To pay or not to pay off your primary residence

General Real Estate Investing
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To pay or not to pay off your primary residence

James H.
Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes

This discussion was cropping up in another thread about a different topic, and I wanted to hear more feedback from other members about what they prefer. As a primer, I am going quote @Rich Weese contributed as I find it was very interesting - hope you don't mind Rich.

" Brian and Jon H- Here is my contrarian view to owning your OWN residence free and clear and why I don't do it. I like my contrarian view for the following reasons . I DO agree you should have A house free and clear.
1. I have at least a home free and clear.
2. I am able to obtain a better loan on OWNER OCCUPIED home.
2. I do have a sense of security with F&C home- and it doesn't have to be the residence.
3. I live in a nicer home, higher LTV, lower rate, etc and still have a F&C home if everything goes to pot.
4. If everything only goes PARTIALLY to pot, the lender probably won't want my highly leveraged home I live in. We all know people who are under water for over 3 years and lender hasn't taken the home.
5. I get interest deductions on my residence, which I wouldn't if it was F&C.
6. I still have the sense of security with other F&C home.
7. I have more $ to invest elsewhere because F&C home is not as expensive and only there for severe emergency.
8. The extra $$ to invest makes me more $$, more writeoff etc-which I wouldn't otherwise have.

Just a contrarian view for BP members to digest. Rich"

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Rich Weese
Real Estate Investor · the villages, FL · Member since 2008 · 5k+ posts · 3k+ votes
14y

Brian- I forgot to mention-you're ok reproducing anything I write. I stand by it, so feel free to share. This has the possibility of being a fun thread if it doesn't turn ugly. Speaking of ugly-today isn't. In Yellowstone waiting for kids and grand kids to arrive for reunion.This is TRULY what passive income is all about! REALLY Rich-(because of 6 kids and soon to be 12 grand kids!)

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  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    Steve,
    Regarding your comment above on Andy's post, worrying about a "no" should never be a worry. As a young man, if u worried about hearing a no and never asked a girl out, u would end up alone all your life. Salesmen have to hear lots of "no's" before they get a yes.

    To Andy - I can understand your dilemma, but from a financial investment point of view, not doing so is a wasted opportunity. Keep in mind that the new payment is Not being paid by you, but from the cash flow from the asset u purchase with the borrowed capital.

    People can argue back and forth if this is a wise or poor choice, I only agree it is a poor one IF the person lacks an ability to create arbitrage from it. If that ability exists, then not taking advantage of the opportunity is the poor decision!

    Podcast Guest on Show #130
    1Reply
  • Kama Ward
    Investor · Asheville, NC · Member since 2012 · 184 posts · 76 votes
    14y

    I divide it into acquire mode or preserve mode. If you are in acquire mode get the mortgage, if in preserve mode payoff the house.

    You can see different life phases/situations/risk tolerances in this thread. You can go back and forth between the two- first single-then young kids and dependent spouse- then kids out of house and spouse with career- then old coots who just want to play with the grand kids or deal with a serious illness . Someone certainly can be in the acquire mode until the day they die. Others will want to kick back by their 40th birthday.

    We had a chance to pay off our house and did. Right now we have enough cash to use for investments-- because our investing is constrained by other factors-- my skill level, market size, and competing priorities. I will have no problem getting a mortgage again if the other factors change. I'll also be fine if we choose to stay in the slow lane

    1Reply
  • Account Closed
    Clarksville, TN · Member since 2012 · 29 posts · 7 votes
    14y

    "100% of shorts and foreclosures have 1 thing in common...."

    If you are going to saying that all foreclosure happened on mortgaged property, that isn't 100% true. When that show "Extreme Makeover Home Edition" started, the improved houses incurred huge taxes, and some of those people got foreclosed because they couldn't afford the new property taxes.

    But what is more important, is that something like 99% of mortgaged properties are paid off on time. It is really a small fraction of people that get foreclosed, and probably because they didn't have sufficient reserves to handle bumpy situations. It's why cash reserves are critical to RE investing.

    My family owns a 2nd home in FL, and my plan is to pay that off ASAP. But our primary residence...I'm about to refi it since rates are below 4%. It would be a foolish mistake for me to pay off that cheap deal.

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  • James H.
    OP
    Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y

    Interesting responses from everyone.

