So Yeah, I Paid Off My Mortgage

It’s an age old debate, and sometimes a feisty one in the “personal finance” circle online.  The question is this: In this particularly low interest economy that we’re in, does it make sense to pay off your mortgage?  I can’t answer that for you.  Hell, I can barely answer it for myself.  But I figured it would make for a good article to explain my own reasoning for the decision to pay off my low-interest mortgage.

Financial Analysis

First off, I know most of the money-driven decision makers on here are thinking “BNL – You’re an idiot!” So let me address this financial aspect first.

Before I start, let me just state upfront that I’m going to somewhat simplify the math, particularly around taxes because it starts out simple, but becomes complicated math that would dilute the overall point.  Additionally, once I quit, my tax bracket and tax implications change dramatically.  

The interest on my loan was at 3.275% and I owed roughly $100K.  This means I was paying about $3,275 per year in interest.  This interest is tax deductible at a marginal tax rate of ~30%, which means that’s $980 less in taxes I have to pay on my income.  Subtract that $980 from $3,275 and you’re left with $2,295, or the equivalent of only paying an interest rate of 2.3% due to the tax break.  So now you’re thinking I’m even dumber than you thought, because there are tons of dividend-growth stocks out there that pay over 2.3% dividends (taxed at 15%, for now) and have raised their dividends every year for 10, 20, and even 50 years!

But it’s not that simple.  Over the past year, I’ve gotten involved in private money lending (a new article on that will be coming soon), where I lend money to a real estate investor at an interest rate of 12%.  On top of that, I get 2 “points” up front, which means I get a payment of 2% of the value of the loan immediately.  So if the deal lasts 6 months overall, then that 2% becomes 4% annualized, and the overall return on the loan is roughly 16% annualized.  I’ve done two deals with an investor this calendar year, and returned an average of 15% annualized.  The 1% drop is due to downtime between the two loans where the money was inactive.

What does this have to do with paying off my mortgage, you might wonder?  Considering I just gave up $100K in liquid capital, then at first glance this just makes my decision even crazier, since now I have less money to loan at 12% interest.  That’s what I was thinking too, until I discovered the wonderful world of HELOC’s (Home Equity Line of Credit).  Now that I paid off my house completely, I can easily get a loan for up to 75% of the value of my house at 4.25% interest rate.  What this means:  I can borrow money at 4.25% and lend it to someone else with an expected return of about 15%.  Better yet, when the money isn’t actively invested with a real estate investor, I can pay down my HELOC and have no interest payments.  This is in contrast to keeping the money in cash, where during that same downtime I still have to pay my 3.275% mortgage interest.

Volatility

There’s also the matter of volatility.  If you’re into investing, then you’ve certainly heard the common meme that with risk (volatility) comes reward.  And for the most part, I’ve found this to be true.  But this can also be turned around: with reduced return comes safety (less volatility).  And as someone looking to quit my full time job sometime in the near future, there’s certainly an interest in reducing volatility.

In other words, while I may be able to keep a reasonably predictable income through dividend growth stocks, I still don’t want to see my capital rising and falling with the market.  Dividend growth zealots will argue that the capital doesn’t matter as long as the dividends keep coming in (and in fact a bad year such as 2008 can actually work to your advantage since you can buy low), but this argument ignores one very important thing for a proud family man like me – peace of mind.  This shouldn’t be discounted, at least not for me.  As stoic as I like to consider myself, and as calm as an investor as like to think I am – there’s still no doubt that a year like 2008 will happen again.  And I have no desire to watch a $1M nest egg drop to $650K in a single year.  Say what you want about dividends not being reduced during that time, that would still be a stressful year.  Worse yet, if a few dividends do get reduced and I have to eat into my capital, I’m doing it at a market low point – the worst possible time to tap into invested capital.

The truth is, I didn’t care about my losses in 2008 when it happened, because my job was paying me way more than I spent, and that job was secure. But in the future, when I’m not working and just living off my dividends and other passive income, a few bad months of income could mean having to (a) eat into my capital when the market is down, or (b) having to go find a job.  Neither is necessarily catastrophic, but it puts at risk the financial freedom I’ve worked so hard to achieve.

