Extra money - focus on 1 of 5 mortgages or a little for each.

36 Replies

I have a few properties and positive cash flow. I was trying to decide if I should try to 1) focus on paying off one mortgage or 2) spread a little to each loan. I have a long term perspective on them all. I have a reserve for capital expenses and don't plan to add any more currently, but would like to service the debt. All mortgage rates are pretty much the same.

I'd focus on paying one off vs. paying down a bit on each.  If you can get to the point where you own one free and clear, that opens up a lot of options if you ever need/want them.  Having all 5 paid down an extra 15-20% doesn't really do much for you.

Nothing wrong with doing a debt snowball for psychological reasons or paying off the highest interest rate for math reasons.  Debt snowball would mean focus all extra money on the smallest mortgage with the presumption that paying it off will give you a psychological boost.

Did you get all the mortgages at the same time? That can dramatically affect the answer too. 

Your question might look simple or naive but it's a calculus question that I'm not capable of figure out quickly. You gonna need a kid fresh out of Finance major or has Master's degree in it.  You are trying to figure out the minimum interest paid out to the lender in all four of your property together. 

Without that info and assuming you got all loan around the same time. I'm gonna say pay one off first at least to 2/3 of the mortgage amount then move to another one. I think this way you have the most of your payment applied towards your principal rather than your interest. 

Actually! Pay off 1/3 then move on to the next property. But Michael is right! The difference is prlly a few hundred dollars went towards the principal rather than the interest. 

I would say pay on one. Look at all your mortgages. Are they all standard mortgages without prepayment penalties? I would do variable rate ones first, no telling what can happen to interest rates. Ones with PMI next, if you can get the PMI off that is. Is there expensive insurance on one that you would be able to get rid of it you paid off the house?   If so that might figure in.  Now look how much goes to principal and how much to interest for each mortgage on your amortization schedule. If you are making appreciable payments the best return for your money is paying the one with the highest interest $  amount in the  payment per month.   This is an easy way to combine the impact of the interest rate and the length of loan.  The interest $ payments are higher  early in the loan.  If you send the bank an extra principal payment (mark it as such) they cannot compound interest on that money.  It is probably not as accurate as that finance major would calculate for you but it works.

Hey @Steven Frey  I think @Colleen F.  @Michael Seeker  

 all make very good points so I had to give them all a vote. We would need to know the details (specifics) of each of the loans to determine which one would be best to pay off but I think your question was a little on each or focus on one and I am for the paying the extra on one of them.

Paul

You get the most bang-for-your-buck with principal pay down earlier in the life of a mortgage (most of your payments are interest at this point).   You would need to do a little modelling to find out the exact percentages, but if all your mortgages a newish (<5yrs), then my conjecture (at this point, unless I break out the HP) is you should start pay down on the newest ones first, then gradually shift your payments towards progressively older mortgages.

1(506) 471-4126

Thank you everyone for the kind responses and sounds like the aim at one is the consensus.  I appreciate it and will move in that direction!!

They are all reasonably close in timeline and interest.  All are 30 year with rates in the 4.375-4.625 range and no prepayment penalty.

Originally posted by @Steven Frey:

Thank you everyone for the kind responses and sounds like the aim at one is the consensus.  I appreciate it and will move in that direction!!

 maybe not consensus ... aim at one (combination of youngest and largest), until you have paid it down to a point where you will save more interest - per dollar of pay down - by rolling onto another mortgage.

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Do you have ANY debt at higher rates than these mortgages? If so I'd hit that first.

@Brandon Hicks  has a good point which did not occur to me as our properties are held in a corporation, so the monies cannot be used to pay down personal debts.  

But if you hold the properties personally, then it is the same principle as describe above, just put your other debts into the list of loans to be paid down and put your money where it does the most good.

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@Roy N.

When held in a corporation the funds just have to be paid to the owner 1st then the owner pays personal debts from a personal account.

Originally posted by @Brandon Hicks:

Roy N.

When held in a corporation the funds just have to be paid to the owner 1st then the owner pays personal debts from a personal account.

 Naturally, but pedantically the payments are not coming from the corporate owned properties, but from the owner's income.   The owner could do that, but it triggers a taxable event and the funds might well be better used to retire the debts of the corporation.

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@Roy N.  

Im not an accountant so any tax matter should be discussed with an attorney. Taxation of the distribution will depend on what type of corporation you have. If its an S-Corp or LLC than those are pass-through entities and will make no difference whether paid on principle or paid to the owner. There is no deduction for principle payments from my understanding.

I'm gonna turn around and say pay them evenly everyone! @Roy N.  comment just reminded me that early payments goes mainly towards interest! I remember it's 66% interest and only 33% principal in the first year. The portion for interest gradually gets reduced to 0% at the end of your term. 

