Paying down additional principal each month
Homeowner · NYC · Member since 2023 · 8 posts · 4 votes
Paying down additional principal each month
Most Popular Reply
Joe VilleneuvePro Member
Plymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesPaying more on the mortgage every month isn't building equity...it's buying it. Paying that extra each month isn't negating negative CF...it's just paying it upfront. If you are at a breakeven after moving out, like this is, then you are really at negative CF waiting to happen. You aren't the one paying the interest, your tenant is since the source of funds is the rent. If you make cash added payments out of pocket, like you're suggesting, that comes out of your pocket and actually is an added cost to you since that principle you are paying for was part of the mortgage payment, which again was being paid for by the tenant's rent.
I would sell, take your equity/profit, and put it into a different deal with positive CF. This is a losing property for you.
51 Replies
- Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes3y
Since your a first time home buyer one advantage you might have is your rate. (assuming FHA). Check with your lender to see if your rate is assumable when selling the house. You may be able to command a higher selling price by offering a lower rate and lower closing costs to the buyer if its an assumable loan.
- Homeowner · NYC · Member since 2023 · 8 posts · 4 votes3y
Thanks @Wendy Patton! Yes, just about all of the advice is to forgo paying the additional $250 which it what I expected. Everyone’s feedback has been great and I think I’ve got a good idea of how to proceed. At the end of year 5 is when my mortgage payments will be 51% principal 49% interest.
- Real Estate Agent · Nashville, TN · Member since 2015 · 2k+ posts · 2k+ votes3y
Back in 2014 I bought my first house and had a 4.75% interest rate. (Primary residence)
I was throwing in an extra $100/month for about 2 years.
After 2 years I really started paying it down aggressively. I was adding any large commissions, bonuses, etc towards the principal. Paying down debt provides a guaranteed return.
Of course, hindsight I can look back and say I should have leveraged every single dollar and bought more houses instead...but it's easy to look back and say that's what you SHOULD have done. We all should have bought bitcoin in 2010 when it first came out...
The thing is that you're at 2.75%. You can literally get more money from a savings account right now. Wealthfront is at 4%, Ally bank at 3.75%. US Treasuries are paying more than your interest rate right now. You can get a "risk free" return right now for more than what your mortgage is. So in your case, I would not be putting any more money down on principal when banks are paying higher interest rates on deposits right now.
Another point I would make is that not EVERY single decision has to at all times make financial sense. Paying your mortgage down that's 2.75% doesn't make the best financial sense, but there's something more to having a paid off house....
- 3yWendy PattonBusiness MemberReal Estate Consultant · Clarkston, MI · Member since 2009 · 864 posts · 350 votes
@Billy Mcavoy see? then you are also already close to that 50% mark which is huge and your tenant is the one paying that for you - those low rate lows won't be around for awhile, if ever. Enjoy it and keep it - don't pay it off early at this point. It's paying itself off with almost 10k per year -
Michigan Real Estate Investors535 Reviews - Member since 2019 · 7k+ posts · 4k+ votes3y
Totally, in the last 10 years I have been adding principal monthly to my primary home mortgage, even though I have 3% rate, the reason besides the obvious is simply, rather than $200 gone for consumerism I'd rather build equity. Having less number of houses that appreciate highly is easier to manage and maintain rather than having 10 cheap small cash-flowing houses.
For all Midwest properties that I have a sub 3% rate, I never touched/added principal.
But for DSCR STR where I had a 7% rate from HML, I am adding $20K principal per year aggressively. My target is to reach 50% LTV by year 6 or 7. There's strategic reason why we add principal, it's just little bit hard to mention it unless folks understand amortization, as time=money. By year 7 if projected appreciation is close to 15% is reached then I would sell again.