    K. Marie Poe, I definitely hear what you are saying about young family and all. I kind of got a late start (played a little longer than many) and didn't graduate college until I was 28. I'll be 33 in August and we don't have kids yets. I'll probably be 34-35 when we have our first and a couple years later our second (hopefully). If I leverage a lot right now, I'll still be leveraged a lot when the kids come into the picture. Then to wait another 12 to 15 years for them to be older - shoot, I'll be 50 years old before I take risk if I wait for that.

    The more I think about it, the more I want to take out a good sized mortgage for a nice house in a good neighborhood where I want my kids to grow up. I think if I buy good and make some nominal extra payments here and there, I'll have plenty of equity built up by the time the kids are still pretty young.

    If I have to, I can move back into my current house that has a 450/month PITI. If it got REALLY bad I could move into my paid off rental. I actually think that with how good prices still are and how great interest rates are, I'm actually reducing my risk in the long run by taking out a mortgage on the "forever" house now rather than later.

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  • Account Closed
    Investor · Central Valley, CA · Member since 2012 · 6k+ posts · 3k+ votes
    14y

    Brian Hoyt I have noproblem with leverage against a primary residence. Just depends what the plan is. It may be just the right time for you to upgrade to a new house for a future family. I just see too many buy hold people starting out playing loose with the numbers. Leveraged property is only as good as the things you can do with the money to create more money. I think it takes a lot of time and skill to build a truly consistently cash flowing rental portfolio. BP and the internet is full of articles and blogs from people giving advice who haven't held rentals for even 3 years, so I think the reality if often skewed. It might take you some experimentation to find the right type of housing combined with the right tenant pool so that cash flow could supplement or replace income.

    Capital reserves, also known as savings, is what makes it possible to get through mistakes. But it's hard to save when everywhere you turn there's a good deal needing a down payment. :) You are not alone in the drive to buy rentals before a "market recovery".

    1Reply
  • James H.
    OP
    Investor · Fort Worth, TX · Member since 2011 · 1k+ posts · 450 votes
    14y

    K. Marie Poe, although I don't have the experience to be qualified to agree with you, I do believe you. I have been pretty conservative so far and it is makes me pause to read about how quickly a lot of people lever up after just starting. I attribute it to that they must have started with a bunch of cash or be high earners. Otherwise it would be crazy, IMO.

    Ironically, by using a VA loan (which we qualify for), I'll be at 100% financing. BUT, I will have cash reserves as I won't need to make a down payment. So, higher leverage in this particular case (relative to the purchase price) is probably more stable.

    If I put 20K down on a 130K house, I have more equity than 0 down, but then I don't have any cash. And the difference in the monthly payment is not substantially different for 130K over 30 years vs 110K over 30 years.

    0Reply
  • Steve Babiak
    Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
    14y
    Originally posted by Will Barnard:
    Steve,
    Regarding your comment above on Andy's post, worrying about a "no" should never be a worry. As a young man, if u worried about hearing a no and never asked a girl out, u would end up alone all your life. Salesmen have to hear lots of "no's" before they get a yes.

    ...

    Will Barnard - we truly know that hearing "no" is part of this business. That being said, the scenario you provided isn't quite the same, so I will slightly modify it here to make it more similar, in order to demonstrate a point - counterpoint discussion, as this is a thing where right and wrong aren't always precise and clear.

    As a young man, you are dating that beautiful girl, and you decide to let her go (you have the cash in hand, but decide to pay down the mortgage by giving up the cash). You then decide that you would like to have that girl back as your girlfriend (go to the bank and fill out the loan application AND possibly pay some up-front fees for application or appraisal). You are then told "no".

    Salesmen hearing "no" isn't the same, as that salesman never had the sale to begin with.

    1Reply
  • Will BarnardPro Member
    Moderator
    Developer · Santa Clarita, CA · Member since 2008 · 15k+ posts · 10k+ votes
    14y

    Steve, point well taken, your example is a better one in deed! Based on that, I can see where the fear of the no is present and real.

    Again, fear or no fear, my opinion is that leveraging the primary residence at todays low rates and investing those funds in a cash producing asset yielding higher retruns than that of the cost of the loan is prudent.

    Podcast Guest on Show #130
    0Reply
  • Ryan M.
    West, MI · Member since 2012 · 674 posts · 182 votes
    14y
    Originally posted by Greg Turnquist:
    "100% of shorts and foreclosures have 1 thing in common...."