Market Timing

You’ll never hear me talking about “timing the market” or day trading.  With that said, there’s a simple fact that I can’t get away from.  The P/E ratio, at the time of this writing, is approaching 20 and climbing.  This is common.  What’s also common is that it will go back down to it’s long-term average of 12-15, potentially at an alarming rate.  I prefer to ride the roller coaster up, not down.  On some levels, I hate even writing this as I know it’s bad to try to time the market, but simple math will tell you that a P/E ratio of 20 means that it takes 20 years to get your money back before taxes, excluding growth (a speculative play).

Image courtesy of multpl.com.

chart-image-23a3d6e72adb3231

There are two ways for the ratio to return to 15.  Either earnings rise and the prices remain the same (meaning no additional principle growth for me) or the earnings stay flat and the prices drop (meaning loss of principle for me).  Of course, it could be some combination of the two scenarios. Either way, neither are attractive to me.

Now, it could be that the P/E will continue to rise to 40 before dropping, in which case if I timed it perfectly I would stand to make a lot more  money.  But that gets back to speculating.  I’d rather stay conservative, and wait for the market to return to normal.  This doesn’t mean I’m selling the stocks I have, just that I don’t want to double down on it.

Decoupling Needs From Money

Let’s get away from the financial analysis now.

Ever since I started this site, I set one specific goal – I wanted to become financially independent.  There are other aspects to my long term goals of this site, but the fundamental facets to becoming financially independent are:

  1. Increasing passive income
  2. Decoupling needs from money (reducing expenses)

My decision to pay off my mortgage negatively impacted #1, and positively impacted #2.  You could argue it’s roughly a wash.

However, over the past 3 years that I’ve been (semi) actively writing here, I’ve come to the conclusion that #2 is more important, because #2 is much more in my control.  I can buy safe stocks, I can buy a good rental property, and I can find other relatively safe investments.  But I can’t control any mismanagement of the companies I own with those stocks, and I can’t control my renters ability to pay rent on time. In other words, I can’t control the reliability of my income.  I can reduce risk, but only to a limited extent.

On the other hand, I have much higher control of my expenses.  I can control the size of my house and the mortgage required. I can control whether my family needs one car or two.  I can control my grocery budget and how often and where we eat out.  I can control, to a high degree, my need for money.  Up until now, my largest expense by far has been my mortgage.  Not that that’s gone, I can focus on the next biggest items (Next up, groceries!)

 

So that’s it.  That’s why I paid off my mortgage.  Feel free to leave your thoughts below in the comments.  I’d love to hear whether you agree or disagree with my decision (not that I can change it now!)

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51 Responses to So Yeah, I Paid Off My Mortgage

  1. Insourcelife says:

    First of all, congratulations! This is a huge financial achievement that is very rare for people in your age bracket.

    I find it amusing that almost every article I read posted by a person who paid off their mortgage, they feel a need to defend their decision. I’m currently aggressively paying down a big mortgage and feel great every month when I press that Transfer Money button which commits the capital I could have invested in the market to reducing the outstanding principle on a loan carrying a measly 3.25% interest rate. I don’t want to OWE anyone anything! Sure, I COULD make more money elsewhere but I could also loose it. Problem is, if I invested that money, in 2-3 years from now I would still owe a ton of money to the bank – regardless of a win or loose in the market. Just like you I am a family man and I value security of a paid off home much more than chasing alpha in the market. Your home is your castle… but only if you own it!
    Insourcelife recently posted..If $h!t Hits the FanMy Profile

    • Fatchance says:

      ISF, I paid off all my debts but my house back in 2006. I wanted to pay off mortgage but my wife said I was an idiot. Since we had an incredibly low rate (for then) of 4.75% it was much better to invest. I disagreed so we decided to let a financial advisor be the tie breaker. He said not to pay off the house. Since this is not what I wanted to hear, we went to another financial advisor. That guy said not to pay off the house. We went to a third and got the same advice. I relented and agreed to keep the dreaded mortgage. We put $100K in the market instead, saw it rise a little and then crash in 2008-2009.
      At that point my wife said, “We should have paid off the house.”
      Anyway, we paid off the house in 2010 and I have ABSOLUTLEY NO REGRETS. Of course this is what I wanted to do all along so I am biased.
      Get your hose paid off. If it ever turns out to be the wrong decision, you can always go back into debt.
      P.S. My mother-in-law is 65 and has a brand new 30 year note. How depressing. She is locked into debt for life.
      I am, however, “FREE AT LAST, FREE AT LAST!”