In general, for super-high appreciation market like Hawaii and interest rate is high or using high rate DSCR,I'm aggresively timing it to add principal to reach 50% LTV.If I don't add principal, the house would be paid off when I would be 75. Why I need to do that if I can pay it off when I am 55 LOL
- Real Estate Agent · Austin, TX · Member since 2020 · 1k+ posts · 941 votes3y
Quote from @Billy Mcavoy:
I’m a first time home buyer and looking for some advice. I purchased a condo in December 2020 (in DC) and currently live in my unit. I’m moving to NYC in mid May and will be renting out my DC condo around June 1st. I have a good interest rate (2.75% rate) and have been paying an additional $250 down on principle each month. At this rate it’s estimated that I’ll pay off my loan 10 years early saving ~$31k in interest payments.
If I stop paying additional $250/month on my principal my cash flow will be more or less break even on month. However, if I pay down $250 extra on principal each month I’ll have negative cash flows but I’ll build equity in the property faster and avoid paying more interest in long run. What’s the general guidance when considering additional monthly payments on principal? Am I doing the right thing or should I forgo paying extra down on principle each month?
I think of paying down debt the same way as buying an investment (stocks, bonds, whatever). If you pay down a loan, any additional payment is giving you a return of 2.75% in savings. Would you buy an investment if the return was 2.75%? Would you pay off a loan to save 2.75%? Can you invest the difference somewhere else and earn higher than 2.75%?
That's how I think about it.
- Investor · Boston, MA · Member since 2015 · 1k+ posts · 3k+ votes3y
Quote from @Joe Villeneuve:
Quote from @Scott E.:
I agree with everything that @Joe Villeneuve said but before committing to sell there are a few things to consider...
1. What do you forecast the rent growth to be in the area? How long will it take with you raising rents every year before this property will turn cash flow positive? (probably a long time, but something to consider)
2. What do you forecast the appreciation rate to be in the area? Condos generally don't appreciate as fast as single family homes. But this is something else you should be thinking about.
3. Are you currently paying mortgage insurance which is eligible to "fall off" at some point? You say you're a first time buyer. I'm assuming you used FHA or put less than 20% down.
Selling might be the best option, but I'd hate to see you lose that 2.75% leverage. We will probably never see rates that low again in our lifetime.
I like your list. I too would hate to lose 2.75% leverage, if that leverage was getting me anything. In this case, it's just a trophy and what it is getting you is a property that isn't negative CF right now. As far as the rest of your statement goes:
1 - I have found that most rent growth runs parallel with expenses, so the resulting CF is so minimal it doesn't really matter.
2 - Condos appreciation is iffy, like you said. If the appreciation in the area has been steady, then just buy a SF in that same area. However, I don't bank on future appreciation to bail me out since you have no control over it. I will buy a property based on past appreciation, actually it's a must with me, but I don't look at it as a lost recover solution.
3 - A very valid point. I guess this really depends on how long they have to get there. If it's over a year, maybe two, I would move on.
I would add a 4th to your list:
4 - What will the current lender say when this unit is converted from owner occupied to a rental? Also, what are the condo rules regarding this? (I guess that's 4a and 4b)Have to disagree with your #1 Joe since it goes counter to the nature of costs in RE. I agree that OpEx expense growth will grow in parallel with rent grow, however it makes around half of the total expenses, with the other half being debt, which is fixed. So the cash flow will rise in a related way to the rent growth.
Simple example to illustrate. I make widgets and sell them for $5. Their total cost is $4, $2 of raw materials and $2 in fixed payment loans. My Cash Flow is $1. If prices and costs go up 10%, now I sell the widget for $5.50 and raw materials cost me $2.20, but my loan hasn't changed and still costs $2, so my total cost is $4.20 and profit is $1.30.
The only way for the profit to remains $1 if prices go up by 10% is for expenses to go up by 25%. That can happen, but that 25% increase in expenses usually isn't happening in new builds/ rehabbed homes, its buying stuff that needs lots of CapEx, which obviously doesn't fall into OpEx.
IMHO, this is one of the underappreciated aspects of REI and ways to build long term stable cash flows that outpace inflation.
- 3yJay ThomasPro MemberReal Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
Unless the interest rates are exorbitant, it's generally not advantageous to pay extra principal every month on an investment property. Utilizing that extra money elsewhere can often be a better option.
