Paying off mortgages

Member since 2019 · 15k+ posts · 11k+ votes

1mo

Different strategies for what works for you. Some will say pay off the highest interest rate first (which should save you more), others will say do the one with the lowest balance (so you have the success of paying it off).

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Henry ClarkPro Member

Developer · Member since 2020 · 4k+ posts · 4k+ votes

1mo

OP lay your loan terms, collateralization, balances, etc out.

1. What is your sensitivity to interest rate increases? Are all of these fixed? Variable? Balloon terms? Rate hike caps?

2. If you have exposure to rate hikes (variable/balloon terms), those are the ones I would pay down first. Pay the smallest balances first in case you need them for collateralization. Also to reduce the number of balls in the air.

3. Are they all with the same lender. I would try to put them under the same lender, in case you get squeezed, then you can use any excess equity LTV for loans under stress.

4. Then pay down highest rates.

All of these deals you made I will assume were viable when you made them. Thus, I would look at reducing your loan risk first versus straight highest rate.

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Ashish AcharyaBusiness Member

CPA, CFP®, PFS · FL · Member since 2017 · 5k+ posts · 3k+ votes

1mo

Vitaliy, if the end goal is a debt-free “small and mighty” portfolio, I’d rank the loans by more than just interest rate.

The 8% seller-finance loan and the 7.5% HELOC balances would be the first ones I'd scrutinize because they're expensive and likely give you the biggest guaranteed return from paying them down. I'd be much slower to aggressively pay off a 3.25% mortgage unless the psychological benefit of being debt-free matters more to you than keeping that capital available for reserves or other investments.

I’d also look at each property’s cash flow, remaining balance, equity, and how much monthly cash flow gets freed up when a loan disappears. Sometimes paying off a smaller 6%–8% balance first can materially improve portfolio cash flow even if it isn’t mathematically perfect.

From the tax side, remember that rental mortgage interest is generally deductible against rental income when the debt proceeds are tied to the rental activity, so the after-tax cost of the debt may be lower than the stated rate. I’d compare that with your expected return from keeping the cash invested elsewhere.

And since you have roughly 15 rentals, I’d also make sure you’ve reviewed cost segregation across the portfolio. Accelerated depreciation may improve the after-tax return on some properties, but the benefit depends on whether the resulting losses are actually usable under the passive-loss rules. (irs.gov)

I’d probably attack the highest-cost and most restrictive debt first while keeping the cheap fixed-rate mortgages unless eliminating one creates a meaningful cash-flow or risk benefit.

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John MorganPro Member

Rental Property Investor · Grand Prairie, TX · Member since 2018 · 2k+ posts · 2k+ votes

1mo

Knock out the HELOCs and 8% loan. Don't touch the others. I'd use your cash to keep buying more and more cash flowing properties. I've got 20 mortgages and sleep like a baby. If the numbers work, then keep deploying your cash at deals that fall in your lap.

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Garrett Phelan

Rental Property Investor · Tulsa · Member since 2022 · 9 posts · 9 votes

1mo

It sounds like you are in a great spot. Congrats.

One thing I would check first is whether extra principal actually lowers the payment.

On a normal mortgage, it usually does not. It lowers the balance and saves interest, but the payment usually stays the same and the loan just ends sooner. Some lenders will recast after a lump sum, but not all of them. I would ask.

The HELOCs are different. Since they are revolving, paying those down should lower the interest you are charged right away.

So I would probably start there.

If your main goal is to own everything free and clear, then I think rate order makes sense. The 8% seller finance and 7.5% HELOCs would be high on my list. I would be in no hurry to pay off 3.25% money.

The HELOCs also help cash flow now, which is nice. Pay them down, lower the interest, free up more cash, then use that to keep attacking the debt.

I would also check whether the HELOCs are variable and whether the seller finance note has a balloon or prepayment penalty. Either one could change the order.

Big picture, I would look at the whole portfolio, not just one loan at a time. Fifteen doors with some 3.25% debt is a strong position. Paying that down might feel good, but it may not be the best move if you still want to keep buying. Especially when short term Treasury funds have been paying close to that while keeping the cash liquid.

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Ken M.

Investor · Get yourself trained before doing something inadvisable. · Member since 2024 · 3k+ posts · 1k+ votes

1mo

Quote from @Vitaliy Zima:

I've been buying properties last several years but I have an end goal of owning a "small and mighty" portfolio where I own all homes outright. I'm at almost 15 doors now and I haven't really started paying off any homes as I get too excited with constant prospects of good buys so I just end up buying more 😅

How do I determine which homes I should pay off first? I have mortgages ranging from 3% all the way up to 8%. Logic says to pay off the higher interest ones, but this is new area to me.

Is there any math behind which homes to pay off first? What are some things to consider? Some examples of some loans I have

-180k left with a 3.25%

-78k left with 8% seller finance loan

-115k left with 6.25% interest

I also have 2 outstanding HELOCs open with outstanding balances. That's simple interest loans. Balances are 110k and 50k outstanding. Both are at 7.5% interest.

Be aware that paid off houses are being targeted for title theft.

Also, when you have a mortgage, the mortgage company shares the risks with you. What you might want to consider is borrowing **wise borrowing** against them to buy your next houses.

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Paying off mortgages

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