while is priceless.  In case you want to buy more properties, having the money in case reserve looks really good for the bank.

Jonathan (JB) Borchers · Answer

i would suggest contacting a good financial advisor before making a decision - it really depends on your goals, and when you want to retire, what kind of returns you want to make, etc.. i would think most good advisors would not encourage you to pay off the loan unless you sell.  for one, interest rates are amazing right now (and historically speaking).  so you aren't paying much to borrow the money, so don't tie up $31k just to get rid of a payment - however, if you only plan to keep that $31k in a 5% or less money market for 30 years then based on a returns standpoint it could make sense to pay it off since your mtg rate is higher, at 5.8%.

but do you have at least 6 months worth of reserves elsewhere if you did use the $31k to pay down the loan?  if not, then this decision is a no brainer - keep the loan open and make sure to keep enough money available.

however, considering you have a grasp of real estate investing based on the rehab of a foreclosed home, i expect that you want to make much higher returns on any investment you make.  although a primary residence isn't an 'investment', analyze it as such if you are deciding you might put money there.

i have a decent chunk of reserves saved up, but if i had your liquidity i would look for much better returns w/that chunk.  if you wanted to make a solid return to outweigh what you are borrowing w/the mtg, i'm sure that a handful of the investors on this site would offer you at least 10-18% return if you let them borrow some of that money to fund part of their deals.  and even though you are making a mtg payment, the 5.8% interest rate is minimal in comparison to getting a possible 15% return (or possible profit share to increase ROI depending on how you structure if you decide to lend your money as a private investor).  crunch your numbers - the higher ROI opportunities should be out there for you.  the higher return will cover the 5.8% you are borrowing and then some.

but as i suggest, you should talk to a financial advisor first or some other financial professional to see what works best for YOU.  it wouldn't hurt if they knew a thing or two about real estate investing either.

Timothy W. · Answer

A financial advisor is very good advice.  But make sure you look for one that has created his or her own independent wealth.  Are your grandparents alive?  For them to set up a trust fund leads me to believe one of them certainly has some financial intelligence.  Perhaps they could advise you.

When I was 26 I bought my first investment property.  It was a multi unit that I lived in.  I lived in 1 unit and rented the rest.  For a 26 year old - that's not a bad strategy at all.  You already do have a property, but you could potentially rent out that home and acquire another property.  Now's a good time in life to pick up a few houses that will cash flow and a ton of equity by the time you're 36.

John Robertson · Answer

Wow, wish I could be facing this decision right now.  If this is your primary residence I would strongly consider paying it off.  It would be a great safety net.  If you don't have a mortgage or rent, that $683/mo. would take care of groceries real well and you could do a lot more with your other income.

It's my $.02, I'm curious to see what the more experienced folks have to say.

Mary-Beth Morgan ccl · Answer

If it is an investment property I would say no, Refi get the cash to buy more investment properties. If it is your primary home I would say leave it and enjoy the tax benifits if you don't have any little dependants running around. If you don't need the tax benifit and your main goal is debt free, then yes pay it off. But in your situation I would look into some investments, set your self up for a great retirerment while you can.

George Batton · Answer

My interest rate is 5.8%.  The reason I want to pay it off so soon is because I've already been fixing up this house and it's been really taxing on me.  I'm not sure if I'd want to move in 2 years and collect the profit.  I figure that if once I do get it paid off, I can save up tons of money and eventually buy rentals while having a nice place to live.  Or maybe just invest the cash in good growth stock mutal funds.