      • Insourcelife says:

        Great story, Fatchance. It’s always good to hear words of encouragement from others who choose to pay off their mortgage early and who are glad with their decision years later.

        To play devils advocate though, I wonder what those financial advisers would say now with a 20/20 vision of what actually happened in the market since 2006. What if you invested 100K in 2006 and kept in the market until now? S&P 500 was at around 1,300 in 2006 vs. around 1,800 today. That’s almost a 40% increase instead of 4.75% (or less due to write-offs) you would have saved by paying off your mortgage early.
        Insourcelife recently posted..Installing a Baby Gate Without Drilling Into a BanisterMy Profile

      • Sorry to hear about your bad timing, but thanks for sharing this story. This assumed market volatility was the ultimate tie-breaker for me and my wife, and your story helps cement my my confidence that I made the right decision.

        I always said I that after I paid my college loans off, that I would never go back into debt. Unfortunately my early 20′s hit me and everyone around me told me to go into debt, buy the biggest house you can get a loan for, and watch the profits soar. I’m just glad I’ve finally put that mistake behind me.

      • @Insourcelife

        I’ll play devil’s advocate right back. The 40% gain you mentioned is closer to 38% and that’s over 6 years, and is closer to a 5.5% APR… So not that significantly higher that what was saved by paying off the mortgage. Additionally, it had (and still has) high risk/volatility. And with risk, comes reward. So is the additional 1-2% reward worth the risk? I suppose it depends on your timeline and risk acceptance. For me, I’d take the reduced volatility at this point. You can’t ever take the house away from me, but you could take all my invested money away from me. But the 25 year old version of myself would disagree, because I had a longer timeline and different goals.

        As for your specific question, I suspect an advisor would claim they were right all along. Nevermind the fact that stocks could drop over the next year, and the numbers would then count against them. That’s my biggest problem with the common financial advisor, they work too much off long-term emeprical data and don’t so much consider the current real world. Then again, I may be biased, considering that I know two financial advisors personally, both with degrees and certs in financial advisement, and both cash poor and planning on a 65 year old retirement banking heavily on social security.

      • Insourcelife says:

        @BNL. I agree and like I mentioned, I’m trying to pay off my low 3.25% mortgage as soon as I can. I was just saying that in Fatchase’ example the adviser would probably say something like “see, I was right, the market beat the rate of return you locked in when you paid off your mortgage, especially if you consider the interest tax write-off”. I’m personally fine with that for the same reasons you and other people already mentioned and I value the security of 0 debt much more than chasing a higher % in the market.

      • Petunia 100 says:

        I realize it is not the main point of your discussion, but I can’t help but notice you are trying to ballpark estimate the return of the S&P 500 from 2006 – 2013 without including dividends. Because of this, your estimate is not even close.
        Petunia 100 recently posted..Money In, Money OutMy Profile

  2. Leigh says:

    I fully support this decision! Some people think I’m a bit crazy, but I’ve been paying my mortgage down aggressively. It started out at $286,000 back in June of 2012 and is now down to about $198,200 and will be paid off in another couple of years.
    Leigh recently posted..Two Year Mortgage Pay-off PlanMy Profile

  3. Bryan says:

    I am also a supporter of your decision and agree that your #2 (reducing expenses) is a more reliable play than #1 (increasing investment income).

    I’m also trying to get into hard money lending, but haven’t found any good opportunities… if you need someone to pool money with for a bigger loan, let me know!

    • Awhile back, I was in discussions with a local investor who is a real estate agent that focuses foreclosures and flips, a flipper himself, and has a certification for appraisals. We discussed one of us getting a brokerage license and starting an LLC where we could pool money together and start a legit hard money business. I figure $1M is the minimum amount needed where you can keep a significant amount of your money constantly invested, and not having to turn down people looking for money (otherwise, you end up with a bad rep and they will learn to go elsewhere).

      If we ever take it beyond just talking about it, I’ll write about it here. I’m sure you’re not the only one that would be interested.

