Pay off mortgage through TSP

6 Replies

I bought this property for $119,900 and now have a principal amount of $65K. I have it rented for $1480 with a mortgage payment of $812. I use the entire $1480 plus $500 for a total payment around $1800 with allot going towards principal. My calculations show that it would be paid off within 3 years. My plan is to have this paid off before leaving federal service. I'd like some input on whether I should use the TSP loan option of borrowing $50K at 2.87% to pay off earlier?

Why are you helping your tenant pay off your mortgage for you? That extra $500 isn't saving you money...it's costing you money you aren't spending now.  As long as you have positive cashflow, your tenant is buying the property for you.  Any money that comes out of your pocket, you are spending on the property...that you don't need to spend.

If I read this correctly, you're actually spending $500 more...out of pocket.

Think about it this way: 

A - If you take the same property, and over the next 3 years you had no positive cf, because you spent it all + $500 extra on the mortgage, that property cost you about $60k.  With no income...just cost.

How many months would it take to recover $60k...which is what you need to do before you show any profit...and before you mention appreciation, you get the same appreciation whether you pay this way or the minimum.

At $18k/y cf (after payoff), it will take you over 3 additional years before you start making a profit...that's actually close to 8 years from when you start the early payoff.

B - If you put 20% down (about $24k), that was cash, and you had positive cf (on average) for the full term (let's say 20 more years), the cost of this property to you was $24k.

If you had $500 positive CF without doing this early payoff, or $6k/year, you would have broken even at the end of year 4...and you would be profiting.

Let the tenant buy the house for you.  That's their job...not yours.

Now, if you had that extra $36k to invest in a different property, maybe one just like this one, you would be much further ahead.

My initial reaction is no. What is the interest rate on your current mortgage? Which funds is the money in your TSP in? If you take out a TSP loan, you're then paying 2.875% (current rate as of today), but you're also foregoing probably 10-12% in gains that you could be getting. The C and S funds are gaining 18-22% over the past 12 months. Opportunity cost. You might save 2-3% on your current mortgage by paying back TSP, but you're going to be giving up at least 8-15% on TSP gains.

Now, if you asked me should you take out a TSP loan and buy another rental property, then that math probably says yes, because you could get a low percentage mortgage loan and borrow even more money. And you'd have another cash flowing property with equity gains (hopefully) that would most likely outpace your future gains in the TSP.

I understand your point of having positive cf. My goal is to pay off the home ASAP because I've been doing the same thing for quite a long time and to say the least pretty burnt out. I can afford to come out of pocket $500 and still sustain a comfortable lifestyle. If I only use the $1480 towards the mortgage payment, the time frame would be considerably longer than 3 years, that's why I don't mind paying the $500. Once paid off, I'll have the entire $1480 as cf and free and clear. Not sure if my thoughts were clarified. Thank you for responding and please add your continued thoughts. v/r

Originally posted by @James Meyer :

I understand your point of having positive cf. My goal is to pay off the home ASAP because I've been doing the same thing for quite a long time and to say the least pretty burnt out. I can afford to come out of pocket $500 and still sustain a comfortable lifestyle. If I only use the $1480 towards the mortgage payment, the time frame would be considerably longer than 3 years, that's why I don't mind paying the $500. Once paid off, I'll have the entire $1480 as cf and free and clear. Not sure if my thoughts were clarified. Thank you for responding and please add your continued thoughts. v/r

 Your missing the basic math.  At the point of  your payoff, it would only be clear...not free.  You paid for it, and are merely recovering the money you used to pay for it before you are actually ahead.

Take that $1000/month, and invest it in a different property.

Never looked at it from that perspective. So, my idea of paying it off early is a decent idea, however, after clear use the $1480 to invest it in a different property? WOW! My plan to quite work is slowly not looking as real as I originally thought. If I were to invest in a different property I would then need to finance another loan to purchase the property which requires employment etc. What would be your advice?