Hoping to pick your brains about the best course of action here.
$135,000 remaining on Primary home @ 3.75%
$165,000 remaining on Investment property @ 4.25%
Both properties are in North Carolina.
Investment property is a beach home and used for vacation rentals (so, cyclical income that we mostly have to dump back into upkeep and insurance). Most importantly, the investment property will become our primary home upon our retirement in 14 years. In retirement, our monthly cash flow will be cut roughly in half, which will be no problem if we eliminate both mortgages by/at retirement. Retirement is guaranteed pension, not 401K etc. Savings is currently at 85K.
Which makes most sense to achieve this goal?
1 - Pay off the current primary home with the lower balance and interest rate asap and then pay down the debt on our investment/future primary home until retirement, and then take the proceeds from the sale of our current house and pay off the remainder of the new primary (former investment) home and live free and clear for our retirement, making the cut-in-half cash flow just fine. The income from the home sale would be used to pad our retirement savings.
2 - Pay down the investment property with the higher balance and higher interest rate ASAP and then use the primary home sale to pay off the remainder of the primary home mortgage, whose balance will be minimal by that point, and then use the cash for retirement as in #1.
2 - Just pay the minimums on both for the next 14 years and then use the primary home sale to hopefully finish off the investment-turned-primary home mortgage. The cash we would be saving (bank account only, not invested) from not paying extra on the mortgages(s) would be our retirement cushion instead of the cushion mentioned in #1.
Things to consider: We are 14 years from retirement, with 2 kids in elementary school. Having a strong cash safety net is very important to us in case of job loss, critical illness, etc. Also, even though we know that high leverage is good for investments and taxes, etc, our current goal is to have no mortgage costs at retirement, so we'd like to stick to that plan. Our mental health will just be better if we know we can 100% make it on just our pension money.
Have you thought about turning the beach house into a full time rental with less wear and tear. Put all rental income towards that loan. If rates permit you could try to switch to a 15yr loan on the future home. Your current home has the lower interest rate and you'll be selling it when you move, so I wouldn't worry about extra payments there. As far as your saving you could invest it elsewhere. Possibly even another rental in the area you are moving to, providing more income at retirement
Payoff more each month on the higher interest mortgage.
It sounds like you should speak with a financial advisor and come up with a road map to retirement.
14 years allows enough time for material growth in your retirement assets and additional savings.
Generally speaking mortgage paydown is low ROI.
Your risk profile, wants, needs, and goals all need to be considered.
@T Pellin I'd look up the Cash Flow Index for paying off loans. It's great method to identifying which loans to pay off first to maximize cashflow (my gut tells me to pay off your income-producing property and then snowball that additional income to your primary residence) Also look into the Velocity Banking method that uses a HELOC to pay off large debt faster.
There is a lot of skepticism out there about the Velocity Banking method, but I'd run your own numbers. From the numbers that I've ran, for my personal finances, Velocity Banking works BUT you have to commit to paying off the debt. If you fall short, or don't follow through you WILL end up making no use of your cash. Also, you do end up paying more interest in the SHORT run, but again, if you follow through you always end up paying less interest compared to just paying the minimum payment.
I'd pay off the higher interest rate first. There are online mortgage calculators that allow you to see how much money you save by making extra payments and how it shortens the length of your mortgage.
If you are not going to invest any money for a higher return (> 4,%) pay off the highest interest rate-your income property then your home. Then sit on approximately $400k of equity making very little or nothing .
However, for your piece of mind you are giving up a lot of earnings for 14 years. Your loan interest rates are low I would keep them In place ALAP. I would invest the extra cash flow to provide more passive income now and in the future. Even with mortgages paid off expect taxes and insurance and maintenance to be higher in 14 years.
@T Pellin This is a fun scenario to ponder. My wife would day to pay off all debt now, and put all extra cash under the mattress for a rainy day! I take the opposite view--when mortgage rates are low (both of yours are low), if you are going to invest the cash you have for stronger returns, just pay monthly mortgage payments. If you aren't going to invest for stronger returns, pay down the most expensive mortgage in bites that allow you to have liquidity for life situations. It's always great to tell others what to do with their money, isn't it? LMAO.