Can I Prepay a 3.65% Rental Mortgage If I’m Investing 25%?

July 16, 2023

In this highlight, Brian and Bo discuss paying off your mortgage, investing, and assets.

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Going to move on to Jay’s question. This one kind of made me chuckle a little bit to myself. He asks, “Can I prepay a 3.65% rental mortgage at 36 if I’ve hit my 25% retirement? I want to free up the $1K a month, but I don’t want Bo to be mad at me because I ‘hate’ math. I’m 36, and it’s 3.65%. Man, a lot of numbers in there that sound a little the same. Okay, that one’s for free. And he’s saving 25%. I’m not like the others. Let me say why I always make the joke about ‘oh yeah, do that if you hate math’ because I understand how long-term investing works, how opportunity cost works. I know that we recently came through a time period where it was possible to get very cheap money, very low rates on borrowed dollars. We have primary mortgages that are two and a half, two and three quarters, three percent. And it sounds like you have a rental property that’s a little over three and a half percent. Well, right now, if you want to go out and buy a property, you have to go borrow money at six percent, seven percent. And we know that right now cash that you’re holding in a high-yield money market can make you four and a half percent. If you were to invest those dollars, perhaps over the long term, it can make you seven, eight, nine, ten, eleven percent annualized over the long term, depending on what you’re investing in and what your time frame is. So the money is really, really cheap. So why do I advocate for ‘man, don’t pay off low-interest debt’? Because low-interest debt can be valuable. Because those dollars can work more for you. There’s an arbitrage mathematical calculation. However, Jay played the rook card. He said the thing that matters, and Brian, this is where I want you to pick up for me. He said, ‘I’m already saving 25% towards retirement.’ So it doesn’t matter that he’s 36. It doesn’t matter that he’s, you know, fill in the blank. He’s already got a rental property. So this is a leveraged asset, a leveraged investment asset, not a leveraged use asset, which is different. If he chooses to pay off that 3.65% mortgage on the rental, is it okay? Yeah, I mean, this is I’ve had this conversation because there are other content creators like Andy Hill and others that I’ve talked to. They got out of debt really quickly, and I don’t pick on them too much because I always get them to confess one thing to me. I’m like, ‘Look, we all know you paid off your mortgage really quickly, but tell me this: Were you already saving and investing 25% in traditional index funds?’ Yeah, of course. Yeah, and I’m like, ‘Okay, I’m not gonna pick on you too much because you’ve already really prioritized the traditional financial wealth-building tools, and now you’re just trying to get a little whipped cream and some cherry. Yeah, maybe it’s not maximized, but it’s definitely going to reduce some risk. It’s not what I would necessarily do when I can make that much on cash, but it is something that I think that Jay, I’m not gonna pick on you too much because you’re already doing what you’re supposed to, which is putting that 25% to work. Now, I will challenge you if your goal is to retire pre-50. You might need to make sure that you really, really are putting enough money to work because you’re counting on a lot from your army of dollars. So just do the math on how much you need. We have a great course, ‘Know Your Number’ at learn.moneyguy.com that can let you know how an early retirement or a traditional retirement how much ahead of the curve you are so that you can put it all together. But we’re not gonna pick on you too much. I did think it was one of those things where I feel like, now even though this is a rental property, this might have been a house that he lived in first and then turned it into a rental property. We’re in such a weird mortgage market right now. If it’s an FHA loan, you pay attention because now, look, you’re supposed to only do those for your first-time home. It’s for your primary use. So rental property typically didn’t fall. But like I said, it might have been your primary residence that you turned into a rental property. If you have any type of FHA loan that’s assumable, it’s a big value. You might want to look at it because there might be a third option you haven’t even asked us about, which is that there might be a chance to go ahead and lock in. You know, selling that property or just don’t walk away from that mortgage too soon if there’s value beyond just normal use that you see. And in that same thing, it makes you understand if you have a house that you couldn’t sell because for some reason or another, and then it turns into a rental, make sure you understand your two out of the last five-year window where you can exclude the gains on a primary residence because once it turns into a capital asset, that changes after it’s been a capital asset for so long. So just keep that in. There’s a lot. There’s a lot there. But the big thing, Jay, you’re crushing it. I don’t think you’re bad at math. Well, he didn’t say he was bad. He just said he hates it. Oh, oh, okay. Good at math but hates math. I’ll give you that with them all. All right. I love-hate. They call it a love-hate relationship. I got it.



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