An investment mortgage with 5.5% interest rate, 100K balance and 20 years left.
Saving account with 100K in the saving account at 0.5%
HELOC without any balance and 100K credit limit.
Let's say the rent is $700 and just covers the mortgage payment (ignore all the maintenance fees)
Question. Does it make sense to do any of the following?
Payoff the mortgage with savings. That means have no life savings, keep HELOC as a backup plan (but keep $700 a month to restore the savings)
Use HELOC to payoff the mortgage. The current rate would be 3.5% (prime + 0.25%) but it's not fixed and may go up.
Use some kind of combination of the 2 above
Keep in mind that this is an investment property and right now the mortgage interest is an expense for tax purposes. If the mortgage is paid off then "would be interest" becomes a taxable rental income.
I don't think it's all or none. First, 15 year mortgages are sub-3% right now, even for an investment property you'd get under 4%. shop around, do the math, a 1% drop is $1000 a year to start, nothing to sneeze at.
Don't let the tax tail wag the decision dog. If you could invest the $100K at a taxable 5.5% in this economy, you would. In this case, that's your return on prepayments on this mortgage. Personally, I'd like to see a refinance and pay down of principal so the cash flow is at least positive.
Beyond that, you need to decide how much cash you're comfortable having or not having in savings. I'd also consider when to start investing long term, in equities. (low cost ETFs is what I prefer).
I would not recommend using your own money to pay off something that is not a strong asset. Use the savings where it will have the maximum return. Why not put (some of) the savings into another investment mortgage? Thanks to the leverage your return would be much higher than 5.5%, plus you would have more income.