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Mortgage Payoff Race Update – Changing Priorities?

Last September, Jason from Live Real, Now and I made a bet.  We are racing to see who can pay off a mortgage first.

Our Rent House

At the time of the bet, Mr. BFS and I had about $24,500 left on the mortgage on our rental house.  Jason had a similar amount left on his home loan.  The rules on my end were that I needed to pay for our closing costs for the new house, save up $20,000 of padding again, and then pay off the first mortgage without touching any of that padding.  Jason is going to pay off a vehicle loan and then attack his.  Whoever loses will visit the other person’s place…me in “hell” or him in “the frozen arctic”.  :-)

Mortgage Payoff Race Update

Well, we saved up the $20,000 in padding by the end of last October.  Yay!  But things sort of slowed down from there.  With two house payments and two sets of property taxes, our cost of living has nearly doubled.  You can see our budget here – with taxes, we need to bring in $8000 a month.  We bring in way more rental income too ($2300 per month), but generally, our self employment income has settled at just above what we need to pay for taxes, basic bills, very basic savings, and our little lifestyle luxuries like lawn care.  Basically, we only save the rental income for the mortgage payoff.

From October 2012 to now, we have set aside $15,000 in a savings account for the mortgage payoff.  We have $22,000 left to pay.  If things continue as they are now, we should be able to make our last payment ever sometime between August and October of this year.  But here is the deal…

Changing Priorities

Life’s priorities don’t just stay the same forever, right?  Well, ours don’t at least.  Last year, taking on a huge, new mortgage made us want to pay off the remaining part of our old one SO badly.  Now we have tasted rental income and wonder if we rather refinance our huge mortgage and start saving for another rental property.  Or invest more in the stock market.  Or just keep cash on hand for a new-to-us vehicle since mine has been slowly dying for the last 8 years since the Chevy Aveo sucks and hubby’s Toyota Prius has hit 110,000 miles and we don’t know what to expect.  Overall, we wonder if we should use the $20,000+ in cash that we will have saved up within the next few months to pay off a 4.5% mortgage.

I do hate debt.  I would love to be completely mortgage-free within the next 10 years or less.  But I also would love to have some more rental property since it makes so much sense in our area.  $125,000-$150,000 homes that rent for $500 per month or more than what their mortgages and property taxes cost is just hard to pass up.  We might try to do both since I am a fan of having your cake and eating it too (what’s the point otherwise, right?) BUT I wanted to throw it out there that we may go a different way.  Nothing is decided yet, we are still saving, and we are on track…just don’t know if we will stay on this specific track all the way through…

Do your goals change like this too?  How often do you think your priorities seem to switch?  What do you think about our situation?

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24 comments to Mortgage Payoff Race Update – Changing Priorities?

  • I would pay off the mortgage then focus on investment properties. You’re so close!

  • if your rental market is really that great, and you make smart decisions with the properties you purchase, I would say go for the rental properties. You are right, that a 4.5% mortgage that is essentially paying itself, is no real burden to pay off early. One other consideration however, would be the greater cash flow you would have once the mortgage on your first rental was paid. You could take that entire $2300 each month and sock it towards your new current mortgage, or towards a new rental. I think I would take a portion of the savings you have and pay down the mortgage, then wait to get the rest paid off in due time. Then use the rest of your savings on the down payment of a new rental home, and go from there. Before long, you could have started a rental empire!

  • Congrats on having such a huge savings! Bet or not, I think this would classify you as a ‘Winner’ :)

    Having been a landlord, I would caution about going at another property after having been a landlord for a short period of time. (A year? I can’t recall when you started). We had to go a few months one time without a tenant and that hurt. You do have that cushion to fall back on, but if the vehicle situation is likely to change, due to the vehicles deciding they don’t want to work any more, I would make sure those new expenses are accounted for first.

    I’d certainly push at getting the mortgage on the rental paid off, but hold off on getting rental #2.

    Things to consider.

    Joe

  • 4.5% is nothing. Keep the mortgage and go for more income. If you get a few rental properties and manage them well, you could be “retired” soon. The middle class saves money. The rich MAKE money. I say you go for making money!

  • Here is my advice on your situation. Take it for what it is worth. I paid off my main mortgage last year, and then bought a duplex in cash. I love having the rental property and want to expand in the coming years, so I understand how you are feeling right now. But, I would never expand at the expense of of having two or more mortgages without having at least one property owned free and clear. Right now things are going good for you, but should the economy tank you would be in a world of hurt. And frankly, should your online income dry up you would also be in a bad situation very fast. Not only would an economic crash hurt your main income, but you might also have trouble finding renters. And in a bad economy, you aren’t going to be able to sell your properties for what they are worth, if at all. You could potentially lose three homes (your main one, your old one/rental home #1, and the proposed new one/rental home #2). Worst case? Yes… but it can happen and it DID happen to many people not that long ago. On the other hand, if you at least pay off your original home/rental home #1 you are guaranteed a roof over your heads should things get bad. Once that is paid off, then you can refocus your efforts towards saving for additional rental properties. Trust me, there is no better feeling than the security of knowing you own a house outright. Whatever you decide, I know you will be successful at it because that is just how you roll. :)

  • Personally, I’d pay off the rental mortgage. As previous posters have mentioned, it massively reduces your risk and your cash flow requirements. Given that it provides so much income, you will be easily able to save up for an additional downpayment, plus be able to quickly pay down an additional rental, should you choose to do so. I’m not sure what mortgages are going for these days where you live, but 4.5% is still a fairly high after-tax rate of return to achieve on investments.