      Of course, before we do that we have to get quote a few legal items covered to ensure everyone is properly protected. This includes him and me, the investors, and the borrowers.

      • Bryan says:

        There are similar pools in my area. But I like the idea of having a smaller group of partners so all our names are on the note. Some pools don’t put your name on the note, so you don’t have a direct tie to the property and if things go belly up, you are left chasing the managers.

        Yield sure is hard to chase these days. Think about it: if the 30 year bond was paying 10% like it used to, we could all just dump our money in that, 100% safe, and live off the interest. I long for higher interest rates! I like buying 7% yielding preferred stocks from solid companies like PSA, but principal values are volatile like you say.

  4. Totally fine with your decision to pay off the mortgage, especially as it gives you a ton of freedom to make those private loan deals should they arise AND gives you a reduced monthly level of expenses when that money isn’t invested. A win/win in my book and a smart play on maximizing your available leverage as well.
    writing2reality recently posted..2013 Prosper Investment CriteriaMy Profile

  5. Dom says:

    hmm…

    sounds too good to be true? The returns that is, from the hard money lending. Do you have any guarantees on this?

    I’m sure you’ve done your due diligence and all but I’ve heard of quite a few people getting their fingers burnt when the housing market takes a slide, with their money in the game.

    As you say, no reward without risk, but surely you are chancing a lot more through your money lending than investing in established companies?

    Dom
    Dom recently posted..The cider insiderMy Profile

    • Nothing is guaranteed, of course. Including investing in established companies. But it’s a pretty secure loan. I’m only willing to invest up to 70% of the ARV (after repair value), based on the appraisal. And, since it’s the first and only lien on the home, if my money is not paid back within 1 year, then I can foreclose on the home and take ownership. that’s never the goal with a hard money loan, but it’s my legal right.

      So the biggest risks are:

      1. The housing market takes a massive dive and the value of the house drops below the 70% I loaned out. At which point I could take a loss. (Then again, a drop that big might mean that it would make a good rental property).

      2. The REI is incompetent and doesn’t do the work right. The protection here, if I chose to use it, would be to only give the initial value of purchasing the house, and putting any additional money into an escrow, where I only release the funds on a weekly/monthly basis after reviewing the work that was done and the receipts to prove it.

      The 15% return is pretty high, since 16% is the maximum and requires the money to be constantly active. After my second loan, I’ve been inactive for about 2 months, so the “annualized” return is dropping. That’s not really a “risk” though, just a downside. This is also a good reason that using an “annualized” return isn’t necessarily a good way to describe hard money lending – unless you get enough money and flippers pulled together to keep the money reliably active.

  6. Oelsen says:

    Financialization has its logic, life none. Control what you can, maximize freedom, which is most of the time not maximized profits. Truely owning something is the gold of these days.

  7. Basij Lorena says:

    I also agree with your dision and u did a great job. I also follow your statement thanks for providing such a great idea.

  8. We did the same thing this year. I feel conflicted about it on some days, admittedly, but it was the right move for us. I personally could not imagine being FI and still being leveraged to the tune of six figures. Like you said, peace of mind. If all that costs you are some hypothetical opportunity costs, I’d say that’s a good deal. Others will disagree, but whatever.

    Like you said before, follow your arrow (I point everyone to that video now too, BTW). I hadn’t heard of her before but she gets her own station on my Pandora now. :)
    Done by Forty recently posted..They Want to Help You…My Profile

  9. Carol says:

    We had a similar discussion with ourselves before buying properties outright. Given recent housing market cycles, we also considered the fact that in buying mortgage free we were assuming the full risk of home ownership in an uncertain market. Traditionally the banks assume a good chunk of that risk with you. While we have never foreclosed (on previous mortgages), and would go to great lengths to avoid it, there is something to be said about sharing risk. In the end, we decided the reduction of costs was more important. Thank you for sharing your analysis.

    • This is a valid point if foreclosure is an option. Maybe I’m not smart enough to find a way to hide all my assets such that I could foreclose despite the large amount of personal capital I have (maybe I should get an MBA!). That’s not knocking on your choice, just that I’d prefer not to include foreclosure and an option for me, since I don’t see a way I’d need it barring a major economical failure – in which case a foreclosure would be the least of my problems, since I don’t own a gun! :)

  10. Executioner says:

    Congrats on paying off the mortgage. My wife and I have no regrets about paying ours off either. I completely agree with the power of reducing expenses in the quest for financial independence.

