Which Mortgage Should I Pay Off First?

Mortgage
Q&A
:
“Which
mortgage
should
I
pay
off
first?”

Today
we’re
going
to
talk
about
strategy
if
you
hold
multiple
mortgages
and
want
to
reduce
your
total
interest
expense.

It’s
not
uncommon
to
have
multiple
mortgages,
such
as
a
first
and

second
mortgage
tied
to
the
same
property.

Or
perhaps
a
couple
mortgages
on
separate
properties,
such
as
one
on
a
primary
home
and
another
on
a
second
home
(or
investment
property).

Before
we
dig
into
the
details,
paying
down
the
loan
with
the
higher
interest
rate
is
generally
advised.

Generally
Best
to
Pay
Off
Highest
Interest
Rate
First

• Like
  any
  type
  of
  loan
  or
  credit
  card
  you
  may
  have
• It’s
  typically
  beneficial
  to
  pay
  off
  the
  one
  with
  the
  highest
  interest
  rate
  first
• Such
  as
  a
  second
  mortgage
  (as
  they
  often
  feature
  very
  high
  mortgage
  rates)
• But
  you
  should
  take
  your
  time
  and
  do
  the
  math
  to
  be
  sure

Let’s
consider
an
example.
If
you’ve
got
a
first
mortgage
at
a
rate
of
6%,
and
a
second
mortgage
set
at
12%,
it’d
probably
be
in
your
best
interest
to
knock
out
that
second
mortgage
sooner
rather
than
later.

That
means
making
extra
mortgage
payments
on
the
second
mortgage
if
you’ve
got
the
money
handy
(assuming
you
actually
wish
to
pay
down
your
mortgage
ahead
of
time).

These
days
you
have
to
question
whether
borrowers
actually
want
to
pay
off
their
mortgages
early,
as
many
are
locked
in
at
record
low
rates
that
are
quite
favorable
to
hold
onto.

Anyway,
let’s
look
at
an
example
to
illustrate
the
savings:

1st
mortgage:
$200,000
loan
amount,
30-year
fixed
@4%

2nd
mortgage:
$50,000
loan
amount,
30-year
fixed
@8%

Extra
payment:
$100
per
month

Let’s
assume
you’ve
got
a
first
mortgage
with
an
interest
rate
of
4%,
and
a
second
loan
set
at
a
rate
of
8%.

If
you
were
to
pay
an
additional
$100
a
month
on
your
first
mortgage,
you’d
save
$26,855.30
in

mortgage
interest
over
the
full
duration
of
the
loan,
and
shave
4
years
and
11
months
off
the
loan
term.

Conversely,
if
you
decided
to
pay
an
extra
$100
a
month
on
the
second
mortgage,
you’d
save
$44,134.28
in
interest
and
shave
more
than
14
years
off
the
term.

So
clearly
the
move
here
would
to
be
pay
off
that
second
mortgage
first,
seeing
that
it
has
a

mortgage
interest
rate
double
that
of
the
first
mortgage.

What
About
Different
Loan
Amounts?

• It
  may
  appear
  that
  you
  can
  save
  money
  by
  paying
  off
  a
  lower-rate
  mortgage
• If
  the
  interest
  rate
  isn’t
  much
  lower
  than
  the
  other
  mortgage
• And
  the
  loan
  balance
  happens
  to
  be
  a
  lot
  larger
  since
  it
  could
  accrue
  a
  substantially
  larger
  amount
  of
  interest
• But
  you
  have
  to
  factor
  in
  the
  different
  payoff
  periods
  and
  apply
  the
  funds
  accordingly

Here’s
an
instance
when
the
opposite
looks
like
it
could
be
true.
Let’s
look
at
another
example:

1st
mortgage:
$300,000
loan
amount,
30-year
fixed
@4.5%

2nd
mortgage:
$50,000
loan
amount,
30-year
fixed
@6%

Extra
payment:
$100
per
month

Imagine
we
increased
the
loan
amount
on
the
first
mortgage
to
$300,000.
We
also
raised
the
interest
rate
on
the
first
mortgage
slightly,
and
lowered
it
to
6%
on
the
second.

As
a
result,
it
would
appear
to
be
in
your
best
interest
(no
pun
intended)
to
make
the
extra
$100
payment
on
the
larger
first
mortgage,
even
though
the
interest
rate
is
lower
than
that
of
the
second.

