I came across an article about how to make anywhere from 5% to 15% guaranteed.  It went on to say that if I told you what it is, would you invest?  I thought, “Guaranteed??!!??  If its guaranteed, then sure, I would invest…  even at 5% … because its guaranteed. Who wouldn't?”

As I read the article, it talked about paying off credit card debt, and saving the interest (and penalties if you pay late).  Thus, making 5 – 24 percent on your money.  Which is true.  If you are not paying interest and penalties than that money stays with you to invest and earn interest (always better to be on the receiving end).  ha 🙂

But it got me thinking about other forms of debt, like, mortgage, Home Equity Line of Credit (HELOC), etc…  Is there a point where its not worth paying off some kinds of debt?  I mean, is there a line and if so, where is it?

Things We Know

Credit Card Debt

This type of debt will keep us poor, period.  This is definitely a place where we can leverage our money by paying it off at the end of every month.  Yes, I have seen credit cards that charge as much as 24% interest.  Holy cow!!!  I would love to get that kind of return!!

Car Loan

Cars depreciate in value, so the rule of thumb is to never take out a car loan (if at all possible) but if you are in a pinch and must, then the loan should not be longer than 3 years.  Why?  This is to protect us from being underwater (owning more on the car than it is actually worth).

Gray Area Debt

Student Loans

We need an education and the cost is going up.  There are lots of ways to keep costs down but the average student will come out of college with some kind of debt.  So how do you handle the debt?  Do you pay it off as quickly as possible?  Depends.  If you are a school teacher or public servant (police officer, etc) then the loans are forgiven after 10 years (in most states).  In this case, pay the absolute minimum each month and write off the rest in 10 years.

What about home loans?  Is it worth it to pay off?  This is the very question I am struggling with.

I have the following debt:

1) Home Mortgage $89,000 @ 2.875% 15 year fixed, paid off by 2030 (monthly payment of $802 not including taxes and insurance)

2) Consolidated Mortgage for 5 rental properties: $200,000 @ 4.00% 15 year, 7 year Term Fixed.  (That means that I get to pay a monthly payment as if it is a 15 year loan BUT at 7 years, I have a balloon payment of about $153,000 in 2022 – which I can either pay off or refinance it.  The monthly payment is $1,842 not including taxes and insurance.

Well, I did a little digging and talked to my A-TEAM (Tax Accountant, Financial Advisor and Property Manager/Realtor).  Here are their takes on if I should pay these off or not.

Tax Accountant

I have been with my Tax Accountant since 2005.  He has stuck with me through thick and thin and always gives advice with my best interest at heart (even if it hurts a little).

HELOC

He says if he had to pick, his vote would be to pay it off.  Sure, I get the tax breaks, but those only come once a year and its not enough to make it a factor.  His second option would be to wait until the balloon payment is due then pay it off.

Savings = $1,842/month plus 4% annually for 3 years if I paid it off this year.  Additional savings based on whatever the interest rates are at the time of refinance, if I chose to refinance in 2022 when the balloon payment comes due.

Home Loan

He says if he had to pick, to pay it off as well.  The interest is so low that the tax break is almost negligible.

Savings = $802/month plus 2.875% annually for 10 years if I paid it off this year.

Financial Advisor

I have been with my Financial Advisor since 2008 (since before he got his license – he was my banker).  He has stuck with me through thick and thin – even handled the loan paperwork on my first 3 rental properties.

HELOC

He says the 4% interest I am paying is so small, for a business loan, that I could go either way because the interest I am earning on my cash investments, this year, more than cover the 4% interest I am paying out.  He says, its more of an emotional decision, meaning, what would make me more happy, having cash in the bank and keeping the debt or paying off the debt and having less cash in the bank?

Home Loan

He says if he had to pick, it would be the same as above.  It really comes down to what would make me sleep better at night?

Realtor/Property Manager

I have been with my Realtor since 2011.  She and her husband have stuck with me through thick and thin.  From the first time I met them, they really understood the situation I was in (6-figure debt and desperately needing to sell my house to downsize).

The very first time we met was to talk about selling my house.  They were recommended to me by a good friend.  I remember the day so clearly, she and her husband came over to my house and after a tour we sat at the breakfast table, where they gently broke the news that I couldn't afford to sell it because there was no way I was going to get enough money out of it to buy something else.  That was like a punch to the gut, I actually broke down and started to cry right in front of them.  The very first time we met!  Ugh, I was so embarrassed.

Anyway, we kept in touch and watched the real estate market.  Once there was a window where I could sell, we took it.  2012, I moved. 2013, I bought my first rental property and the rest, as they say, is history.

HELOC

They both agree, don't pay off the loan.  Not only to not pay it off but refinance when the balloon payment come due.  Their thinking, the rental properties income will more than cover the loan amount.  Rental income in these areas is practically guaranteed.  They even felt that when the timing is right to keep that money handy to buy other rental properties and grow that monthly income.

Home Loan

They both agree, don't pay off the loan. 2.875% interest rate is so crazy low, no one will see that again for a very long time, if ever.  They both feel that  I would make that money back in other ways invested properly.

Additional Information

I did pull this historical returns for both the S&P 500 and DJIA, just to understand what the returns have been, each year… we all know that the average is around 7-8%… which is well above the interest I am paying on both of these loans.

S&P500 returns for every year from 1998 to 2018

Dow returns for every year from 1998 to 2018

The Decision

I agree with my Financial Advisor, in that it is an emotional decision at this point.  They money is secondary because the interest I am paying is low compared to the returns on the cash investments.  While the idea of buying more rental property sounds good, I think, I am happy at owning 5.

I decided to not pay off either loan this year.  Instead, I took $150,000 and put it in a short term bond fund that gives 2.35%.  That way I will be ready to pay off the HELOC balloon payment in 2022, when my daughter graduates from high school.

As for the home loan, I may wait until the balance is $35,000 to $40,000 before paying it off.  It interest really will be nothing to write off by then.

What would you have done?