I am going to pay off one of my mortgages on my rentals this week in additional preparation for Financial Independence and Early Retirement (FIRE). It is non-owner occupied, so a refinance would only drop the interest a little bit, and cost a few thousand to do it. Here is how I plan to do it, and I think it’s one of the best ways to pay off a mortgage.
Current Balance: $188K, Current Interest: 5.5%, P&I Payment: $1,145.51, remaining years ~26.
This is the mortgage for my third four-plex. Paying off the mortgage would add an extra $13,746 to my bottom line. Since some of the amount is principal reduction, not all of it would be taxable. It is about $10,000 in interest I would not have to pay, or write off. So my taxes might go up ~$3K or so. My passive income stream would go up almost another $1,000 per month when it is fully paid off.
I am going to use some investment account money that is currently earning .01%, some cash earning 0%, some home equity line of credit (HELOC) money that is on a promotion at 1.9% for about another 5 months or so, and then the HELOC adjusts to prime, which is 3.25%.
So I look at it as similar to buying an annuity with an immediate payout at 5.5%. It would be like an annuity with 100% of principal returned after 26 years. All principal returned at death. An annuity guaranteed by Real Estate I own, rather than some insurance company. And I have the option to cash out (by selling) at any time, without penalty. It should decrease the financial risk of retirement, just a bit. It is also sort of like putting money in a 5.5% bond fund, a mortgage bond.
I would deplete my cash balance just a bit, and I would have the HELOC paid off by the time I retired. The goal would be to have it paid off in less than a year. While the HELOC was in place, it would save 3.6% over the first five months (~$2800), and then save ~$4,200 per year when the promotional period ended. The interest savings would go down as the loan balance dropped. Currently I am paying over $10K per year in interest on that loan.
Once the HELOC is paid off, it would also give me 12 rental units that I have paid off, plus my residence. FIRE is looking quite a bit better as I get closer to my retirement date and analyze the numbers. Lately, I just do not have the ambition or desire to put up with the Megacorp BS. It’s not that bad, I am just finding that I do not have the time or ambition to do it.
The downside is I will have less cash, but still well over two years of cash reserves. I can generate a bit of cash even quicker without the mortgage payment. I will lose a major milestone that I have accumulated in investable assets for a bit. I find that I have too much just sitting at .01%, so I may as well put it to use. Interest rates should also be low for a few more years, certainly below 5.5%.
Since the HELOC is an adjustable rate, if there is two years at 3.25%, and two years at 7.75% the interest expense would be a wash. Of course it depends on principal balances and the exact interest rate, but in a linear world it’s close.
The downside is by taking out a HELOC, I put another live lien on my personal residence. Since my house has been paid off multiple times, I always hate to do it.
Once this is done, I will have 2-duplexes and 2-Four plexes paid off. With 24 renters total and an average rent of just over ~1,000 each, there will be more that goes to the bottom line. There are still lots of expenses that come out of the rent though… I will still have three mortgages for the other three 4-plexes. The total P&I for those are $3,340. It is still not a bad amount owed for 24 units.
I am thinking it is time to begin my ride off into the sunset, rather than climb the next peak. As I think about how much enough is, I may not need much more to live the way I want to live.
Are you planning of paying your mortgage off early?