You
would
save
$34,087
in
interest
over
the
life
of
the
loan,
and
shave
about
three
and
a
half
years
off
your
loan.

If
you
chose
to
make
the
extra
$100
payment
on
the
second
mortgage
each
month,
you’d
only
save
$29,226
in
interest,
though
you
would
shave
13
years
and
7
months
off
the
term.

Because
the
first
mortgage
is
so
much
larger,
a
lot
more
interest
accrues,
and
because
the
interest
rates
are
fairly
similar,
the
first
mortgage
winds
up
being
more
costly
if

paid
down
on
schedule.

We
Have
to
Consider
the
Savings
From
an
Early
Payoff
That
Can
Be
Applied
to
the
Remaining
Loan

But
it’s
not
quite
that
simple.
If
we
applied
the
extra
$100
each
month
to
the
second
mortgage,
it
would
be
paid
off
in
16
years
and
five
months.

Technically,
that
means
there
is
now
an
extra
$300
available
($299.78
was
the
old
monthly
payment
on
the
second
mortgage)
to
put
toward
the
remaining
first
mortgage
balance.

Remember,
the
first
mortgage
would
require
that
extra
$100
for
about
26
years
and
five
months
to
realize
the
full
interest
savings.

And
with
the
second
mortgage
payment
of
roughly
$300
extinguished
about
10
years
earlier,
it
could
now
be
applied
to
the
first
mortgage
for
the
remaining
loan
term.

So
you
could
apply
an
extra
$300
per
month
to
the
first
mortgage
beginning
around
month
198.

Arguably,
you
could
deploy
$400,
since
you’d
have
the
$300
freed
up
and
the
$100
you
were
previously
paying
extra.

If
you
put
that
$400
extra
toward
the
first
mortgage
beginning
in
month
198,
you’d
save
$17,581
in
interest
on
the
first
mortgage.

And
the
loan
would
still
be
paid
off
roughly
three
and
a
half
years
earlier,
just
as
if
you
had
applied
$100
to
it
instead
of
the
second
mortgage.

Collectively,
the
interest
savings
would
be
$46,807,
factoring
in
the
$29,226
saved
on
the
second
mortgage.

That
would
be
significantly
better
than
$34,087
in
interest
saved
by
simply
applying
$100
toward
the
first
mortgage
from
day
one.

In
summary,
be
sure
to
do
the
math
(using
an

early
payoff
calculator)
to
determine
which
home
loan
to
pay
down
first.

Of
course,
interest
rates
on
second
mortgages
tend
to
be
a
lot
higher
than
first
mortgages,
so
the
answer
is
usually
to
pay
down
the
second
mortgage
faster.

Just
be
sure
to
pass
on
the
monthly
savings
to
the
remaining
loan
once
the
other
loan
is
paid
off.

Consider
All
the
Details
Beyond
the
Interest
Savings

• There
  are
  other
  factors
  to
  consider
  beyond
  interest
  rate
  and
  loan
  amount
• Such
  as
  if
  one
  loan
  is
  fixed
  and
  another
  is
  an
  ARM
  (and
  subject
  to
  future
  rate
  increases)
• Or
  if
  you
  have
  other
  high-interest
  debt
  that
  should
  be
  paid
  off
  first
• Such
  as
  a
  high-interest
  credit
  card,
  student
  loan,
  or
  personal
  loan

Additionally,
many
second
mortgages
may
be
ARMs,
such
as

HELOCs,
so
there’s
the
risk
the
rate
could
rise
over
time.

This
would
give
you
more
incentive
to
pay
it
off,
to
avoid
any
payment
shock
or
increased
interest
expense.

[How
to
pay
off
the
mortgage
early.]

Of
course,
it
may
not
always
be
wise
to
make
larger
payments
than
necessary
on
your
mortgage(s).

If
you’ve
got
credit
card
debt
at
18%
APR,
you’ll
probably
want
to
pay
that
off
before
making
extra
payments
on
your
mortgage(s),
which
carries
a
relatively
low
interest
rate.

Some
homeowners
seem
to
want
to
pay
down
the
mortgage
as
quickly
as
possible
while
racking
up
thousands
in
finance
charges
on
their
credit
cards,
despite
the
fact
that
mortgage
interest
is
tax
deductible
and
credit
card
interest
is
not.

Speaking
of,
you
could
consider
which
loans
are
tax
deductible
and
which
are
not,
and
add
that
to
the
overall
decision
as
well.

Read
more:

Pay
off
the
mortgage
or
invest?