  • Wow, great story. Thanks for the clear financial breakdown.

  • I don’t know what I would do in your situation but I personally do know priorities change. We were initially going to pay off my fiancée’s student loans by the end of the year but we decided to buy a house instead as it made more financial sense and would happen in the next few years anyway.

  • Of course, your goals change and they should. We are living aren’t we? Therefore change is inevitable. The changes should not be radical. Look out 10 years from now and determine wher eyou want o be and start now. It is called strategic planning.

  • I would probably pay off the mortgage, but seeing as you are so close, house prices are going to rise after 2013, and interest rates are not going to stay low forever, it might be smart to use the money for a down payment. Calculate how long it will take for you rental home to pay off by itself. Maybe it’s only 1 year?

  • Normally I would say pay off the mortgage. However, considering your in one of the best cities economic wise, I would say go for the rental property. You can get quite a bit of money from renting houses in Houston as people influx here for the jobs. I have friends renting two bedroom houses for $1500.00, but you can get more than that. With the rental property you could probably pay off your mortgage pretty quickly.

    It’s good to have goals like this. I have habit of making my goals an all-or-nothing thing and stressing myself out, LOL, so I try to be flexible. Life can throw us some curve balls sometimes, and we have to be flexible.

  • I’d pay the rental mortgage off before changing anything else. At that point you have a lot more freedom – your rental income can go to finance any of those other goals you’ve mentioned, without needing to touch the rest of your budget. If you’re set on buying a second rental property I’d suggest paying off the first mortgage, taking the rental income to save up for a new down payment and researching what sort of multi-tenant properties you might be able to invest in.

  • Life’s priorities only seem to stay the same for a few months at a time. I’m constantly shifting mine too :)

    I would pay off the mortgage on your rental house and then re-evaluate. That’ll cut $500/month off your expense sheet and leave you with a lot more flexibility. Plus, you’re so close to paying it off!! Have you considered making extra principal payments each month instead of keeping the money in a savings account? That would save a bit more in interest.

    Are you guys investing in self-employment retirement accounts? I would investigate that, making sure you’re not just using Roth IRAs now. I would give it another year with this rental property before you consider buying another one!

  • The only thing constant about life is change! Its very normal for priorities to change, it just means you might be visiting the frigid north. :) We had a similar situation when I decided to take an extra year off work with your young children, and then bought a home on the lake to renovate. Needless to say Derek’s FreeAt33 has since been delayed. :)

  • Right now we’re looking at our priorities again and trying to decide if we want to buy a rental property. We think it makes sense with the low interest rates and low housing prices, but it’s still a little scary since our house isn’t paid off (and won’t be for quite a while). But the upside of buying is we’ll have the rental income to put on our mortgage to pay it down faster. I’ve talked to my mom about this and she thinks it’s risky, but we think it’s a “risk” worth taking. Plus if we needed to we could rent our place and make the mortgage payment in rent. Finances can be confusing. Do what makes sense to you after doing your research. Others might not agree, but they aren’t in your shoes :-)

  • Take my advice with a grain of salt (since I’m not a home owner at all!): I’d pay off that first mortgage since you are really close, then refi the big mortgage and save up for another rental property. Even if interest rates rise over the next 12-18 months, they will still be low.

  • Thanks for all of the advice! I think we are leaning towards paying off the mortgage, refinancing our big one if we can, and then we’ll see where the market is for property at that point…

    @Call Me, yeah, I think that’s where we are leaning.

    @Adam, thanks for the advice!

    @Joe, yeah, we have a couple of reservations about expanding right now too.

    @Kevin, thanks for the motivation!

    @Denise, thanks for the advice from experience!

    @Anne, good point.

    @Lance, yeah, priorities change…good luck!

    @krantcents, thanks!

    @Savvy Financial Latina, it would take 4-5 more years for the rental to pay itself off since the monthly mortgage is only $500 ($425-$450 goes towards principal) and there is $22,000 left.

    @Melinda, yeah, flexibility is sort of necessary for your sanity. :-)

    @Sheryl, good idea.

    @Leigh, we made a ton of extra principal payments up until mid-2012, then we slowed down in case we need the cash for an emergency before paying off the other house. It’s costing us about $50 a month in interest, but that’s pretty cheap for peace of mind insurance. :-)

    @Mandy, LOL, I just sort of hope that Jason does the same thing and then our bet is just dropped, hahaha.

    @KK, good luck with your decision too!

    @Little House, I think we are doing exactly this. :-D

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