I had a recent email exchange with a reader about mortgages. Thanks Khunara for inspiring today’s question!
I’m always yapping how I’ll never, ever, ever, EVER pay off my mortgage. I even wrote about it here. I’m having second thoughts though. Here are the details of my mortgage situation:
- My home is worth about $400,000*.
- I owe about $110,000 on the loan, so I have $290,000 in equity.
- My mortgage is 3.25% (15 years) and I have 12 years of payments left.
- I don’t have enough deductions to itemize, so I can’t write off my mortgage interest on my taxes.
- Because I have a corporation (not W2 income), I can’t get a mortgage loan without 2 years of tax returns (mid 2017).
- I have about $100,000 in cash.
The key point is the last one. I can get by on about $36,000/year, so $100,000 is a ridiculously large emergency fund. Except that it isn’t really an emergency fund.
Why I have $100,000 in cash
The Mrs. and I have been eyeballing a couple real estate transactions. Most of them are fix and flips, but one is a sweet rental 4-plex that I can’t quite pry out of the hands of the 80+ year old owner. I even wrote her a song**. That didn’t work.
I have $100,000 in cash to help purchase one of these properties. And it kills me. The money is wasting away, not even making 1%:
I may need the money at any moment, so I don’t want to throw it into an investment subject to big swings. Mr. Market could go down 20% tomorrow. Alas***, I have a new idea.
Ask the Readers: Should I Replace Cash with a Line of Credit?
I can get a line of credit (LOC) for 80% of my home’s equity. Here are the juicy details:
- If I got a line of credit now against the $290,000 I have in equity, that would give me about $232,000 in borrowable funds.
- If I paid off the home, the $400,000 in equity would give me $320,000 in borrowable funds. Instead of a cash reserve, I’d just use the LOC for a real estate transaction.
- The LOC rate is currently 4%, but will go up with any Fed rate hikes.
- There are no costs to the line of credit except for a $500 appraisal fee that the credit union refunds after the LOC goes through.
- My current mortgage is 3.25% and while that is a low rate, it is still 2.35% higher than I earn on my cash.
- Paid off home! (how cool is that?)
- Because I can only borrow 80% of the equity, the $110,000 I use to pay off the loan would only give me $88,000 in LOC funds.
- Rates will eventually go up, raising the amount that the online bank account pays in interest. I’d feel silly if I paid off my 3.25% mortgage only to have the bank paying 3.5% interest in 2020.
Questions for you:
- Am I missing a better option for my cash? Remember that I need liquidity. I don’t want the money in the stock market or anything subject to big swings.
- Are there any advantages of paying off my mortgage that I’m missing?
- What would you do?
*In my performance updates, I’ve been valuing my home at $350,000. Based on recent sales on my street, I’m reasonably confident that I could get at least $400,000 for it. An upcoming appraisal will give me an accurate number.
**In case you didn’t see the song in the other post, here it is (sung to “In Your Eyes” by Peter Gabriel) that I wrote to the old landlady in an attempt to buy her 4-plex:
Real estate, I get so lost, sometimes,
Days pass and this emptiness fills my heart,
When I want to run away,
I drive off in my car,
But whichever way I go,
I come back to the 4-plex you own.
All my desires, they have grown,
It’s your 4-plex, I want to own,
20% down, I will provide,
I reach out from the inside.
(In your 4-plex) The light, the street
(In your 4-plex) My investments are complete
(In your 4-plex) I see the doorway
(In your 4-plex) Of a thousand retirements
(In your 4-plex) The resolution
(In your 4-plex) Of all the fruitless searches,
(In your 4-plex) Oh, I see the light and the street
(In your 4-plex) Oh, I want my retirement complete
(In your 4-plex) I want to touch the deed
The returns I see in your building.
***I’ll bet you don’t read many bloggers that work sweet words like alas into their prose. Pretty cool, eh? My bag of word tricks is still very much full. Coming soon: hence, flabbergasted and one of my favorites, komorebi.
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