- Lender · Seattle, WA · Member since 2014 · 2k+ posts · 899 votes3y
@Billy Mcavoy- if you are only paying 2.75% - you will be wiser to use those additonal funds somewhere else ( savings / other investements etc ...) ....if the interest rate were higher than market - then paying additonally would make sense ...
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Billy Mcavoy:
I’m a first time home buyer and looking for some advice. I purchased a condo in December 2020 (in DC) and currently live in my unit. I’m moving to NYC in mid May and will be renting out my DC condo around June 1st. I have a good interest rate (2.75% rate) and have been paying an additional $250 down on principle each month. At this rate it’s estimated that I’ll pay off my loan 10 years early saving ~$31k in interest payments.
If I stop paying additional $250/month on my principal my cash flow will be more or less break even on month. However, if I pay down $250 extra on principal each month I’ll have negative cash flows but I’ll build equity in the property faster and avoid paying more interest in long run. What’s the general guidance when considering additional monthly payments on principal? Am I doing the right thing or should I forgo paying extra down on principle each month?
There is a LOOOooooong list of other things you could put that $250 into that will return a heck of a lot more then 2.75%. So think of it this way, to save on paying 2.75%, your sacrificing 12%, 15%, 17% returns.
You could easily just pick a simple well rated dividend stock, and put that $ in, turn on auto reinvestment drip, and in 10 years early, pay off the remaining mortgage balance in full AND still have a considerable holding in that stock account to boot.
You could put that $ into something earning a say 10% dividend rate, not to mention stock price going up but let's focus on div alone. So your paying 2.75% on that money which means you putting 7.25% in your pocket.
There is no mathematical sense in paying down that mortgage early, it's costing you a lot to do so.
- Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes3y
Quote from @Conner Olsen:
Quote from @Billy Mcavoy:
I’m a first time home buyer and looking for some advice. I purchased a condo in December 2020 (in DC) and currently live in my unit. I’m moving to NYC in mid May and will be renting out my DC condo around June 1st. I have a good interest rate (2.75% rate) and have been paying an additional $250 down on principle each month. At this rate it’s estimated that I’ll pay off my loan 10 years early saving ~$31k in interest payments.
If I stop paying additional $250/month on my principal my cash flow will be more or less break even on month. However, if I pay down $250 extra on principal each month I’ll have negative cash flows but I’ll build equity in the property faster and avoid paying more interest in long run. What’s the general guidance when considering additional monthly payments on principal? Am I doing the right thing or should I forgo paying extra down on principle each month?
I think of paying down debt the same way as buying an investment (stocks, bonds, whatever). If you pay down a loan, any additional payment is giving you a return of 2.75% in savings. Would you buy an investment if the return was 2.75%? Would you pay off a loan to save 2.75%? Can you invest the difference somewhere else and earn higher than 2.75%?
That's how I think about it.
ETF's, pretty hard to find one with return's that low. That's the SUPER "E-Z Button" on this one. CRF or CLM pushing on 19% div rate now. That's a kind of no-brainer.
- Real Estate Agent · Los Angeles, CA · Member since 2018 · 2k+ posts · 1k+ votes3y
Here's the problem with making extra payments:
You aren't actually saving that much on interest. Keep in mind your mortgage is on an amortization schedule. Banks know that you are likely going to sell or refinance before the 30 years is up. Therefore they designed it to where the majority of the interest paid is in the beginning. Towards the end of the mortgage, it is more principal. By making extra payments, you are just shortening it on the tail end, where there is less interest paid.
Making an extra payment every month could go towards better producing assets. Since you bought in 2020, it is likely you have a sub 3% interest rate. High Interest Savings Accounts right now are paying 3.5%-4%. You could put those payments there and you would actually make more money. Then when if you want to sell or refinance, you have all of this money and it gives you flexibility on what to do next.
