Many people disagree on whether early mortgage payoff is a good idea or not. This topic is highly debatable since so many factors must be taken into consideration. Who doesn’t dream about paying off their mortgage and freeing up all that monthly cash? Yet, it comes down to two options 1) pay your mortgage off early or 2) invest the money instead. The answer depends on each person individually. Let us first take a look at the advantages and disadvantages of paying off your investment property mortgage early.
Advantages of paying off mortgage early
1. Better cash flow
Paying off your investment property mortgage early will save you lots of money. Once you pay off your mortgage you will have extra space in your monthly budget. If you are an owner-occupant, you will keep a big piece of your paycheck. And if you are a real estate investor, you will increase your rental income. Either way it’s a win-win scenario. More cash flow for you!
2. No more interest payments
The longer you carry a mortgage, the higher your total interest amount will be. The higher the interest rate on mortgage, the better it is to pay it off early. Better a dollar in your pocket than the bank’s.
3. Allows you to purchase more rental property
Paying your investment property mortgage early will allow you to purchase more property. You will free-up your money and can save up for a bigger down-payment, which means you can pay off that mortgage early, buy another property, and continue this cycle.
4. Reduces your debt-to-income ratio
Debt-to-income ratio is one way lenders and mortgage lenders see an individual’s ability to manage monthly payments and pay debts. When you pay off your investment property mortgage early, this reduces your debt-to-income ratio and gives you more opportunities to purchase investment properties.
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Disadvantages of paying off mortgage early
1. Lose out on mortgage interest deduction
When you don’t pay off your mortgage you lose out on mortgage interest deduction, which means more of your rental income is taxable at your regular tax rate. You lose this tax benefit that many investors rely on.
2. Your time until retirement
If you pay off your investment property mortgage early, you take away your means to invest for retirement or long-term goals. Your timeline until retirement may be a factor to consider before paying off your mortgage early. Having multiple investments can secure your retirement.
3. You cannot borrow it back
A lot of the times, paying off the mortgage means it’s difficult or expensive to borrow it again. There are people who call back their lenders a year later saying that they need cash and find themselves no longer qualified to borrow.
4. You won’t be able to invest elsewhere
Paying off your mortgage won’t allow you to invest in other properties. For many people, it would make more sense for them to invest the funds elsewhere so they can establish financial savings in other portfolios.
What should YOU do?
When you begin to consider paying off your investment property mortgage sooner rather than later, you must first examine you financial situation and both short-and-long term goals. What is your current rate and term as your loan? Do you carry several other debts like car payment or other loans that you wish were off your plate? What is a more valuable goal to you – paying down high-interest rate debts like credit cards or paying toward owning your home free and clear? So many questions come to mind and so many factors must be kept in mind to decide on whether or not paying off mortgage early is good or not.
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If you are a person that chooses to pay off your investment property mortgage early here is how to do it:
Make bi-weekly payments
This is a great way to start when you plan on paying off you mortgage. Bi-weekly payments aren’t magic but they take advantage of the fact that there are 13 weeks in each year, not 12, and there are 52 weeks in a year, not 48. So by paying one half of your mortgage payment every other week, you end up making one extra full payment each year! So for example, if you have a fixed rate mortgage just under $160,000 to be repaid over 30 years at 6.5% interest. Your payment is $1,000 per month or $12,000 per year. If you keep that payment schedule, over the life of the loan you will pay a total of about $202,000 in interest. But if you make biweekly payments, you pay half the monthly payment, or $500, every other week. That means you pay a total of $13,000 per year instead of $12,000. Keeping a biweekly schedule reduces your interest expense from about $202,000 to $184,000, saving $18,000. Not to mention that you would pay off the loan in just over 27 years instead of 30.
Add an extra amount each month
If you are determined to pay off your investment property mortgage early, every little bit helps. Instead of saving to make an additional large payment once a year, pay an extra amount each month. So for instance let us say you have a $100,000, 30-year, fixed-rate mortgage at 4.5%. If you add an extra $100 to your payment each month, you will pay it off almost 9 years earlier and save over $26,000 in interest. Every little counts!
Round up your payments
If you don’t have a lot of extra money to put towards paying off your mortgage early, you could simply round up your monthly payments. For example if your payment is $870 why not just pay $1000? Of course you have to make sure that the extra goes towards paying down you principal balance.
Get rid of private mortgage insurance
This is charged by lenders when you take out a conventional home loan with less than a 20% down payment. But you can request a cancellation after you pay down your mortgage balance to 80% of the original value of the property. This will definitely make paying off your investment property mortgage easier.
The idea of paying of your mortgage early or not is a personal choice that depends on each individual’s financial situation. For every situation, there are pros and cons and the best way to decide is by taking the long-term consequences and goals into consideration. Be sure to check out Mashvisor for great tips and advice for buying investment properties.