Is paying off my mortgage the best idea for my future

38 Replies

I have in mind of paying one of my properties off in the next few months. The advantage the way I see it is once I pay off the property it will free up my borrowing power a bit more so it will not be such a challenge to finance another property. It is going to cost me $30,000 but in return it will give me about $400.00 more dollars a month. I have thought about keeping the $30K but I am at the 4 mortgage mark and it becomes more difficult to get loans. Our credit score is good at around 725. (this will be the only property we will have payed off if we do this)

My main concern is once I leave my job and go into real estate as a realtor and home flipping on the side. I am worried if I don't free up the books a bit no lender will offer any loans for me to purchase other properties. Should I look at this in a different way or any other options?

Thank you for giving me direct advice from different views.  I know this topic has been discussed several times from other people.

Congrats @Brian Johnson  on being in a position to pay a property off!  I would, yes.  In addition to freeing up borrowing power, there's something that happens to ya.  This peace of mind I can't describe.  The grass feels different, not being anxious to fill a vacancy...  If you don't like it, I guess you could put a new mortgage on it!   Many on here will split hairs about the interest you are paying vs what you can earn somewhere else, maybe the 'tax advantages' of mortgage interest?  Whatever.  Feel the peace!

From a pure math standpoint it would be good to pay it off if you have at least 10 years left to pay on.  Your return would be about 10%.

If I was going to change jobs to one which will pay minimum wage on average and the pay is irregular, I would want to have at least $30,000 in the bank.

Good Luck.

Bill

thanks for the input. With this payoff it will allow me to generate $1000 per month in net cash flow. Which will help us in our new career paths. My wife will be getting a job in our new location. ( not yet decided but a warm location near the beach)

I was in a similar situation a few months ago and I decided not to pay off a property. Just like you I had a property I was going to pay off and figured the extra cash flow would make it much easier for me to qualify for the loan on the next property. After thinking about it I figured once all said and done I would end up with a paid off property and a property with a loan on it. I figured there was no point in paying off a loan just to pay fees to get a loan on another one. Even if I did get a loan on another one it would have been easier for me to qualify putting the huge chunk down. 

Your situation may be different depending on the price range you're in. I'm in Baltimore so I can buy houses for $30k-$50k

it depends on what your overall strategy is. If your main concern is not being able to borrow again beyond four mortgages, that really shouldn't be too much of a problem. 

Hypothetically, you tie up 30k to be able to borrow again to buy property number 2. You net is $400 higher per month now, but reserves are squashed, tied up in equity now. This could be a problem for the lender, more so than having four vs five mortgages. At your new cash flow of 1k per month, it would take you 30 months to get back to the same cash position and your return on that property went down because it is now up leveraged. The 30k was just "invested" at a fixed rate return of whatever the mortgage rate it paid off was at.

Now how everything ties in with the move and getting situated at the new job and all that, that takes it away from a pure mathematical/leverage situation, and is also very personal. And that dance is why this business is a mixture of art and science sometimes.

Ryan, that is a interesting perspective. I'm am glad I posted and ask for different perspectives. Sometimes I get fixed on one idea and loose sight of the many different paths I can take. 

So maybe it is a good idea to speak to different banks and see what they say after looking at my financial situation?

The math will tell you.   If you do not have a better use for the 30K (ie. something which, after opportunity cost, will net you a higher return), then pay-out the mortgage.  You can always arrange an equity backed LoC on the property, so you can pull out capital (typically up to 65%) on short notice if you need it to close a deal.

Roy, 

Exactly what I was thinking.  My thoughts were to see if I can get a equity line open on it. I know that the banks I went to on credit lines on rental properties are not allowed by most in Kentucky. Maybe they will if it is free and clear. 

I will be pulling $100k out of my 401k once it is rolled over in a IRA. This will be my cash used for my future real estate flips and rental buys in our new location. I just don't want to be over leveraged going into this new career path.

Originally posted by @Bill Jacobsen :

From a pure math standpoint it would be good to pay it off if you have at least 10 years left to pay on.  Your return would be about 10%.

If I was going to change jobs to one which will pay minimum wage on average and the pay is irregular, I would want to have at least $30,000 in the bank.

Good Luck.

Bill

 Bill, this may be a dumb question but would you be able to break down the math in your first sentence? From a common sense perspective, that makes complete sense, I'm just curious what the mathematical formula is behind it. Thanks.

Brian - The current lender I use (aimloan) will lend you up to 10 mortgages provided that you qualify for them.  It would be good for you to talk to them or other banks to understand whether is more important to have reserves (the $30K) or the lower debt to income ratio in your specific situation.

Steve makes a great point that I can't emphasize enough.  If you know you won't be able to sleep at night if you take a specific action (paying it off, or not to pay it off), then don't take that decision even if the math tells you it is the right decision.  First of all, take care of your well being and then take care of everything else.

