Mr. FAF and I bought our first house in 2016. We’ve been trying to save up and put all of our extra income each month towards the mortgage.
Our goal after our house is paid off: (1) buy a rental property or (2) move to another house and turn our current house into a rental.
It will take years before we can finally pay off the mortgage. Many real estate investors would say that I can totally invest in real estate while paying off the primary residence. But I don’t want to take that route for three reasons:
1) I hate debt.
It’s that simple. I grew up in an average if not lower-middle class family. My parents didn’t have much, but we tried to live within our means.
Sometimes (or most of the time?) I felt like we were really poor. My parents had fights about finances pretty often, and I hated it when it happened. I don’t want Mr. FAF and I to be in the same situation as my parents.
I don’t like borrowing money from other people and also don’t like it when other people borrow money from me. I only lend money to friends when they’re really in need and I know they’ll pay me back.
Even if they don’t pay me back, it’s still ok with me if those are the friends who have helped Mr. FAF and me a lot when we were in difficulty. But our friends rarely borrow money from us since they know we don’t have a lot.
When I know I have money borrowed from other people, I feel burdened. They money or the things that I have, I feel, are borrowed from other people and are not really mine.
If one mortgage already stresses me out, I don’t think I’ll like to double that amount of stress with two mortgages – one for my primary residence and one for the rental.
2) A paid-off house can protect us against market instability.
It’s a big risk to put our primary residence at stake in order to obtain another mortgage for a rental. If the rental is not doing well (i.e. tenants not paying), I don’t want to fall behind on our mortgage payments and have my family end up in the street.
Real estate investors often talk about leverage – the ability to use mortgages to expand their real estate portfolios and not put all eggs in one basket.
For example, if you have $100,000 in cash, you can either (1) tie it all up in one paid-off house or (1) borrow money, put $20,000 down plus $5,000 in closing costs on 4 different houses, and use rental income to cover mortgage and expenses for those rentals while possibly making profits (cash flow).
That all sounds great unless the tenants decide to stop paying rent for a couple of months and put your portfolio at risk for serial foreclosures. I want to be on top of the game.
Even if tenants stop paying rent and I can’t evict them after months of taking them to court, I can still feel good about having a paid-off house and being able to pay mortgage on the rental.
2) A paid-off house sets a good foundation for future investment.
The current interest rate for mortgage is 5% (Mar 2017). Many argue that you should not pay off your mortgage and invest it in the stock market or other channels for interest rates as high as 7%-10% instead.
However, as Dave Ramsey argues, that high interest rate depends largely on the market. The math seems to work, but it doesn’t factor in the risk or uncertainty associated with the market. If the market crashes, your investment can plummet or disappear into thin air (Hello, 2008 financial crisis!).
After Mr. FAF and I pay off our mortgage, we will have the freedom to choose whether to invest into rental property or mutual funds or both.
So there you have it. Our plan for the future: Pay off the mortgage and invest in rental property. Paying off the mortgage is not a right or wrong answer. It depends largely on how much risk you’re willing to take.
– If you’re a risk-taker, leveraging might be your cup of tea.
– If you’re risk-averse like me, welcome to the paying-off-mortgage-early club!