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Choosing the right kind of mortgage to use as a real estate investment vehicle, as well as the safest way to pay it off, can be a difficult decision for potential investors.
Depending on your investment objectives, you may want to consider the benefits of keeping your capital as liquid as possible. You can use it to continue expanding your real estate holdings to build additional real estate equity. Other investors, however, may prefer to pay off their entire mortgage early, to alleviate their debt burden.
Before we dive into the difference between building real estate equity and paying down debt vs maintain that debt, we want to offer you a free strategy call to discuss which option is right for you in context with your portfolio. So, if you are ready to learn the benefits and drawbacks of debt vs real estate equity, click the link below to get started today.
Which option is right for you?
Ultimately, whether you should pay down your mortgage aggressively or not depends on your specific circumstances and the terms of your loan. There are six variables investors should consider before deciding whether or not they should pay down their mortgage in advance, or use their real estate equity for further investments. These variables include:
- Expectations for inflation;
- Income tax rate;
- An assumed rate of return;
- Your mortgage interest rates;
- Real estate appreciation in your area;
- The current value of your asset.
The type of mortgage you have can also play a role in your decision. If you have a closed mortgage on your investment property, for instance, you may want to avoid paying it down too aggressively, to avoid unnecessary bank fees.
If you’ve got a high-interest open mortgage, however, you should plan to pay off the balance as quickly as possible, or at least reduce the amount you owe on the principle. Following this will improve your negotiating standpoint when it comes time to refinance.
It’s important to take these variables into careful consideration when determining whether or not you should pay down your mortgage or maintain your liquidity. You also need to think about personal factors, like your investment objectives, when deciding how you plan on paying your mortgage down.
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Benefits of paying down a mortgage to Build real estate Equity
There are obvious benefits associated with paying down a mortgage aggressively. Chiefly, doing so can elevate your real estate equity and overall net worth. Here are just some of the most significant reasons to consider paying down your investment property’s mortgage as quickly as possible:
You’ll save on Mortgage interest
One of the primary benefits of paying down your mortgage quickly is it allows you to save a substantial amount of money on interest payments and bank fees while building real estate equity. Even slightly increasing your monthly payments can end up saving you thousands of dollars in interest payments in the long-run, so long as you avoid hitting the prepayment cap outlined in your mortgage terms.
It’s healthier to live debt-free
For many people, the presence of debt in their lives becomes a psychological health concern. If you’re worried about carrying too much debt, and the way it’s impacting your lifestyle choices and decision-making abilities, consider paying your mortgage down more aggressively. Doing so could provide you with greater mental clarity.
You’re guaranteeing income
Often, mortgage payments are the highest operating expense when it comes to managing your rental property. Paying off the mortgage means you’re much more likely to earn a consistent income off of your rental property while building real estate equity at the same time. You’ll be putting much more cash into your pocket, rather than into the bank’s coffers when managing a paid-off asset.
You can eliminate mortgage insurance
If you own multiple properties, or if you paid less than 20 percent down when you purchased your investment property, you’re likely carrying mortgage insurance. Paying your mortgage off means you won’t have to continue shouldering this monthly expense, which could be eating into your margins.
Benefits of keeping your mortgage
For all the benefits associated with paying down your mortgage, there are also some drawbacks. You might be surprised to learn there are advantages to maintaining a mortgage, instead of paying it off outright.
Lack of liquidity
It’s always good to have accessible cash-on-hand. If you sink your liquidity into paying down an existing mortgage, you may not be able to afford necessary repairs if something were to happen to that property. Similarly, if your assets are tied up in hard investments, you won’t be able to take advantage of new investment opportunities.
Mortgages don’t affect value
Maintaining a mortgage on your home in no way adversely impacts its value. This means you can still count on your investment asset to continue appreciating, whether or not you’re carrying debt on it. When it comes time to sell off your property, nobody will care if you still owe on the mortgage.
Inflation reduces savings
When you pay down your investment property on a fixed rate, you’re paying down the same amount each month for the duration of the life of the loan. This means as the currency inflates—which it almost certainly will over 30 years—your monthly payments will begin to feel smaller and smaller, and your interest fees will seem insignificant, in light of the future devaluation of the currency.
More difficult to diversify
If you’re heavily invested in a single asset, you won’t be able to spread your capital into other areas of investment. Any savvy investor will tell you it’s dangerous to have all your available capital tied up in a single project, even a relatively stable and dependable one, like real estate. If the worst were to happen and your local market crashed, you’d lose your capital and have nothing to fall back on for wealth creation.
At the end of the day, whether you decide to aggressively pay down your mortgage or not depends on your financial status, your investment goals and the terms of your mortgage.
Make an informed choice
For many first-time investors, it makes sense to continue making regular payments on your closed mortgage, using your existing liquidity to facilitate future investments. If the presence of debt in your life is making you uneasy, or if you have enough cash on-hand to pay the loan down aggressively and continue investing elsewhere, it may make the most amount of sense for you.
Now that we have looked into the difference between building real estate equity and paying down debt vs maintain that debt, we want to offer you a free strategy call to discuss which option is right for you in context with your portfolio. So, if you are ready to learn the benefits and drawbacks of debt vs real estate equity, click the link below to get started today.