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Yo. Ya’ll are so wise with this shit. Thank you.
The pure mathematical answer is that you only pay it off if you don’t think you can earn greater than 4.25% elsewhere
The practical answer, as B1 mentioned, is that it is largely dependent on your risk tolerance.
Personally, I wouldn’t pay it off. The flexibility is invaluable to me, I can make more money in the market, and it sounds like you don’t have cash flow issues
If you need the liquidity, keep the investment in something more liquid. Paying off the mortgage early only makes sense if you can’t find a safe place to get a higher return than your current mortgage interest rate.
Debt is often good. Frees up money for other things. Don’t pay it off unless you think you can’t otherwise get a 4.25% return on your money.
Perfect example from myself, wife and I have over $100k left in federal students loans at little under 4% interest. We also have $500k+ in equities in our brokerage account. Not only is inflation helping devalue our student loan debt, but the money we could use to pay off the student loans is earning way way more than 4% in our brokerage account.
Great points. Adding to it are the tax advantages. You deduct mortgage interest, student loan payments, etc. The tax shield is the keystone to debt financing
I’ve been wondering the same thing and in a somewhat similar situation.
Another option is to use your capital for a down payment on another rental property? Probably just depends on your risk tolerance.
Also depends on mortgage interest rate. 3% is not bad debt.
Maybe try the personal investment chatter bowl. Lots of helpful resppnses there for these typenof questions.
Paying 4.25% interest rate on rental property, fwiw
Echoing other posters, refi even if you don’t do cash out and pay the minimum to increase cash flow for other investments.
Chief
With inflation as it is, I wouldn't pay early, even at 4.25%.
With the housing market the way it is, you’ll net a gain when you sell the rental property anyway. Key is to sell it before you buy another place, that way you have liquidity for a down payment if needed.
Just sold my old house last year and used half the net to put 20% down on our forever home. Kept the rest for DIY and Reno projects that we just finished over the last 4 months. Now the remaining cash is going into the market.
1. Refinance if you intend to keep rental property long term. If youre planning on cashing in on the hot market, dont bother. Not sure what rates are if you refinance so id say do it if it saves you a substantial amount like 400 plus a month.
2. Pay more towards the principal amount every month. (An extra $1500 a month perhaps?)
3. Lump sum payment of maybe 30% of the remaining balance as opposed to completely paying it off.
4. You can always take out equity from this property to use as a down payment for next home. Although im not too familiar with this strategy but i know real estate investors do this all the time.
Refinance, pull out the cash to purchase another rental property. Interest rates are extremely low
Definitely refi if you can. Another piece of info not discussed is how much are you netting from rental income? Is it enough to service the debt and how consistently is it coming in? If the tenant is able to service the debt, this gives you further flexibility and reduces your need to pay off the rental property’s mortgage yourself