If it was me, I would think about this as another investment decision.  You are investing $30K to get $400 more per month.  Your return on that investment is 16% (=400*12/30,000 = 4,800/30,000) without including the higher tax cost.  If you will pay 20% of taxes on that 4,800 that means your 400 net per month (or $4,800 per year) will be reduced by $960.  Still your return on investment is 12.8% = (4,800 - $960)/30,000.

Unless you have another investment that will give you more than 12.8%, or if you have a personal requirement for your capital that is higher than 12.8%, then the payoff seems the way to go.

Marco C, 

That is a very good way to look at it.  I will contact the company you referred to this week.  The financing for future investments is really my main concern.  I don't like the idea of getting hard loans with crazy high interest rates. So my focus to solve this problem has been on decreasing my debt to income.  

My lender will do 10 loans as well.  They factor credit score, cash reserves (they really look at this one) and current leases with paying tenants.  Another option is to keep your loan and save the cash flow you have to expand.  Once you accumulate what you want, take all the excess cash flow from all the properties and start paying off the mortgages one at a time.   

the problem I confronted in past was the local banks will not work with me because at the time I had 5 mortgages.  We sold the 4 plex so now we have 4 mortgages.  I was even turned down for a refi a few years ago with $20,000 cash in hand! Go figure

@Brian Johnson  

Start talking to your lenders about commercial or portfolio lending.  It's a bit more effort to get your head around at first and you pay for more things than in residential lending .... well, you pay for them in residential lending, but they are more overt on the commercial side (at lease here they are).   It's one way around the 5 or 10 mortgage limit banks impose on their residential underwriting.

In the long run, it's more straight forward and you will have to tread there anyway if you wish to go bigger the quadraplexes.  

Once again thanks for all the great information.  I think I need to contact a few lenders and see what they say about my situation.  I normally don't like dealing with long distance lending but if it needs to be done so be it. 

I will post up the information I gathered from the banks and lending companies I contact.  After reading all the different insight on this thread I want to do some more research before paying off my property.

I don't invest remotely, but I do finance that way. I have used out of state lenders before and never noticed the difference. I always do remote closing at my kitchen table with a hired out notary anyways, so the only thing that changed was the area code that the broker was calling from.

If you have a specific next move in line, find the lender first and ask them what they think you should do with the money. Better to start the relationship when you aren't on a deadline. If it is a coin toss I always keep the money in cash. I like options. And I don't want to pay off a house and then have to ask someone to loan the money back to me via a LOC or note. And then pay to get it back on top of that. Unless this is what is required to get the deal done that is.

Originally posted by @Roy C. :

Surprise that I haven't seen @Joe Villeneuve respond to this thread yet. 

Anyway, similar topic was discussed recently on this thread:

http://www.biggerpockets.com/forums/48/topics/1596...

I was also interested in this topic, and hope it helps, Brian. 

 LOL, yeah I do enjoy reading @Joe Villeneuve input on other threads. He always has very insightful information.   Based on the things I have read on his post.  I think he would say refi back to a 30 year to get the cashflow you need. 

Originally posted by @Bryan N. :

My lender will do 10 loans as well.  They factor credit score, cash reserves (they really look at this one) and current leases with paying tenants.

 In regards to the cash reserves, balances in 401K accounts are considered cash reserves (by my mortgage broker), so changing that could also affect things. Just another thing to consider.

I read on the thread that Roy C. posted.  

The post where Joe Villeneuve explains where paying cash up front  for the property and refi to pull the cash out with profit made.  This is a great example where once I have a property free and clear can be used as a tool to extract cash later when needed.  If the property is payed off and later on I need large sum of money to pay cash for a property.  I can always pull the money out by refi.  

My first thought was to try and get a HELOC of some form on the property.

Great dicsussion.  I am in a similar situation with looking to pay off a property or keep the cash.  Steve made a great comment about the feeling of not having a note on your investments, it really puts you at ease dealing with bad tenants and vancancies.  Maybe you "lose" on your tax returns bu,t you would keep the 3-6% you are paying in interest in your pocket.  With this said, I did leverage a property to buy two properties.  The numbers all made sense but the feeling that I now have two mortages has not sat well.  It has made me realize that I am more comfortable with paying off than levergaing.  I know it will slow down my frequency of buying properties but it give me a better return.    From my conversations with banks, if the properties cashflow and you have a good relationship with the bank, you can get loans pushed through.  I also think not having mortages is helpful and reduces their "risk" in you.    Thanks for posting!

@Brian Johnson .  Sounds like a personal preference.  If I were looking to change careers - I would look at paying it off as well....but only after I had a 3-6 month emergency fund in place for living expenses.  Sounds like you've got some fun life changes ahead!  

You might consider replacing it with a credit line.

I would echo the looking into of commercial financing. I transitioned a couple years ago and while I pay maybe .5% higher for an interest rate, I have no limits on funding with good deals... I also agree to reseaech pulling from your 401k intl a self directed. Two things on that, one being that you use those funds ar reserve funds so double check if moving them to a self directed ira has any effect. Then also consider the rules of a self directed IRA and how hands off you must be and if you can accomplish that.

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