PAY OFF A MORTGAGE...what would you do?

Question

What would you do?

So I purchased a unit in 2016 for $125k. We mortgaged about $87k and now the balance is about $80k. We are renting it for $1195 and making close to $600 per month positive CF.

I’m thinking about paying off the mortgage of $80k next month and will be CF positive $1195 per month now. But I’m losing some of the tax benefits of wetting off the mortgage interest.

So my question to you, would you pay off the mortgage or not? (Assuming purchasing another unit is not an option)

Thanks!

Brit F. · Answer

@Jason C.,

You'll find BP treats this question like politics & religion; there's no right answer because it depends on factors very personal to you, which fuels the perpetual battle of risk vs return.

What value do you realize by paying it off?  Are you trying to lower your risk or do you want to add a LOC on the property once it's paid off?

Given your $500/mo gain once the debt is cleared, your pre-tax Cash on Cash (CoC) return is $6k/80k = 7.5%, and subtract ~2% to approximate your after-tax CoC return.  If you're comfortable with that, then do it and feel good about it.

On the other hand, if those numbers make you hesitate and if you're tolerating the risk, then look for other ways to invest your $80k (private lending, crowdfunding, traditional securities, etc).  Or, do you have any other debts that you could clear that might generate a better CoC return?  Student loans, car loans, primary residence, etc.?

Quick math check: I'm a little confused on your cashflow numbers.  Once the debt is cleared, how will your cashflow equal the rent (both = $1195)?  Do you have other income that's offsetting your operating expenses?

Anthony Dooley · Answer

@Jason C. there is no tax benefit by keeping the mortgage. If your annual interest payments are $10,000 to the bank, the IRS will let you deduct $2,500 from your taxes. If you had no mortgage, you would pay the IRS $2.500 in taxes, but you not be paying the bank $10,000. Get it? It isn't a dollar for dollar trade between your cost and your tax savings.