Payoff Primary or Reinvest?

Question

Hey BP!

I am in a dilemma and looking forward to hearing your feedback. I am entertaining the thought of selling or cash-out refinancing some of my rental properties. Initially, my plan was to reinvest the proceeds into better properties or multifamily. Now, I'm considering the idea of paying off my primary residence (about 75% of it) which I just moved into this year.

I'm considering selling because the properties I purchased in 2019 are selling for double what I paid for them and the difference with the refinance is about $60,000 less. Because these are townhomes, I'm not sure the prices will return to this level once the market adjust.

I know paying off the primary might not be the best in terms of ROI, but in terms of financial freedom paying off my primary is a large part of that goal.

I look forward to hearing your thoughts. Let me know any additional information you may need to help.

Braden C. · Answer

@David C. There is something really comforting/freeing about not having a mortgage for your primary residence. I've never heard someone say they regret having their house paid off, but I've heard hundreds of people complain about their mortgage...

David C. · Answer

@Jeff Copeland in your experience, do you see investors take risks they wouldn't ordinarily take by having the HELOC? I ask because it is almost like having cash ready at a very low cost and the idea of buying something in "cash" and getting a good deal can seem very enticing.

Just curious if people subconsciously take less caution when using the HELOC vs qualifying for a loan.

I could see utilize the HELOC for the rehab and keeping the LTV low on my primary as a result.

David C. · Answer

@Eddie Shumulinskiy this is a good point. My thoughts are very similar to yours. That's why I struggling with it. The one aspect that Im challenged with is that when thinking about financial freedom, my mortgage is a big part of that hurdle. So if I didn't have a mortgage then financial freedom happens a lot sooner.

Does your financial freedom account for your mortgage as well?

Jeff Copeland · Answer

Have you considered paying off your primary, and then getting a HELOC on your primary?

Many banks offer excellent terms at 80-90% LTV on a HELOC for your primary residence.

That would give you the best of both worlds - Mortgage paid off, but with instant access to capital if you need it for other investment opportunities.

David C. · Answer

@Eddie Shumulinskiy if you could payoff you mortgage sooner, wouldn't that accelerate your path to FI?

Eddie Shumulinskiy · Answer

@David C. I am pretty early on in my FI journey so as of now the plan is to build uppitiest enough passive income to cover the monthly mortgage payment. Once I've reached FI then I can focus on getting rid of the mortgage altogether.

Eddie Shumulinskiy · Answer

@David C. if it were me I would say it depends where I would be in the journey to financial freedom. I would make paying off my primary residence as kind of the last step of financial freedom. In terms of debt, it is the best debt to have, especially now where rates are so low. Then I can maximize my ROI on all the other cash, which will be kind of similar to paying off your house because all your other investments will be paying your mortgage. While I'm still building up to financial freedom, I would try to maximize each dollar. Only after I reach the level where I need to reach to finance a FI or FF lifestyle then I would begin tackling the primary residence debt.

David C. · Answer

@Braden C. Exactly. I think it's that piece of mind that you really can't quantify. That's where I struggle being a numbers guy, I want ever $1 to be maximized. Getting rid of a mortgage is just as you said, comforting.

Jeff Copeland · Answer

They generally do not, for the same reason. A HELOC on your primary is much less risky for the bank.

But the beauty of a HELOC is it is not debt, and it does not cost you anything, until you use it.

You are correct and wise to be cautious and invest wisely. But having capital available for immediate access at 3% (give or take) on a HELOC can open up a lot of investing opportunities, especially in real estate, where cash is king.

And you wouldn't generally use your HELOC for long term debt, only for acquisition when on opportunity comes along. For example:

You could use your HELOC to pay cash for a property that needs work. Shopping with cash allows you to beat out all of the financed offers, and allows you to buy a property that might not qualify for financing at all.

You could then use your HELOC to fix up the property, increase it's value, and then refinance into long term debt and pay off your HELOC. Textbook BRRRR method.

The HELOC is just the springboard that allows quick access to capital at a very low cost, it's not the long term solution.

David C. · Answer

@Jeff Copeland I have considered this. One of the reasons I'm not sure if I would do it is I like mitigating my risk. I'm not sure I want to leverage my personal residence for investing. Again, I'm not against it, just weighing options & the risks.

If I can do a HELOC on a second home or vacation property, I would prefer to go that route with my next purchase. Do banks provide HELOCs for these?

Payoff Primary or Reinvest?

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