Directing Their Money

Ken and his wife have two mortgages, including a rental property. They have no other debts and make $140,000 a year. Are they allocating their money correctly by paying off the houses?

QUESTION: Ken in Indiana and his wife have two mortgages, including a rental property. The first is for $160,000 on their primary residence. They owe $35,000 on an investment property. They have no other debts and make $140,000 a year. Are they allocating their money correctly by paying off the houses, or should they be investing in mutual funds instead?

ANSWER: If your house was paid for, would you borrow on it to invest in mutual funds? I wouldn’t; I’d want my house paid for.

Since your rental is such a small mortgage compared to your house, you can have that rental paid off by next summer if you just focused on it. Just knock it out because it’s small. Do that and then start chipping away on the house mortgage.

Of course, you’re doing Baby Step 4 in the process. That means you have 15% of your income going into retirement. While you are doing that, then you start putting away money for the kids’ college funds, then you pay off the mortgages on Baby Step 6. We usually pay off the home before paying off rentals unless the rental is very small, which this one is.

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