Should I refinance or pay off my primary residence?
I have a general financial/psychology question. A bit of back ground, I have owned 3 homes and a couple of rental properties. I currently only own my primary residence. It is a 6 acre farm with a brick ranch. We have been living in an RV while we rehab the house. I paid 210k for the property and have put roughly 150k into it. When it's all said and done, based on recent similar property sales, including a neighbor with the same size house and 6 acres, I expect the property to be worth 425-450k. I owe just under 150k on the property.
My question is, do I refinance and pull my equity out to invest or do I pay the property off and enjoy the freedom and peace of mind of not having the mortgage? I understand mathematically, it probably makes more sense to refinance and invest. But psychologically, I'm drawn to paying it off, especially with my first child on the way. I could also still establish a HELOC and use that to finance rehabs if I decide to flip in the near future. Just looking for general thoughts/philosophies of other investors. Thanks!
Jesse - congrats on being in your position! I think a lot of it has to do with the stage of life you might be in. For instance, if you are looking to retire, paying off the property and having peace of mind could be the most ideal scenario.
However, if you are looking to continue growing your RE portfolio, I think a HELOC looks to be your best bet as it gives you flexibility regarding the timing of your next acquisition/project without having to pay monthly in the interim.
Wishing you all the best!
Quote from @Jesse Holshouser:
There is a psychological benefit to paying it off, but there's also a psychological benefit to watching your money grow.
Read a few books on real estate investing to learn the power of leverage. I like the Unofficial Guide to Real Estate Investing. Here's a very basic explanation to get your juices flowing:
Assume a house costs $200,000 and rents for $1,500. The market appreciates 3% per year.
Pay cash for one house and rent it for $1,500. After five years you'll have earned $90,000 in rent income and gained $34,000 in appreciation.
Buy four houses with $50,000 down on each. Mortgage payment is $1,000 on each house, so you're essentially earning $500 per house or $2,000 a month. After five years you'll have earned $120,000 in rent income and gained $136,000 in appreciation. You've earned $132,000 more by splitting your money and leveraging it.
@Jesse Holshouser I echo Steven's congratulations: you are in a great position which we all aspire to attain.
In my opinion, psychology should play no role in these decisions. If you can get a better return in the markets, why not? Of course, personal preference does have a role to play, though, and it's perfectly respectable and reasonable to follow one's heart rather than mind.
In any event, I have yet to meet someone who is extremely wealthy and not heavily leveraged.
#3 Managing Your Property Contributor
What is your current interest rate and what would it be if you refinanced? Everyone is different, but if you want to buy more rentals; I'd do a HELOC if you don't have the money in the bank for a down payment. I don't pull the equity out of my homes, and am letting the tenants pay down the mortgage on my rentals. I have low interest rates and don't see getting those rates again in the near future. Do what works for you.
Refinancing your property and pulling out equity to invest can potentially increase your financial returns, but it also comes with risks. Investing always involves a level of risk, and there's no guarantee that you will make a profit. Additionally, refinancing can increase your monthly mortgage payments, which may put a strain on your finances.
On the other hand, paying off your mortgage will provide you with the peace of mind of not having a debt obligation, and you can potentially save on interest charges over the long term. However, by paying off your mortgage, you will also be tying up your funds in your property, which may limit your investment opportunities elsewhere.
Ultimately, the decision to refinance and invest or pay off your mortgage depends on your personal financial goals and risk tolerance. It's important to consider your current financial situation, investment opportunities, and long-term goals before making a decision. You may also want to speak with a financial advisor or mortgage professional to help you make the best decision for your situation.