Should I put more money down on one property and pay it off sooner or hold on to the cash?
"I'm a little confused on the use of the property today.  Is this place going to be a personal residence for you for now and become a rental later (after the mortgage is paid off)?  It does make a difference. If you can buy the house and a 100% LTV loan would cost less than 125% of comparable rent ... then buy the house, put as little of your own cash into it as possible and stretch the terms as long as possible.  Scott W is correct on a number of counts.  The ""cost"" of the mortgage is the after tax cost of the payments and when that money is put to work in a well-managed portfolio, it should do better over the long haul.  Don't try for big gains because doing so adds to the risk that you'll end up worse off. If you borrow money at an after-tax cost of 4% and make 6% after taxes ... you end up ahead and build wealth. A vast majority of the wealthiest people use this arbitrage to continue to build wealth.  They have plenty of money to pay off mortgages, but choose not to.  $200,000 at 2% is an extra $4000 per year.  Compounded at a 7% rate ... it adds up to $180k after 20 years ... not exactly chump change. Money in an investment account is accessible when you need it.  Money in home equity is not, has a zero rate of return (before inflation) and is not accessible except through another loan at the bank's whim.  If you lose your job and your home is close to paid off but isn't yet, you could have a serious liquidity issue. NOW ... if a 100% mortgage would cost MORE than 125% of comparable rent, then there should be no deal.  You are looking at a crappy investment.  It is cheaper and better just to rent.  I don't care if prices are going up right now.  Prices move around.  Just because Canada hasn't seen the value drops like in the US so far doesn't mean it can't happen in the future.  If comparable rents don't validate the price with a good margin for profit for an investor, then prices are frothy and cannot be trusted and you should lower your monthly costs by renting rather than buying.  That $350 per month you could save in ""rent"" adds up just as much as the $4000 per year in arbitrage. For rentals, you should only pull the trigger when you can do the purchase without leverage and STILL get a 10% CAP rate or higher (rate of return after taxes, insurance and other fixed costs).  That way if the rental rates drop (and again that is quite possible), you would lose some of your profit but not all of it.  If you leverage the property, there is a high probability that you could wind up losing money as rents fall and you have to cover the mortgage out of nonexistent cash flow. I know somebody is going to say, ""But John, 10% CAP on rental real estate?  That's just not possible around here.""  That may be the case.  It IS possible somewhere.  I have clients buying property in Arizona, New Mexico, Alberta, Michigan and even California who are finding 10% CAP rate properties.  They do exist.  They just aren't everywhere. If you want to add leverage to the rental picture to improve the return, then do so understanding the risks.  He who lives by the leverage sword, dies by the leverage sword.  Down here in the US, the real estate market is littered with corpses of people who thought they could handle that leverage sword.  It is a gory, ugly mess." I'd suggest taking all the money you have saved up and putting in a mutual fund and hold off on buying a rental property until you can buy it outright.  I know it seems like this will take forever, but it has a HUGE advantage: I know it seems like it will take forever to save up the money to buy a property for cash, but in the long run, its the best option by far. I would go with the 2nd option (put down as little as possible) with a small caveat: avoid the mortgage insurance if you can and put down 20%. Holding your rental property(ies)'s mortgage has some benefits: You can write off the mortgage interest.  In Canada you cannot write off the mortgage interest from your primary residence. You can write off stuff renovations and new appliances.  You can use this to your advantage if you have both a primary residence and a rental property.  Get my drift? P.S. I do not think it's a good time right now to buy a property and rent it out simply because the housing prices are over-priced.  The rate of return of your investment is too low. P.S.2.  I get the feeling from your question that you would like to purchase several properties in the long-term future.  I would like to say that the key to good and low risk investing is diversification.  Don't put all of your money into one basket.  This includes real estate.  Like any other investment, real estate goes down too.  In the last 50 or so years real estate has only apprepriated around 2.5% per year.  While, real estate is a good long term investment, don't make it 80% of your investment portfolio. My figuring (and I'm not an expert here, but I think this is basic math) is: Let's say you had a windfall of $1000 extra dollars today that you could either: a. Use to pay down your mortgage b. Put into some kind of equity mutual fund Maybe you have 20 years left on your mortgage.  So your return on investment with choice A is whatever your mortgage interest rate is, compounded monthly or daily.  Interest rates are low now, but who knows what they'll be in the future.  On the other hand, you should get more return out of an equity mutual fund investment, so I'd say B is your better choice, except: But that's also the other reason why I favour B over A.  Let's say you lose your job a year from now.  Your bank won't be too lenient with you paying your mortgage, even if you paid it off quicker than originally agreed.  But if that money is in mutual funds, you have access to it, and it buys you time when you really need it.  People might say that you can always get a second mortgage to get the equity out of it, but try getting a second mortgage when you've just lost your job. I would go with option B. That is safer, as it would leave you with more options, in case of an unexpected job loss or an emergency.