    If you are going to saying that all foreclosure happened on mortgaged property, that isn't 100% true. When that show "Extreme Makeover Home Edition" started, the improved houses incurred huge taxes, and some of those people got foreclosed because they couldn't afford the new property taxes.

    My family owns a 2nd home in FL, and my plan is to pay that off ASAP. But our primary residence...I'm about to refi it since rates are below 4%. It would be a foolish mistake for me to pay off that cheap deal.

    Excuse me then, 99.9999999% have one thing in common, thanks for clearing that up I will now sleep better tonight.

    0Reply
  • Account Closed
    Clarksville, TN · Member since 2012 · 29 posts · 7 votes
    14y
    Originally posted by Ryan M.:
    Originally posted by Greg Turnquist:
    "100% of shorts and foreclosures have 1 thing in common...."

    If you are going to saying that all foreclosure happened on mortgaged property, that isn't 100% true. When that show "Extreme Makeover Home Edition" started, the improved houses incurred huge taxes, and some of those people got foreclosed because they couldn't afford the new property taxes....

    Excuse me then, 99.9999999% have one thing in common, thanks for clearing that up I will now sleep better tonight.

    I think you missed the more important factor: 99% of mortgages are current. I hear that foreclosure line from Dave Ramsey all the time, but not the other one. Saying, "1% of all mortgage holders get foreclosed" doesn't carry the same amount of fear, as "100% of everyone foreclosed had a mortgage."

    0Reply
  • Jason Kosowan
    Investor · Virginia Beach, VA · Member since 2011 · 68 posts · 12 votes
    13y

    Hi guys - this is always an interesting and heated topic.

    I've been fighting with myself for a long while about this very topic. I was always brought up with the "debt is never good". But I eventually realized the power of leverage and wouldn't have gotten anywhere investment-wise in the past few years if I didn't struggle to change this mentality.

    Just this past weekend, I added up the amount of cash I put into my rentals and compared the cashflow from them with what I would have saved if I just dumped it into my primary residence. Huge difference. A few hundred dollars in potential mortgage savings vs almost paying the entire mortgage from the cashflow.

    So, at least for me, the right answer is not trying to pay my primary mortgage off ASAP.

    It still is a personal choice, though. If money is going to be tight or your primary job is unstable, getting more debt could cause you sleepless nights.

    1Reply
  • John M.
    Midlothian, VA · Member since 2012 · 38 posts · 7 votes
    13y

    The debate is basically over 1% tax interest savings. The tax/money difference isn't worth worrying about. It's nothing.

    To me, paying off my house quick made for a nice healthy goal to reach for. It made me save more with a tangible goal in sight.
    Now that it's paid off, it opens up more options. Start a business. Build enough passive income to not work, etc.

    I don't think there's a right or wrong approach. Some people like to smell the roses and live large. Die at 90 yrs old in a massive house with a $500,000 mortgage. Others would like their own home to be the smallest house they own.

    To me, you can't be free if you have debt.

    0Reply
  • Tim Czarkowski
    Involved In Real Estate · Jacksonville, FL · Member since 2012 · 217 posts · 42 votes
    13y

    I think as you get older it is more important to have your home paid off. The rational is the same as switching more stocks to bonds as you get older, you have a lower risk profile because you don't have the time to make it up. Personally I plan to pay my 30 year fixed rate loan until it is paid off and leave it that way. Interest rates are low, I am young, and my returns are much better than 3.75%.

    The big advantage here in Florida is that there is no limit on your homestead exemption here so it is a form of bankruptcy protection to have your home paid off. There is a reason so many millionaires and billionaires purchase outrageously expensive homes here in cash and then make it their residence. Besides the beautiful beaches and zero income taxes of course lol. OJ Simpson actually used that, he had a 10 million dollar or so home, went bankrupt after he lost the civil case, and was able to sell the home afterwards and the money was protected. Pensions are also protected, such as from the NFL. Funding you own pension is another form of bankruptcy protection that a business owner can take advantage of.

    Also Donald Trump has a 100 million dollar home on Jupiter Island for the same reason, he has had several business go bankrupt and nearly bankrupt. Only the rich can go bankrupt and still remain very wealthy. lol

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