What's the Mortgage Paydown Sweet-Spot?

5 Replies

Purchase Price: $30k

Down Payment: 20% or $6k

Mortgage Amount: $24k

APR: 5.5%

Term: 15 years

Repairs: $8k

ARV: $40k-ish

Rent: $700

QUESTION: How much should I pay down this loan right off the bat with a 1.99% HELOC of $30k?

I just bought this deal (my first one) and am currently making the repairs. A local credit union just started a nice HELOC program so I'm jumping on it and figured paying down (or off?) this new investment property mortgage is a worth-while consideration. However, I do not know what strategy I should employ here. How do I calculate how much I should pay down to keep a good COCROI? What do you guys consider the sweet-spot to be?

Thanks to all! 

Cliff T.

    1.99% is free money relative to inflation. All of it. Don't even get a mortgage at the point of purchase, be a cash buyer. If you want to free up the HELOC later, slap a mortgage on the property to pay the HELOC down.

    Chris Mason, Lender in CA (#1220177) and California (#1220177)

    Thanks Chris! Yea, you're right. I didn't really look at it that way.

    I'd like to save some of the HELOC to buy another rental or a new primary with soon, though. I guess I should have mentioned that.

    I don't really mind the interest on the investment property, since it's a deduction. The mortgage is only $196/mo. 

    I suppose if I look at it your way, I should just set aside however much of the HELOC I think I'll want to use elsewhere, and put the remainder on the house. Right?

    And the slap on the forehead realization is this: I just spent $1000 in closing costs.... when I could have just paid cash with the HELOC had I found the HELOC deal sooner! But then I would only have 1 rental property and no more funds to buy more...

    Cliff T.

      "How much should I pay down this loan"

      Zero.

      Don't pay down the mortgage use the HELOC to purchase another property. End result is better. There is no reason to pay down a rental mortgage and create unnecessary under producing dead equity.

      Dead equity will only reduce your cash flow. Make your money earn it's keep by putting it to work not putting it to rest.

      I definitely see your point. I'm really excited about this HELOC. I can do so much with it...

      1. Pay down my primary mortgage faster and reduce the amount of interest paid

      2. Buy more investment properties

      3. Loan it to friends and family at a higher rate

      4. Buy tax liens at the end of the year

      @Thomas S. The dead equity is definitely a bad thing regarding the rental property I described above. But that's not the case with my primary mortgage, right? Paying it down faster saves me interest and gives me the ability to take out another HELOC sooner. Just trying to make sure my logic is right on that, thanks!

      Cliff T.

        @Thomas S. Are you viewing the HELOC as equity? It's a form of debt, so I kind of view the move of paying down the mortgage with a HELOC as essentially refinancing at a lower rate, but with a different debt instrument. It's not dead equity, he'd be keeping the same amount of equity. Although, if he does have the desire to go purchase another property, I do agree that he should just use the HELOC for that because if Cliff pays down his current mortgage with the HELOC he will have to acquire another property with a traditional mortgage, so there's no point unless the mortgage he gets on his next place is at a significantly lower rate than 5.5% (the one on his first purchase).

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