Both seem to be reasonable. To decide you need to guess if the value of the house will go up or down between now and when you sell. If you think the value will go up - reach a calculation agreement now. If you think the value will go down - wait until the house is actually sold. So ya pays yer money, and ya takes yer chances... I think I understand the two scenarios Unless you are absolutely confident that you understand both scenarios - make sure your lawyer gets involved and explains them to you until you do understand. "Mathematically, the wisest choice is to invest your extra money somewhere else and not pay off your 0% loan early. An extreme example highlights this. Suppose some colossal company offered to loan you a billion dollars at 0 % interest. Would you take it? Or would you say ""No thanks, I don't want that much debt."" You would be crazy not to accept. You could put that money in the safest investments available and still pocket millions while making the minimum payments back to them. Your choice here is essentially the same, but unfortunately, on much smaller scale. That said, math doesn't always trump other factors. You need to factor in your peace of mind, future purchases, the need for future borrowing, your short term income and job security, and whether you think you can reliably make payments on this loan without messing up and triggering fees that wipe out the mathematical advantage of slow paying the loan. You are fortunate because you really can't make a wrong choice here. Paying off debt is never a bad choice IMO. However, it may not always be the best choice." The mortgage is a debt and you pay interest on it, typically more than you can earn elsewhere (especially once taxes are taken into account.) By lowering the principal, you lower the total interest you pay. This is true whether you sell the house after 1 year, 10 years, or 100 years. In your case, prepayments made in the next few years would mean that when you sell, your mortgage principal would be lower than it otherwise would have been, and your house equity will be higher. You can therefore either move up to more house for the same monthly payment, or have a lower monthly payment for the same kind of house. Either of those are good things, right? Now is the easiest time to find a little more money, so do it if you can. Later you will have more obligations, and develop a taste for more expensive things (statistically speaking) and therefore find a few hundred a month much harder to come by. You have a loan. You can probably assume you're going to have to repay that loan, every dollar. And every dollar that's outstanding on that loan costs you interest. So assuming you're not hit by any pre-payment penalty, any dollar that you pay down on your house right now saves you a compounded R% a year, where R is your mortgage rate. It doesn't really matter whether you're planning to sell it in a few years or not. If you pay $N, you'll save the interest + $N taken from the sale price and sent to the bank when you sell the house and move (though you might get a tax deduction on the interest). If you have a better place to park your money and earn a decent rate of return, it would be worth it to do that instead of paying down the mortgage. If you had another loan with higher interest rates, that's probably a better loan to pay off. If you can spend some of all of it on something that's actually genuinely worth R% of its purchase price a year (plus whatever the wear and tear takes away from its value, if anything) then spend it on that instead; that'd be a better investment. (For instance, investments in the stock market may offer better returns. However, that's risky! Observe that you can't lose money paying down your mortgage, and that Safety is usually relatively expensive these days, so it's not a bad deal. But if you're talking about using it for long-term retirement savings that are tax-advantaged to boot, that's another matter.) If you already have ample emergency funds and were just planning on putting the money into a savings account to rot at ~1.35% taxable interest, it's definitely worth it to pay down your balance now, unless you're about to sell (so the savings are slight) and it's a real inconvenience. "I've heard that the bank may agree to a ""one time adjustment"" to lower the payments on Mortgage #2 because of paying a very large payment. Is this something that really happens? It's to the banks advantage to reduce the payments in that situation.  If they were willing to loan you money previously, they should still be willing.  If they keep the payments the same, then you'll pay off the loan faster.  Just playing with a spreadsheet, paying off a third of the mortgage amount would eliminate the back half of the payments or reduces payments by around two fifths (leaving off any escrow or insurance).   If you can afford the payments, I'd lean towards leaving them at the current level and paying off the loan early.  But you know your circumstances better than we do.   If you are underfunded elsewhere, shore things up.  Fully fund your 401k and IRA.  Fill out your emergency fund.  Buy that new appliance that you don't quite need yet but will soon.  If you are paying PMI, you should reduce the principal down to the point where you no longer have to do so.  That's usually more than 20% equity (or less than an 80% loan).   There is an argument for investing the remainder in securities (stocks and bonds).  If you itemize, you can deduct the interest on your mortgage.  And then you can deduct other things, like local and state taxes.  If you're getting a higher return from securities than you'd pay on the mortgage, it can be a good investment.  Five or ten years from now, when your interest drops closer to the itemization threshold, you can cash out and pay off more of the mortgage than you could now.   The problem is that this might not be the best time for that.  The Buffett Indicator is currently higher than it was before the 2007-9 market crash.  That suggests that stocks aren't the best place for a medium term investment right now.   I'd pay down the mortgage.  You know the return on that.  No matter what happens with the market, it will save you on interest.  I'd keep the payments where they are now unless they are straining your budget unduly.  Pay off your thirty year mortgage in fifteen years." Have you changed how you handle fund distributions?  