Background: My wife and I are DINKs and we are grateful to earn enough to max out our 401Ks. When we married, we each had a home, one of which we decided to keep and rent out instead of sell (and it's doing reasonably well!) The remaining mortgage on the rental is around $95k on a 15-year fixed loan with 2.625% interest. We have around $60k in liquid savings outside of retirement accounts.

My question is this, while mathematically it makes sense to invest the rest of our disposable income in IRAs and then a taxable account, I feel like having two mortgages puts us at increased risk in case one of us were to lose a job.

For context, my original plan, which was a bit Ramsey-an was to pay off both mortgages (our primary residence mortgage is a 30-year fixed at 2.25%), but I feel like that just doesn't make any sense.

I am curious about others' thoughts on either spending the next several months saving in a high-interest savings account then paying off the rental mortgage, thus freeing up around $800 a month in income, or simply investing all extra income into IRAs and taxable accounts.

I appreciate any insights or opinions here!

EDIT: Because people are requesting more personal info.

-We are not in particularly high-risk jobs (I'm a SWE and my wife is in architecture/engineering)

-Rental total cost per month is $1050 and rent is $1250

-Remaining mortgage on rental is $94k and primary residence is $245k

Comments

You must log in or register to comment.

84740296169 t1_jacpi29 wrote on February 28, 2023 at 2:23 PM

#2,104,887

At that interest rate it make zero sense to pay off the mortgage

TeslaSaganTysonNye t1_jacptjx wrote on February 28, 2023 at 2:26 PM

#2,104,998

>I feel like having two mortgages puts us at increased risk in case one of us were to lose a job.

That's a fair assessment, but if your numbers are good this risk becomes less and less something you need to concern yourself with.

>For context, my original plan, which was a bit Ramsey-an was to pay off both mortgages (our primary residence mortgage is a 30-year fixed at 2.25%), but I feel like that just doesn't make any sense.

You are correct. Mathematically speaking it doesn't make sense to pay down cheap debt. However, it's dependent on your risk appetite.

>I am curious about others' thoughts on either spending the next several months saving in a high-interest savings account then paying off the rental mortgage, thus freeing up around $800 a month in income, or simply investing all extra income into IRAs and taxable accounts.

I do my best to take emotion out of some decisions and let number do the talking. A little of both won't hurt either.

corumgold OP t1_jacpwwd wrote on February 28, 2023 at 2:26 PM

#2,105,025

Replying to 84740296169 (#2,104,887)

I appreciate the insight, and you're right - mathematically! I'm also thinking of the psychological aspects of not having 2 mortgages

corumgold OP t1_jacq0j0 wrote on February 28, 2023 at 2:27 PM

#2,105,058

Replying to TeslaSaganTysonNye (#2,104,998)

This was helpful! Thank you!

84740296169 t1_jacq2jk wrote on February 28, 2023 at 2:28 PM

#2,105,073

Replying to corumgold (#2,105,025)

If it makes you feel better and that feeling is worth ~$2000 a year then go for it

Flanky_Bwai t1_jacq8wh wrote on February 28, 2023 at 2:29 PM

#2,105,138

In short. One house is paying itself off and both have abysmal interest rates. I think it would be wise to invest your savings. Even a 3% yearly return (very low) would be more beneficial than paying off your mortgage.

Might as well buy another rental ;)

corumgold OP t1_jacqj0c wrote on February 28, 2023 at 2:31 PM

#2,105,232

Replying to Flanky_Bwai (#2,105,138)

You make a good point! I think my Ally savings account is currently earning 3.4% interest, which is crazy to think… Thank you for your input!

Werewolfdad t1_jacqjmo wrote on February 28, 2023 at 2:31 PM

#2,105,237

Replying to corumgold (#2,105,025)

It seems like you’ve come around but also read this

Mortgage or invest: https://reddit.com/r/personalfinance/comments/zssug0/_/j1ddljd/?context=1

Further keep in mind that rental mortgage interest is always fully deductible so your rate net of tax is even lower

corumgold OP t1_jacqp0s wrote on February 28, 2023 at 2:32 PM

#2,105,281

Replying to 84740296169 (#2,105,073)

Can you enlighten me a bit on where you get the $2000 figure from? Just curious!

corumgold OP t1_jacqtaw wrote on February 28, 2023 at 2:33 PM

#2,105,307

Replying to Werewolfdad (#2,105,237)

Thank you! I will peruse this now!!!

[deleted] t1_jacqths wrote on February 28, 2023 at 2:33 PM

#2,105,309

[removed]

[deleted] t1_jacr2f5 wrote on February 28, 2023 at 2:35 PM

#2,105,374

Replying to 84740296169 (#2,105,073)

[deleted]

84740296169 t1_jacr4fm wrote on February 28, 2023 at 2:35 PM

#2,105,394

Replying to corumgold (#2,105,281)

Yearly Interest on $95k loan a year @ 2.625% = $2493.75

Yearly Interest on a Treasury bond earning 4.6% on $95k = $4350

Difference of $1876.25

corumgold OP t1_jacrfci wrote on February 28, 2023 at 2:37 PM

#2,105,476

Replying to 84740296169 (#2,105,394)

Thank you for this!!