  11. Veritas says:

    Great post and congrats. My wife and I have gone back and forth on paying off our mortgage. We haven’t done it yet, but may do so in the next year or two. My hesitations are future mortgage payments will be made with less valuable (accounting for inflation) dollars, which appeals to me, and I need to research if HELOC rates would jump when the fed rate eventually rises.

    I’ve been following the Shiller PE ratio as a strategic indicator of longer term future market returns and the current ratio indicates the next ten years could produce below average returns. As such I’m quite interested the private money article you are writing so I can diversify a portion of my nest egg out of the stock market!

    I’d also be interested in learning more if you form an LLC for private money lending. Could be a win-win for you (as the manager earning a fee) and investors (earning strong returns) as well.

  12. Pete says:

    Agree with your decision. It was easier for me…my loan was at 5.5%. I think the stock market is even riskier than the PE of 20 would suggest. I have never seen so many companies so filled with debt. Debt/equity, price /book, and debt covering ratios seem so out of line these days. Years ago I could find a slew of companies with a debt/equity of 1. Today a company like Verizon has one of 109. Can this be so? $109 of debt to every dollar of equity? We now know stress shortens your life. I’ll take the peace of mind every time.

    • Bryan says:

      Pete has a very good point. We tend to only measure rate of return in dollars. What about in peace of mind? Probably more important than dollars.

    • Pete,
      I agree about the increasing debt/equity and price/book ratios – especially the p/b. Back in 2009, you could get a p/b at basically 1 (sometimes lower), which basically meant that if the company liquidated and never made another penny, let alone grew the business, you would come out even. Only if they started losing money would you have any risk. Now, p/b ratios are all over the place but not near 1.

      Debt/equity is also too high in many cases, although you have to be careful how you read that. Some companies simply don’t have a lot of “equity,” but that’s not necessarily a bad thing. A telecom like Verizon, for instance, doesn’t have a lot of material equity and generally pays a high dividend so they also don’t sit on a ton of cash. A low D/E ratio also could be a sign that the company simply doesn’t know how to grow so therefore has no reason to take out any long-term debt.

      Regardless a D/E of 109 is something to watch for sure.

  13. First, congratulations on paying off your mortgage. I still have ~25 years left on both of mine.

    Financially, it does not make sense to pay off a low fixed-rate loan when there are greater returns to be made elsewhere. Even outside the tax benefits, the economy tends to be inflationary, making the repayment in real dollars on a 30-year note at <4% APR less expensive over time than paying it all off with current value dollars.

    All that said, the psychic weight of having debt is real and there is value to having it lifted. Whether that value is worth the financial opportunity cost is a personal decision everyone has to make. I'm happy to carry the notes for a longer period to have more capital available for current investments.
    Nicholas Sarwark recently posted..Simple shelf from one hardwood plankMy Profile

  14. I think it is a great idea. The interest rate on the line isn’t that much higher than the first mortgage. You have access to the line for emergencies unless it is tapped out as part of your investment strategy, but it sounds like a win-win situation to me.
    Betsy @ ConsumerFu recently posted..How to Prove you are a Good Credit RiskMy Profile

  15. May says:

    Congratulations on paying off your mortgage! Sometimes it is not just about the numbers. We try to be rational beings and analyze and justify and follow the rules. Some times we use the numbers to fool ourselves. The intangibles need to be considered as well. No financial choice or decision is one size fits all, you did the best thing for you and your situation and that is what counts.
    May recently posted..Could a Couple of Monkeys…or My Kids…Pick a Winning Stock Portfolio in this Market?My Profile

    • Bryan says:

      I was thinking more about paying off a mortgage, and this struck me. NO MATTER WHAT, the choice to NOT pay it off and invest instead, will be more complex. It will involve some risk, time researching, time following investments, possibly some worry, etc. On the other hand, paying of your mortgage is almost guaranteed to simplify your life. After lots of years thinking about these things, I’m starting to realize that simplicity is a lot more important than I thought it was. Simplicity is one of the big missing ingredients in modern life, in my opinion. So, I think I’d vote for simplicity over “Potentially” higher gains.