- Contractor · Abington, PA · Member since 2010 · 29 posts · 7 votes3y
Hi @Billy Mcavoy, your goal of generating wealth through rentals is kind of vague. Are you more interested in cash flow or growth through appreciation? If you were to sell, would you invest in a property for more cash flow? Is there a way to increase the income for this property? Can you achieve a higher rental rate if you rented it furnished? How are you financing your move to NYC, would you want to buy another house, I am assuming that you would be living with your girlfriend so would you need everything you now have. Another thing I would ask myself is why am I so eager to pay off this great rate. It's nice to have equity in a property but you can't invest equity and in order for your business to grow you will have to continue to invest in property. I would love to chat about this more, maybe 2 heads can come up with a creative way to increase your return.
- Investor · Brooklyn, NY · Member since 2022 · 158 posts · 118 votes3y
Like others said, if someone is willing to lend you money at 2.75%, you should never rush to pay it off.
If we were in a different place in the market cycle, I might choose to sell. Bc having lived in the property, you'll likely get the proceeds tax free to reinvest somewhere else. But if your local market isn't strong right now, I might hang on w neutral/slightly negative CF for a couple years before selling. - 3yJohn MorganPro MemberRental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes
I used to pay down my loans too each month for a few years. Dumbest thing I’ve ever done. I’m upset I didn’t use that $ to invest and scale up with more leverage to achieve much more cash flow. I’m ok now having 30 year mortgages vs 15 year and letting my tenants pay them off.
- Rental Property Investor · East Wenatchee, WA · Member since 2014 · 10k+ posts · 16k+ votes3y
Unless I was super close to being rid of PMI, I wouldn't accelerate any fixed rate long-term debt below 5%.
I paid off a dozen mortgages, but they were all higher rate (6%+) and or higher risk like commercial, private or seller-financed.
- 3yJay ThomasPro MemberReal Estate Agent · Houston, TX · Member since 2021 · 1k+ posts · 715 votes
Paying extra on your mortgage every month isn't necessarily a good idea if you're looking to build equity. You may be better off making cash-added payments out of pocket in order to avoid added costs, as the principle that you pay for was already part of the mortgage payment. It's important to be aware of the negatives associated with real estate investments and understand what you are getting yourself into before taking the plunge!
- Real Estate Agent · Newport, KY · Member since 2016 · 24 posts · 0 votes3y
That is such a low rate I would not pay extra...it's free money in most economic situations taking inflation into account. It's even better with inflation what it is right now. Otherwise, @Scott E.'s questions cover it well. Good luck!
- Investor · Member since 2021 · 5 posts · 1 vote3y
Quote from @Joe Villeneuve:
Paying more on the mortgage every month isn't building equity...it's buying it. Paying that extra each month isn't negating negative CF...it's just paying it upfront. If you are at a breakeven after moving out, like this is, then you are really at negative CF waiting to happen. You aren't the one paying the interest, your tenant is since the source of funds is the rent. If you make cash added payments out of pocket, like you're suggesting, that comes out of your pocket and actually is an added cost to you since that principle you are paying for was part of the mortgage payment, which again was being paid for by the tenant's rent.
I would sell, take your equity/profit, and put it into a different deal with positive CF. This is a losing property for you.
As an individual renting a former home I tend to disagree that Billy should sell. I agree the prepayment of principal is not in his best interest and should be discontinued. However, as an individual, we're not talking about an operator here, his best long term option is to seriously consider keeping this neutral cashflow property with a fixed mortgage cost at 2.75%. Presumably, rents will continue to rise as the housing crisis in every major metro continues and as they rise his cashflow will shift to positive soon. Her tenant(s) will continue to pay his mortgage which will amortize and add equity to his asset which really comes at no cost to him.
We don't have the full story and maybe there is more to it but based on what information is provided I would say his best option is to keep the property providing he can weather some maintenance and vacancy costs in the first year or two until rent increases kick in and make up for any temporary cashflow shortfalls.
- 3yJoe VilleneuvePro MemberPlymouth, MI · Member since 2013 · 13k+ posts · 19k+ votesThe advantage of a low interest rate is how it reduces the monthly payment, thus increasing the cash flow. If it doesn't increase the cash flow, there is no advantage to it since it has no purpose.