CAicefishing t1_jacuaoc wrote on February 28, 2023 at 2:58 PM

#2,106,386

Same situation here. Invest don’t pay off the mortgage. If your worried about losing your job, stick the money in a HYSA or treasuries. Don’t forget that $3-5k in interest you’re paying is lowering the taxable income on the property too.

Imaginary_Shelter_37 t1_jacuf4a wrote on February 28, 2023 at 2:59 PM

#2,106,433

If you feel as if two mortgages puts you at increased risk in case of job loss, then maybe you need a larger emergency fund. Increase your emergency fund to a level that makes you comfortable, then invest extra income.

[deleted] t1_jacuogb wrote on February 28, 2023 at 3:01 PM

#2,106,534

[removed]

redditenjoyer737 t1_jacvgoo wrote on February 28, 2023 at 3:06 PM

#2,106,784

Replying to corumgold (#2,105,476)

When you look back on your life and stack up all of your chips into retirement, is that $1,800 going to matter much in your net worth?

corumgold OP t1_jacxqi1 wrote on February 28, 2023 at 3:22 PM

#2,107,490

Replying to redditenjoyer737 (#2,106,784)

Would you mind elaborating a bit more?

corumgold OP t1_jaczn7f wrote on February 28, 2023 at 3:34 PM

#2,108,053

Replying to CAicefishing (#2,106,386)

Thank you! Someone else mentioned just increasing the emergency fund, which seems similar to your advice… I'm glad to have your insight!

Knipfty t1_jad193e wrote on February 28, 2023 at 3:45 PM

#2,108,560

Coming from the POV of having no mortgage, I'd say work on paying them off. Start with your primary residence. Then move on to the rental.

You are investing via your retirement accounts. As long as that is at 15% or more, you are fine.

Having no mortgage payment is a wonderful feeling. One that goes beyond dollars and cents.

Once those mortgages are paid off, then you crank up your investing and live like no one else.

redditenjoyer737 t1_jad2d42 wrote on February 28, 2023 at 3:52 PM

#2,108,970

Replying to corumgold (#2,107,490)

As in what is going to matter more to you - an extra $1,800 or waking up knowing that each morning, that dirt under your feet is yours and yours alone and that you're no longer making payments on anything (except to Uncle Sam)

Jboycjf05 t1_jad4ffz wrote on February 28, 2023 at 4:06 PM

#2,109,658

Replying to 84740296169 (#2,105,394)

That 1800 difference should be smaller. They would have an extra $800 of income each month that could be invested instead. So if you take that into account you're looking at like $300 a year in investment income, bringing the difference down to like $1500.

LuckFinancial988 t1_jad6dcy wrote on February 28, 2023 at 4:18 PM

#2,110,287

Invest it. If you lose a job and need to pay it off, it’ll still be there; but it’ll have a larger balance. There’s not much downside to this situation.

LuckFinancial988 t1_jad6k93 wrote on February 28, 2023 at 4:20 PM

#2,110,344

Replying to Knipfty (#2,108,560)

Not all debt is bad. That money they’re investing isn’t going anywhere where it can’t be used to pay off the mortgage in an emergency situation. Sounds like you subscribe to the Dave Ramsey mentality.

corumgold OP t1_jaddc9n wrote on February 28, 2023 at 5:03 PM

#2,112,529

Replying to Knipfty (#2,108,560)

I appreciate your insight! I can imagine that is a great feeling, and I appreciate getting to hear both sides

corumgold OP t1_jade8y7 wrote on February 28, 2023 at 5:09 PM

#2,112,813

Replying to LuckFinancial988 (#2,110,287)

Thank you! I suppose the only nightmare situation would be if we were to lose our jobs AND the market tanked… But, you can't make decisions out of fear. I think a good compromise might be upping our emergency fund a bit just to be safe.

84740296169 t1_jadxqfa wrote on February 28, 2023 at 7:11 PM

#2,118,998

Replying to redditenjoyer737 (#2,108,970)

That's just annual savings, in terms of present value (assuming he goest through the whole loan this way) it's about $10,000 in savings. PV of $800 payments a month for 11 ish years at 4.61% compared to $95000 on the loan.

yamaha2000us t1_jae9sjr wrote on February 28, 2023 at 8:28 PM

#2,123,092

Are you in that High of a Risk if one person loses their job?

The Rental should be paying for itself.

You really need to provide more information for anyone to give you insight on what is happening.

ct-yankee t1_jaeavuc wrote on February 28, 2023 at 8:35 PM

#2,123,528

Mathematically, at those interest rates, it doesn't make sense to pay off the house. While Dave Ramsey will tell you otherwise, you are better off financially by investing the cash (even in a HYSA at today's rates) and not pay off the mortgage. Ramsey has great advice about avoiding high cost interest debt, but that is where the quality of his advice ends. (Investment and otherwise.)

If your worst case scenario happens and you lose a job/earning is impaired, you'll still have the cash invested to pay it off should that be a choice you make.

Some are really driven by not having a mortgage and the feeling of owning your home. There is nothing wrong with that either, but it is not the best financial decision given the data points you've shared.