  16. Jon Maroni says:

    Congratulations. That is a huge accomplishment and I can see your rationale for paying it off in the time frame you did. We are taking a similar approach to paying off our student loans. We know that the math may not support choosing to aggressively paying them off but it isn’t always about the numbers. The satisfaction of paying them off is worth it to us.
    Jon Maroni recently posted..How to Improve your ResumeMy Profile

  17. 2l2r says:

    Hi

    These seem like conflicting posts
    For example, a few months ago I tried getting a HELOC on my rental house that is 100% paid for, and was only offered up to $40K at 4.5%. And that’s on a house that appraises at $210K! – See more at: http://www.bravenewlife.com/09/lending-club-update-august-2013/#sthash.L37xRHbS.dpuf

    Now that I paid off my house completely, I can easily get a loan for up to 75% of the value of my house at 4.25% interest rate. – See more at: http://www.bravenewlife.com/11/so-yeah-i-paid-off-my-mortgage/#comments

    • It’s not conflicting, although I could have elaborated better had I remembered writing the note about being rejected on my rental house HELOC in a previous post…

      I talked to the banker, and he explained why I was rejected. Basically, money is tight and they don’t like to lend on HELOC’s that are not also a primary residence. At first thought, that made no sense to me, considering that the HELOC is protected by a hard asset (the house). But, they still want to avoid a foreclosure, and it would certainly be easier for me, the borrower, to walk away from a rental house than it would be for a house that keeps you warm and safe at night… I’m still surprised they won’t lend out more than $40K on a house worth $200K and no other liens, but thems the rules, apparently.

      When it comes to primary residence, he assured me that I can get approved for up to 75%, although I’d probably never go over 50%, which works out to about $110K.

  18. Steven says:

    It’s probably because I listen to Dave Ramsey podcasts on my train ride to work every day, but anytime paying off the mortgage vs investing is mentioned this statement comes to my mind “The borrower is slave to the lender”

    I’m probably as big of a gambler and risk taker as many out there, but to me this isn’t disposable income, this is the difference in me never making a payment to Wells Fargo again or relying that my investments will destroy the market and instead of 200K sitting there I have 800K. While I like the risk, the control factor you mentioned in your article was spot on. I can’t control if Microsoft goes up or down, but I can control not making a mortgage payment.

    Also your comments about borrowing from your HELOC to fund an investment sounds like an NBA player investment, thats not good. While I understand your 70% ARV and being able to foreclose on the property, that’s not something I would want my house and residence apart of. Is there any way to save up to have the capital for investments. It just seems like a high risk, said the market crash of 2007-2009.
    Steven recently posted..What Do You Want to Hear? Dumb DecisionsMy Profile

  19. Poor Student says:

    Congratulations on your mortgage payoff. I think that if you feel you made the right decision and are doing your best for your family, you are golden. It’s true that you probably could have made more if you had invested it like you mentioned but at the end of the day, it’s not all about money. Peace of mind is important too.
    Poor Student recently posted..Are Students Eligible for a Credit Card?My Profile

  20. Nate says:

    Well done sir!!!!

    You definitely made the right decision. The reason? Because your risk profile has now changed. It’s that simple. You value stability and CASH FLOW (or at least your guys does even if your brain is still trying to reconcile). I know from experience ;-)

    I found that our level of happiness and contentment increased when are expenses were less than 3K a months and we had years of savings in the bank. The LARGER the gap between expenses and income — the better you will sleep at night.

    You made a great decision. Well done!!
    Nate recently posted..How I Transformed My $45,000 Income into a Six-Figure IncomeMy Profile

  21. Scott W says:

    I wish I could take the other side since most of the responses have agreed with your decision but I also like the decision.

    I have debated a close friend for the last couple of years who believes the math is obvious for investing however, I prefer to not have debt and especially a big debt like a mortgage. I also like diversification since we don’t know what will happen to the markets or housing values the next 10-20 years, for me to own my 200k house free and clear and have 500k in the market makes more sense than 600k or even 650k invested and a 150k mortgage hanging around my neck like a noose.

    I have 5 years left on my 15 year mortgage and will probably pay off sooner and I can’t wait for what I believe will be a great feeling of relief. I can then start throwing even more into the market.

