This post is dedicated to those who refuse to welch on their mortgage debt, even if they bought at the wrong time or got into a high interest rate mortgage that cannot be refinanced. I know your pain and frustration.
I’ve got a confession. I’ve been reluctant to pay down my 4.25%, 30-year fixed vacation property mortgage because it makes me face the truth that I bought a two bedroom, two bathroom vacation property at an inopportune time. Instead of attacking the bad mortgage with laser focus, I wanted to forget all about it.
I’ve been so reluctant to pay down the principal that I paid down my 3.375% rental property mortgage in 2015 instead. Illogical right? My rationale was the following:
1) I already did something positive. The vacation property mortgage was originally a 30-year fixed at 5.875%. Back in 2007, that was considered OK. In December 2012, after not turning in the keys like so many people did during the financial crisis, Bank of America contacted me for a free loan modification down to 4.25% with the same payoff schedule. It was like a reward for being good! I’m sure the Justice Department fining BoA $10B+ had something to do with it too. I had been trying to refinance the loan for years, but couldn’t because I was current. Curiously, only those who were delinquent could get some reprieve. The loan modification lowered my total payment from ~$3,200 to $2,497. Score!
2) Not 100% sure of keeping the property. My Lake Tahoe property ranks last in importance in my real estate portfolio. Most vacation properties do. If the world was going to end again, the vacation property would be first to go if I had no more money. In such an impending scenario, it would be unwise to pay down extra principal. I knew with 100% certainty that I would never foreclose or short-sale my properties in San Francisco because they are way in the money and highly cash flow positive. After such a strong recovery with much more stringent lending standards, I’m confident we will not go back to hell.
3) Investment opportunities. After the financial crisis, I felt it was time to invest more rather than pay down more debt. My net worth was rocked by ~35% and in order to get back to even or reach new heights, I felt strongly the need to put more capital to work. As a result, I’ve been investing six figures a year since 2009. I also put down $248,000 for a fixer upper in early 2014 and spent another ~$170,000 on home improvements. Only in 2015 did I decide to aggressively save cash and pay down my other rental property mortgage because I couldn’t find as many attractive investment opportunities. Besides, the 2/2 condo mortgage in SF was supposed to have been paid down by 2013.