Quote from @Christopher Telles:
Quote from @Joe Villeneuve:
Paying more on the mortgage every month isn't building equity...it's buying it. Paying that extra each month isn't negating negative CF...it's just paying it upfront. If you are at a breakeven after moving out, like this is, then you are really at negative CF waiting to happen. You aren't the one paying the interest, your tenant is since the source of funds is the rent. If you make cash added payments out of pocket, like you're suggesting, that comes out of your pocket and actually is an added cost to you since that principle you are paying for was part of the mortgage payment, which again was being paid for by the tenant's rent.
I would sell, take your equity/profit, and put it into a different deal with positive CF. This is a losing property for you.
As an individual renting a former home I tend to disagree that Billy should sell. I agree the prepayment of principal is not in his best interest and should be discontinued. However, as an individual, we're not talking about an operator here, his best long term option is to seriously consider keeping this neutral cashflow property with a fixed mortgage cost at 2.75%. Presumably, rents will continue to rise as the housing crisis in every major metro continues and as they rise his cashflow will shift to positive soon. Her tenant(s) will continue to pay his mortgage which will amortize and add equity to his asset which really comes at no cost to him.
We don't have the full story and maybe there is more to it but based on what information is provided I would say his best option is to keep the property providing he can weather some maintenance and vacancy costs in the first year or two until rent increases kick in and make up for any temporary cashflow shortfalls.
If rents continue to rise, and most likely so will expenses, the difference between the two (the added CF) will be so small it isn't worth the wait. Rents don't increase enough per month make a big enough impact here. The may gradually do so, but over such a long period of time it's not worth the wait.
The primary role of CF is to recover costs. Costs to the REI is all the cash they put into the deal...throughout the length of the deal. This incudes DP, added monthly pmts towards principle, negative CF, rehab costs, etc...This deal may never get all of its cost back if it waits for the CF to catch up.
Meanwhile, the losses are stacking up from the stagnant money in the equity which is gaining on only a one to one relationship with appreciation. That one to one relationship would exist with every property in an appreciating area. Where the big loss occurs is when you compare this loss to the loss of value when you could take this same equity, if sold, and use it as a 20% down payment...which would means it would be buying 5 times its cost.
Why would you want to weather a storm wearing a raincoat with no hood and holes in it? - Investor · Arroyo Grande, CA · Member since 2014 · 1k+ posts · 1k+ votes3y
Billy, have you looked into running this as a short-term rental? Will the condo association/building/whatever allow it?
It may be worth exploring.
I converted a LTR in Detroit to a STR and it EASILY does 2.5x what I was getting when it was a LTR. And my added expenses are minimal once furnished.
It might give you the best of both worlds, allowing you to keep the property and cash flow well.
- Investor · Member since 2021 · 5 posts · 1 vote3y
Quote from @Joe Villeneuve:
The advantage of a low interest rate is how it reduces the monthly payment, thus increasing the cash flow. If it doesn't increase the cash flow, there is no advantage to it since it has no purpose.Quote from @Christopher Telles:
Quote from @Joe Villeneuve:
Paying more on the mortgage every month isn't building equity...it's buying it. Paying that extra each month isn't negating negative CF...it's just paying it upfront. If you are at a breakeven after moving out, like this is, then you are really at negative CF waiting to happen. You aren't the one paying the interest, your tenant is since the source of funds is the rent. If you make cash added payments out of pocket, like you're suggesting, that comes out of your pocket and actually is an added cost to you since that principle you are paying for was part of the mortgage payment, which again was being paid for by the tenant's rent.
I would sell, take your equity/profit, and put it into a different deal with positive CF. This is a losing property for you.
As an individual renting a former home I tend to disagree that Billy should sell. I agree the prepayment of principal is not in his best interest and should be discontinued. However, as an individual, we're not talking about an operator here, his best long term option is to seriously consider keeping this neutral cashflow property with a fixed mortgage cost at 2.75%. Presumably, rents will continue to rise as the housing crisis in every major metro continues and as they rise his cashflow will shift to positive soon. Her tenant(s) will continue to pay his mortgage which will amortize and add equity to his asset which really comes at no cost to him.