While it is typical to re-invest the distributions to buy additional shares, this may not make sense if you want to get a little cash to use for the home purchase.  While you may already handle this, it isn't mentioned in the question. While it likely won't make a big difference, it could be a useful factor to consider, potentially if you ponder how risky is it having your down payment fluctuate in value from day to day.  I'd just think it is more convenient to take the distributions in cash and that way have fewer transactions to report in the following year.  Unless you have a working crystal ball, there is no way to definitively predict if the market will be up or down in exactly 2 years from now.  Thus, I suggest taking the distributions in cash and investing in something much lower risk like a money market mutual fund. First of all, you should absolutely put money into savings until you have at least a 6 month cushion, and preferably longer.  It doesn't matter if you get 0% interest in your savings and have a high interest rate mortgage, the cushion is still more important. Once you have a nice emergency fund, you can then consider the question of whether to pay more towards the mortgage if the numbers make sense.  However, in my opinion, it's not just a straight comparison of interest rates.  In other words, if your savings account gives you 1% and your mortgage is 5%, that's still not an automatic win for the mortgage. The reason is that by putting the money into your mortgage, you're locking it up and can't access it.  To me, money in the hand is worth a lot more than money that's yours on paper but not easily accessible. I don't know the math well enough, but you don't really need the math.  Just keep in mind that you have to weight the present value of putting that money into savings vs the future value of putting it into your mortgage and paying less interest at some point in the future.  Do the math and see how much you will save by paying the mortgage down faster, but also keep in mind that future money is worth less than present money.  A LOT less if you suddenly have an emergency or decide on a major purchase and need the money, but then have to jump through hoops to get to it.   To me, you need to save a considerable amount by paying down the mortgage, and also understand that your money is getting locked away, for it to make sense. "Thanks for your question. Definitely pay the car down as soon as possible (reasoning to follow). In fact, I would go even further and recommend the following: Why? 1) Make money risk free - the key here is RISK FREE. By paying down the loan now, you can avoid paying interest on the additional amount paid toward principal risk free. Imagine this scenario: if you walked into a bank and they said, ""If you give us $100, we'll give you $103 back today"", would you do it? That is exactly what you get to do by not paying interest on the remaining loan principal. 2) The spread you might make by investing is not as large as you may think. Let's assume that by investing, you can make a market return of 10%. However, these are future cash flows, so let's discount this for inflation to a ""real"" 8% return. Then let's assume that after fees and taxes this would be a 7% real after-tax return. You also have to remember that this money is at risk in the market and may not get this return in some years. Assuming that your friend's average tax rate on earned income is 25%, this means that he'd need to earn $400 pre-tax to pay the after-tax payment of $300. So this is a 4% risk-free return after tax compared to a 7% average after tax return from the market, but one where the return is at risk. The equivalent after-tax risk-free return from the market (think T-Bills) is much lower than 7%. You are also reducing risk by paying the car loan off first in a few other ways, which is a great way to increase peace of mind. First, since cars decline in value over time, you are minimizing the possibility that you will eventually end up ""under water"" on the loan, where the loan balance is greater than the value of the car. This also gives you more flexibility in terms of being able to sell the car at any point if desired. Additionally, if the car breaks down and must be replaced, you would not need to continue making payments on the old loan, of if your friend loses his job, he would own the car outright and would not need to make payments. Finally, ideally you would only be investing in the market when you intend to leave the money there for 5+ years. Otherwise, you might need to pull money out of the market at a bad time. Remember, annual market returns vary quite a bit, but over 5-10 year periods, they are much more stable. Unfortunately, most people don't keep cars 5-10+ years, so you are likely to need the money back for another car more frequently than this. If you are pulling money out of the market every 5-10 years, you are more likely to need to pull money out at a bad time. 3) Killing off the ""buy now, pay later"" mindset will result in long-term financial benefits. Stop paying interest on things that go down in value. Save up and buy them outright, and invest the extra money into things that generate income/dividends. This is a good long-term habit to have. People also tend to be more prudent when considering the total cost of a purchase rather than just the monthly payment because it ""feels"" like more money when you buy outright. As a gut check for whether this is a good idea, here is an example that Dave Ramsey likes to use: Suppose that your friend did not have the emergency fund, and also did not have the car loan and owned the car outright. In that case, would your friend take out a title  loan on the car in order to have an emergency fund? I think that a lot of people would say no, which may be a good indicator that it is wise to reduce the emergency fund in order to wipe out the debt, rather than maintaining both." "Paying off your house quickly should be a #2-level priority, behind making sure you have some basic savings but definitely ahead of any investing concerns, because your house is not an investment; it's your home.  (If you're brave/foolish enough to try buying houses-as-investments in the current climate, this obviously doesn't apply to you!) This isn't a financial matter so much as an issue of basic prudence.  If something disastrous happens, (you lose your job, get in a serious car accident, your kid comes down with cancer, etc,) it will put tremendous strain on your financial resources.  If you own your home outright when this happens, it means that no matter what else might go wrong, you can't get foreclosed on and end up out on the streets, and that's worth more than any rate of return you can reasonably expect to find even in the best of times. It's a well-known investing maxim to ""never bet anything that you can't afford to lose.""  In light of that, consider this: if you have a mortgage that is not paid off, that's exactly what you're doing.  You are placing a bet against a bank that you'll remain solvent long enough to pay off the mortgage, and your home is the wager.  Mortgages may be a necessary evil with housing prices being what they are, but make no mistake, they are evil.  Get rid of yours as quickly as you can." Makes sense so long as you can afford it while still maintaining at least six months living reserves. The sooner you own outright a decreasing asset the better which should be considered when selecting your loan term. However, with today's low rates and high performing stock market you may want to consider allowing that money to be put to better use. It all depends how risk adverse you are. That emotional aide of this decision and emotions have value, but only you can determine what that value is. So - generally speaking, the sooner you own an asset of decreasing value the better off you are, but in exceptionally low interest rate environments such as today there are, as mentioned, other things you may want to consider. Good luck and enjoy your new ride. Nothing better then some brand new wheels aye. I'm not sure about your first two options.  But given your situation, a variant of option three seems possible.   That way you don't have to throw away your appraisal, although it's possible that you'll need to get some kind of addendum related to the repairs.   You also don't have your liquid money tied up long term.  You just need to float it for a month or two while the repairs are being done.  The bank should be able to preapprove you for the loan.   Note that you might be better off without the loan.  You'll have to pay interest on the loan and there's extra red tape.   I'd just prefer not to tie up so much money in this property.   I don't understand this.  With a loan, you are even more tied up.  Anything you do, you have to work with the bank.  Sure, you have $80k more cash available with the loan, but it doesn't sound like you need it.  With the loan, the bank makes the profit.  If you buy in cash, you lose your interest from the cash, but you save paying the interest on the loan.  In general, the interest rate on the loan will be higher than the return on the cash equivalent.   A fourth option would be to pay the $15k up front as earnest money.  The seller does the repairs through your chosen contractor.  You pay the remaining $12.5k for the downpayment and buy the house with the loan.  This is a more complicated purchase contract though, so cash might be a better option.   You can easily evaluate the difficulty of the second option.  Call a different bank and ask.  If you explain the situation, they'll let you know if they can use the existing appraisal or not.  Also consider asking the appraiser if there are specific banks that will accept the appraisal.  That might be quicker than randomly choosing banks.   It may be that your current bank just isn't used to investment properties.  Requiring the previous owner to do repairs prior to sale is very common in residential properties.  It sounds like the loan officer is trying to use the rules for residential for your investment purchase.  A different bank may be more inclined to work with you for your actual purchase. You can increase your monthly cash flow in two ways: It's really that simple. I'd even argue that to a certain extent, decreasing expenses can be more cash-positive than increasing income by the same amount if you're spending post-tax money because increasing income generally increases your taxes. So if you have a chunk of cash and you want to increase your cash flow, you could decrease debt (like Chris suggested) and it would have the same effect on your monthly cash flow. Or you could invest in something that pays a dividend or pays interest. There are many options other than real estate, including dividend-paying stocks or funds, CDs, bonds, etc. To get started you could open an account with any of the major brokerage firms and get suggestions from their financial professionals, usually for free. They'll help you look at the risk/reward aspects of various investments. Personally, I would split the difference, putting about half into each.  Simply because it balances out the problem and I don't have to fret about whether one or the other will provide a significant difference.  As bstpierre points out, the one which will make you more in the end is the one which you can grow the fastest.  The mortgage payment is locked at 5% growth, which, while modest, is also essentially guaranteed at this point.  The CD in your IRA is likely less than that amount, even after tax consideration. A couple additional points to consider: I'd pile up as much cash as you can in a savings account - you will need money for the move (even if it's just gas money) and it's going to be hard to predict where house prices are going so you might or might not be underwater when it comes time to sell the house. Or you might be so deep underwater by then that the extra money doesn't make much of a difference anymore anyway. Once you're actually in the process of selling the house, you can figure out if you can (or need to) use the savings to cover the shortfall, closing costs or if you just built up a little wealth during the time you put the money aside. If you decide you need the extra money, you can always go refinance and get more cash out.  At the end of the day, though, if you pay off your house sooner you can invest more of your income sooner; that's just a matter of discipline.