make mortgage lump sum or save for next house.

Leveraging, renting vs owning, making an investment or buying a home?
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handyy83
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make mortgage lump sum or save for next house.

Post by handyy83 »

So I’ve owned a condo for the past 3 yrs going on to my 4th. Typically I use my yrly prepayment privileges and make a 15k payment at the end of each yr on top of raising my biweekly mortgage payment by 10% for the up coming yr. Its worked great, the two work together to really help drive down the amortization yrs.

This past year I’ve moved out to rent a place with my gf and have also been renting out the condo I own (one in question). I’m hitting the year end I am starting to think about if this year end plan is still the best plan for the future. Specifically we are saving for a home together I’m wondering if it makes more financial sense to

1. continue to do the 15k lump sum, and 15% increase is biweekly payments and manage the house savings to the side.
2. just do the 15% increase and put the 15k to our house savings
3. do neither and really free up my financial flexibility and saving ability

I’m not sure if I can go wrong with either choice but really just want to make sure I’m smart about it.
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Re: make mortgage lump sum or save for next house.

Post by Peculiar_Investor »

Welcome to FWF.

What is your plan for the condo if/when you purchase a house? Will you continue to rent it? I'm thinking along the lines of what will you be declaring your principle residence for tax purposes? If not the condo, then I'm pretty sure you'll be able to deduct mortgage interest payments from rental income for tax purposes. Does this change the questions you are asking yourself (and us)?

The general guiding principle around here is to eliminate debt as soon as practical as the return is known versus saving/investing the funds where the future return is unknown.

My $0.02
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Re: make mortgage lump sum or save for next house.

Post by Flaccidsteele »

The OP is blending emotional and financial characteristics in each option. It all depends on priorities set by the OP and gf. Emotional or financial.
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Re: make mortgage lump sum or save for next house.

Post by Insomniac »

You want to save for a big down payment for the house you are buying with you gf. A big down payment will avoid CMHC costs.
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Re: make mortgage lump sum or save for next house.

Post by handyy83 »

thanks for the points so far. So to reply to some of the questions.

1. I want the purely financial sense decision. not the emotional hence why I figured i'd reach out here.
2 I plan to keep the condo long term as an income property....its in a great location that allows me to not have any real challenges finding tenants. Right now; given that i've raised my mortgage bi weekly each year, i'm in negative revenue territory when its comes to rental income minus cost of that property.
3. Inital down payment for the new house shouldn't be an issue when it comes down to will it make or break the need for CMHC; ie regardless I will be over the required threshold.

Sry for not be able to give hard tangibles; just looking for some general directions/ thoughts so I that I ensure its thought out; particularity from those with no vested emotion in play.
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Re: make mortgage lump sum or save for next house.

Post by Flaccidsteele »

handyy83 wrote:1. I want the purely financial sense decision.
What are the financial characteristics of the rental condo?
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Re: make mortgage lump sum or save for next house.

Post by Peculiar_Investor »

handyy83 wrote:2 I plan to keep the condo long term as an income property....its in a great location that allows me to not have any real challenges finding tenants. Right now; given that i've raised my mortgage bi weekly each year, i'm in negative revenue territory when its comes to rental income minus cost of that property.
With this additional information, I'd be inclined towards redirecting future savings towards the down payment on a new house. My rationale is based on taxation, mortgage interest payments on the rental are tax deductible against the rental income while mortgage interest payments on the new house are not tax deductible. Therefore I'd be inclined to increase the down payment on the new house and therefore reduce the non-deductible interest payments.

At the end of the day, you know you own situation and the actual numbers involved, so you should run the various scenarios to determine which makes the most financial sense to you and your situaton.
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Re: make mortgage lump sum or save for next house.

Post by kcowan »

handyy83 wrote:Right now; given that i've raised my mortgage bi weekly each year, i'm in negative revenue territory when its comes to rental income minus cost of that property...
The advice would be to evaluate what you can net by selling the condo versus what you will gain by renting it. While renting it might seem to be the easiest step right now, it is not founded in any financials that you have shared.
For the fun of it...Keith
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Re: make mortgage lump sum or save for next house.

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handyy83 wrote:2 I plan to keep the condo long term as an income property....its in a great location that allows me to not have any real challenges finding tenants. Right now; given that i've raised my mortgage bi weekly each year, i'm in negative revenue territory when its comes to rental income minus cost of that property.
Negative revenue or negative cash flow?
The capital repayment component of the mortgage is forced savings, not an expenditure.
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Re: make mortgage lump sum or save for next house.

Post by Thanak »

On a rental property, Your return on equity will usually be better if you have a mortage because you are using leverage and deducting the interest as expenses. Having a fully paid rental is strategy for cashflow but your return on equity will probably be very crappy.

Plus, if you have the choice of owing money between your home or your rental, you want to clear your home first because the interest aren't deductible.
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Re: make mortgage lump sum or save for next house.

Post by patriot1 »

Thanak should have wrote:On a profitable rental property, Your return on equity will usually be better if you have a mortage because you are using leverage and deducting the interest as expenses. .
Fixed that for you.
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Re: make mortgage lump sum or save for next house.

Post by kombat »

handyy83 wrote:I plan to keep the condo long term as an income property.... i'm in negative revenue territory
Doesn't sound like much of an "income property."

What could that capital earn in the equities market if you were to liquidate the condo and invest the proceeds? And would it ever call you at 3:00 am about a plugged toilet?
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Re: make mortgage lump sum or save for next house.

Post by adrian2 »

Sorry guys, once again Elvis has left the building.

The OP (handyy83) has last visited the forum two weeks ago.
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Re: make mortgage lump sum or save for next house.

Post by Flaccidsteele »

kombat wrote:
handyy83 wrote:I plan to keep the condo long term as an income property.... i'm in negative revenue territory
Doesn't sound like much of an "income property."

What could that capital earn in the equities market if you were to liquidate the condo and invest the proceeds? And would it ever call you at 3:00 am about a plugged toilet?
I know this thread is dead, but just as an aside, if a real estate investor is working at 3:00am (let alone getting calls about a plugged toilet at that hour), they're doing it wrong.
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