We don't have the full story and maybe there is more to it but based on what information is provided I would say his best option is to keep the property providing he can weather some maintenance and vacancy costs in the first year or two until rent increases kick in and make up for any temporary cashflow shortfalls.
If rents continue to rise, and most likely so will expenses, the difference between the two (the added CF) will be so small it isn't worth the wait. Rents don't increase enough per month make a big enough impact here. The may gradually do so, but over such a long period of time it's not worth the wait.
The primary role of CF is to recover costs. Costs to the REI is all the cash they put into the deal...throughout the length of the deal. This incudes DP, added monthly pmts towards principle, negative CF, rehab costs, etc...This deal may never get all of its cost back if it waits for the CF to catch up.
Meanwhile, the losses are stacking up from the stagnant money in the equity which is gaining on only a one to one relationship with appreciation. That one to one relationship would exist with every property in an appreciating area. Where the big loss occurs is when you compare this loss to the loss of value when you could take this same equity, if sold, and use it as a 20% down payment...which would means it would be buying 5 times its cost.
Why would you want to weather a storm wearing a raincoat with no hood and holes in it? - 3yJustin BrickmanBusiness MemberRealtor · San Antonio, TX · Member since 2021 · 502 posts · 274 votes
Put that extra cash into a new property. And pay off the new one aggressively since it will be much higher
Justin Brickman Realty4.9145 Reviews - 3yJustin BrickmanBusiness MemberRealtor · San Antonio, TX · Member since 2021 · 502 posts · 274 votes
Quote from @Conner Olsen:
Quote from @Billy Mcavoy:
I’m a first time home buyer and looking for some advice. I purchased a condo in December 2020 (in DC) and currently live in my unit. I’m moving to NYC in mid May and will be renting out my DC condo around June 1st. I have a good interest rate (2.75% rate) and have been paying an additional $250 down on principle each month. At this rate it’s estimated that I’ll pay off my loan 10 years early saving ~$31k in interest payments.
If I stop paying additional $250/month on my principal my cash flow will be more or less break even on month. However, if I pay down $250 extra on principal each month I’ll have negative cash flows but I’ll build equity in the property faster and avoid paying more interest in long run. What’s the general guidance when considering additional monthly payments on principal? Am I doing the right thing or should I forgo paying extra down on principle each month?
I think of paying down debt the same way as buying an investment (stocks, bonds, whatever). If you pay down a loan, any additional payment is giving you a return of 2.75% in savings. Would you buy an investment if the return was 2.75%? Would you pay off a loan to save 2.75%? Can you invest the difference somewhere else and earn higher than 2.75%?
That's how I think about it.
I love this way thinking about it
Justin Brickman Realty4.9145 Reviews - Member since 2022 · 8 posts · 5 votes3y
Quote from @Tim J.:
I would keep the condo, don't pay additional principal. That's a great loan rate. Within a few years it will be cash flowing well AND will have appreciated. There will be frictional costs and non-monetary costs for selling it and then buying something else to replace it.
If you can't afford to throw in a thousand or two or three a year to cover your costs, maintenance, vacancy then sell it. But if you can handle the costs without it putting a burden on you financially then definitely keep it.I agree here I had a single I was upside down on I had purchased in 2005 during the previous housing sub prime euphoria. The fact it's in DC is huge, team that with the fact you have a low mortgage rate I would try to hold on to this but invest new money in something else.
I got into real estate investing by accident and it's totally a side hobby/gig as everything I do is for passive income as to focus on my regular job. Long story short I was only netting $300 on a single family we had purchased during the peak of the interest only era, now that same house nets me $1600 a month in cash flow after everything, increased in value substantially more, the tenant has been paying my mortgage down for years and my loan is roughly 40% of the value of the property. Real estate is like a fine wine....
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