Therefore, I think the best solution here is to pay them all down pretty evenly. Try giving the youngest loan a higher weight while doing this.

Example: If youngest loan is about 40% of total mortgage owed! Try applying something like 1% extra so apply about 41-42% of all the money you have for paying down. 

I am assuming your youngest mortgage is only about 6 month younger than the older siblings. 6month/360month=1.6% ----> This is why I used the 1%. 

You can just pay 1% extra towards the younger mortgage and save yourself the hassle. 


@Brandon Hicks has a good point too! Pay off other higher interest rate debt first!

Originally posted by @STEPHEN YUAN:

I'm gonna turn around and say pay them evenly everyone! @Roy N.  comment just reminded me that early payments goes mainly towards interest! I remember it's 66% interest and only 33% principal in the first year. The portion for interest gradually gets reduced to 0% at the end of your term. 

Therefore, I think the best solution here is to pay them all down pretty evenly. Try giving the youngest loan a higher weight while doing this.

Example: If youngest loan is about 40% of total mortgage owed! Try applying something like 1% extra so apply about 41-42% of all the money you have for paying down. 

I am assuming your youngest mortgage is only about 6 month younger than the older siblings. 6month/360month=1.6% ----> This is why I used the 1%. 

You can just pay 1% extra towards the younger mortgage and save yourself the hassle. 


@Brandon Hicks has a good point too! Pay off other higher interest rate debt first!

Paying them evenly doesn't improve cash flow until the end. The constant rate of payment stays the same. If I were in agreement that the best use of capital was to pay down mortgages I would argue that paying the one with the lowest balance off first makes the most sense. Sure you can say go for the highest interest rate first. By going for the lowest balance first you can increase your overall cash flow faster since youll be able to pay that loan off the fastest.

I still say paying down personal debt or reinvesting in more properties is the best use of the capital.

Originally posted by @Brandon Hicks:

Paying them evenly doesn't improve cash flow until the end. The constant rate of payment stays the same. If I were in agreement that the best use of capital was to pay down mortgages I would argue that paying the one with the lowest balance off first makes the most sense. Sure you can say go for the highest interest rate first. By going for the lowest balance first you can increase your overall cash flow faster since youll be able to pay that loan off the fastest.

I still say paying down personal debt or reinvesting in more properties is the best use of the capital.

 Brandon:

If possible, definitely pay down higher interest debt first.

Yes, paying down your younger mortgages first does not improve your cashflow - particularly for U.S.A. investors with long term residential mortgages {for those of us in Canada with an average of 5-year mortgage terms, you could conceivable have lower payments at future renewals, giving you better cash flow}.   That said, paying down your younger mortgages more quickly will save you money in the long run.

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Originally posted by @STEPHEN YUAN:

I'm gonna turn around and say pay them evenly everyone! @Roy N.  comment just reminded me that early payments goes mainly towards interest! I remember it's 66% interest and only 33% principal in the first year. The portion for interest gradually gets reduced to 0% at the end of your term. 


 Early payments or extra payments can be applied wherever you want them to go. If you indicate that X number of dollars should go to principle then the bank should apply that to principle thus reducing the amount you owe which the bank should charge you less interest for. 

@Paul S.  

My comment was that your earlier mortgage payments are predominately interest. Any extra payment (prepayment) applied would be to principal.  

Paul, thanks for the additional clarification.

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@Roy N.   I know what you meant and agree it is better to apply any extra to the principle as early as you can. Although I have often found out that immediately after the purchase extra money seems to be difficult to find.

@Roy N.  you know they were fresh out when I was tree shopping. I am planning to pick one of those up soon though.

Originally posted by @Steven Frey:

I have a few properties and positive cash flow. I was trying to decide if I should try to 1) focus on paying off one mortgage or 2) spread a little to each loan. I have a long term perspective on them all. I have a reserve for capital expenses and don't plan to add any more currently, but would like to service the debt. All mortgage rates are pretty much the same.

 Paying off one at a time is better in that paying an extra principal reduction on all doesnt help your "cash flow."

Now with that statement above, I assume you have 30 year fixed loans where the monthly payment due does not "recast," during the life of the loan until its paid to $0. 

So if you pay down a little on each loan there is no benefit till one or all of the loans are paid off because even the last payment will still be your min monthly payment from a month to month cash flow perspective.

From a psychological point of view paying one off faster is also better because you can see results quicker and it will take less mental will power to push forward paying the 2nd, 3rd, and so on because your mind will see results from the first one relatively quick if you focus.

Hope that helps.

Albert Bui, Lender in CA (#345453), WA (#345453), TX (#345453), and TN (#345453)
949-514-5106

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