Pay Off HELOC or Primary Mortgage?

Question

Hey there BP Community, I have been investing in real estate for about 5 years and have acquired 5 properties.  A couple of them were house hacked and we currently live a duplex right now and with no out of pocket mortgage payment.

We have the good fortune of having 80K on hand and are contemplating payoff one of our properties that has a 79K primary mortgage while keeping a 25K HELOC balance that is attached to the property.

My question is: Is there any risk we might not be considering regarding paying off a primary mortgage (788/month) when a HELOC (199/month) would then move from secondary position to first position lien - ie loan acceleration, change of terms, etc.

Our goal is to minimize monthly expense while starting up a 3D virtual tour servicing business.

Additionally, any alternative recommendations for the use of above mention funds?

Thank you

Mason Hickman · Answer

@Ukaku Eleanya

With an interest rate that is much higher, I would advocate for paying off the HELOC first before the primary. The interest rate on the primary isn’t terrible. Are you looking to scale up your portfolio or just reduce monthly expenses? Is the $80K all of your liquid funds? If the $80K is all your liquid funds, I would look at your entire capitalization strategy and make sure you have adequate reserves for your new business and would even consider holding the funds in reserve and not pre-paying your mortgage. If something goes wrong with the business or properties, it’s far better to have cash on hand than cash tied up in a property. In addition, as more money is being printed by the FED, the mortgage is a good hedge against inflation.

Ukaku E. · Answer

Thank you Mason.  The HELOC is 7.7% while primary is 3.25% @15 years.

Mason Hickman · Answer

@Ukaku Eleanya

What are your interest rates for the primary and the HELOC?