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My renters are moving out and I believe it will take at least 3 months to sell the house. The mortgage is $63k at 7% interest and the house will probably sell for $145k. The reason I'm thinking to do this is to save on the interest (which is $371/month) during the months when it's unoccupied. Possibly saving a total of $1,113 over 3 months. I think it makes sense, especially if it's longer than 3 months but I'm unsure about any tax implications or how it might affect the capital gains or fees I might pay during the sale.

  • Tax related questions need a jurisdiction - where do you live? – Grade 'Eh' Bacon May 22 '18 at 3:18
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    Assuming US and only applicable to federal taxes: Your payment of the mortgage will not affect the captial gains tax. The mortgage interest is a deduction against the rental income. – Glen Pierce May 22 '18 at 3:36
  • @Grade'Eh'Bacon I live in CA but the property is in OH. – Shagymoe May 22 '18 at 15:31
  • I'm never a fan of turning off the money machine. The question of whether to let it go fallow Is separate from the question of paying it off. – Harper - Reinstate Monica May 22 '18 at 23:35
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Since this is a rental property you can deduct the mortgage interest, so note that your true savings is actually less than $1113. (Reduce it by your effective tax rate, e.g. 25% total tax rate means your actual savings would be $835.)

Regardless, if you have the cash sitting in the bank you might as well pay it off. You'll get it back soon anyway. Another way of thinking about this is if you had the option of putting that $63K into a 3-month CD earning 7% APY, would you do it? I'm guessing you would.

  • And if the sale of the property takes longer? For all we know that cash is all OP has to their name... – Cloud May 22 '18 at 12:08
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    OP will also save in mortgage payments, which should build up funds fairly quickly. 7% is a lot to pay to keep $63k on hand. – D Stanley May 22 '18 at 13:33
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    @Cloud - Good thought, and I actually considered adding the typical disclaimer of "of course keep an emergency fund" but decided it wasn't needed here for a few reasons. One, as DStanley mentioned, you build up your would-be mortgage payments. Two, OP already mentioned this makes even more sense if it takes longer- and it does! Lastly, it would be quite a coincidence if the exact amount to pay off the mortgage is all the money they have access to. – TTT May 22 '18 at 13:56
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    Thanks for the answers! Even after paying off the mortgage, I will still have 6 months+ of emergency funds. – Shagymoe May 22 '18 at 15:32
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It depends. If paying off the mortgage will leave you 'cash poor', i.e. under 6 months living expenses left in your account, then definitely not. (The sale could take many months or even years if it is in an undesirable area or there is a crash).

If, on the other hand, you have plenty of cash left after paying it off, then there is no reason not to, as TTT mentions, you effectively get a 7% return on your investment for x months.

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    meh. If you don't have 6 months living expenses you can still pay $50k. It'll save you nearly all of the interest while not at all reducing your mortgage payment. – xyious May 22 '18 at 14:50

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