Should I Pay Off My Mortgage?

 Dream House
Homeowners often face the question of if and when they should pay off their outstanding mortgage. The answer, of course, depends on each person’s unique situation, and you should always consult with your advisers.
For example, a homeowner in San Diego has a home currently valued at $800,000 and still owes $125,000 on the mortgage. The homeowner is trying to decide whether or not to pay off the outstanding mortgage and when should this be done. Daniel Lu (CPA) and Scott Cheng (Real Estate Broker) have advised the homeowner not to pay off the mortgage, but to consider the following unique investment strategy instead. This plan will allow the homeowner to purchase an investment property for less than an average car payment:

  1. The homeowner currently has $125,000 in cash which was going to be used to pay off the existing mortgage.
  2. The homeowner borrows an additional $300,000 on their current mortgage. This gives them a new loan balance of $425,000.
  3. They combine this $300,000 from the new loan with the $125,000 they have in cash (which they were originally considering using to pay off the old balance of the mortgage). This gives the homeowner the ability to purchase a new rental investment property for up to $425,000 without having to finance it.
  4. The new payment for their current home will be $2,091 per month.
  5. The new rental property’s income would be around $2,100 per month.
  6. The overall tax implication would potentially be $3,000 in savings per year ($250/month). While the rental income increases the tax liability, the deductions on the mortgage interest offset it. The new rental property would also be depreciated for tax deduction purposes.

…the homeowner would only be paying a total of $189 per month. This is less than a typical auto loan payment! Instead of owning a car, the homeowner now owns a cash-generating rental property.

Combining the new mortgage payments, the new rental income and the new tax savings, the homeowner would only be paying a total of $189 per month. This is less than a typical auto loan payment! Instead of owning a car, the homeowner now owns a cash-generating rental property.

Additionally, if you consider the appreciation of the property, the purchase of the new investment property becomes an even more attractive option. The average appreciation of real estate in San Diego can be as high as 8-10% per year. With the low interest rates currently available, homeowners should take advantage of this opportunity to invest as soon as possible.
Please contact us if you have questions about your specific situation, or if you think this strategy may work for you. We are happy to run through scenarios with you!

Contact the author...

Scott Cheng - Real Estate Broker


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Contact the author...

Daniel Lu

Daniel Lu - Certified Public Accountant

phone-icon 858-633-3381


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  6 comments for “Should I Pay Off My Mortgage?

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