    Thanks for sharing your thoughts on the subject.

  22. Dude!! I am going say what everyone else is thinking… WE MISS YOU MAN!!! I know you are living the good life in retirement – but your blog has a special place in our hearts. It’s time for another post ;-)

    I hope you and your family had an exceptional holiday!!

    Cheers,
    Nate @ TheyBuyTime recently posted..Stop Making New Year’s Resolutions!!!My Profile

  23. Congrats! I agree, reducing expenses is a huge part of the financial independence equation. It is our goal to pay our mortgage off in the next 4 years. Can’t wait!
    Deacon @ Well Kept Wallet recently posted..What First-Time Home Buyers Should KnowMy Profile

  24. The Warrior says:

    Let me start by saying that I loved the breakdown and acknowledgements of the opposing views.

    I, like you, am more interested in reducing expenses. The more control I have, the happier and more secure I am.

    I get pounded time and time again for wanting to pay down our mortgage faster rather than investing more into the market. The security in knowing that in a worst case scenario, I would just have to pay utilities and for the food budget is more welcome to me than living or dying by the market.

    Know that you do have some support from the personal financial blogging world despite the overwhelming disregard for your approach.

    The Warrior
    NetWorthWarrior.com
    The Warrior recently posted..2013: Financial Year in ReviewMy Profile

  25. Bryan says:

    I have a question. Why not buy a 30 year treasury note yielding 4% and use the income from that to pay the mortgage payment? Your house will be paid off after the 30 years and when the note matures you’ll get your principal back!

    I calculated this and for my scenario I would be ahead about $140,000 by doing it this way compared to writing a check to pay off the mortgage. This even takes into account a small $300 negative cash flow for the amount the mortgage exceeds the treasury yield.

    I suppose the disadvantage would be what if the USA defaults on their debt, but if that happened, wouldn’t it be chaos and anarchy anyway?

    Just wondering everyone’s thoughts on this. The treasury idea eliminates the volatility of the market.

    • There are three reasons, although each could be easily argued…

      1. US Bonds are not only AA rated, where as paying off your mortgage is essentially AAA+ rated. This guy explains it in a little more detail. Like you said, if the US government defaulted on their bonds, there could be anarchy and chaos, which might mean it’s all a moot point and I’d be wishing I had my money in gold or the Chinese Yen.

      2. If the aforementioned chaos does ensue and hyperinflation occurs, then I like the idea of owning all the essentials outright, including my house. While the banks couldn’t increase what I owe, my investments (including the bonds) could tank, leaving me nothing to pay off the mortgage. I’d then be foreclosed and left with nothing. It’s unlikely of course, but now there is absolutely nothing but literal violence that could take my away.

      3. Totally mental. I just never wanted to be in debt, and it feels good to be out of debt. Basically, decreasing my expenses and income by a similar amount is a good thing. On opposite extremes, I’d rather have no expenses and no income, than have 10K/month in expenses and $10K/month in income even though they net the same thing.

  26. Pete Cash says:

    I firmly believe that any chance you get to pay down your mortgage should be taken and I think it’s great when I hear people like yourself talking about achieving this. Your article gives an excellent analysis. :)

  27. CB says:

    Congrats! It’s a huge accomplishment to be in the position to even get to make a decision like this – certainly a high class problem.

    People often contrast paying off their mortgage to the opportunity cost that could be found in the stock market. However, investing in the markets has almost nothing in common with paying off your debt. Instead, it could more easily be compared to buying a CD, since that’s a guaranteed investment. And I’ll bet you can’t find a CD for 2.5%

    For someone who is not planning to work for much longer, capital preservation is extremely important. I think many of the early retirement bloggers are too bullish about the stock market and don’t focus enough on an appropriate asset allocation for someone who’s intending to live off their income in the near future.

    • For someone who is not planning to work for much longer, capital preservation is extremely important. I think many of the early retirement bloggers are too bullish about the stock market and don’t focus enough on an appropriate asset allocation for someone who’s intending to live off their income in the near future.

      This is exactly how I feel. Capital preservation and conservative assumptions about investment returns are my priority. I look at my investment income like a garden used to feed my family. It needs to be protected and nurtured. I shouldn’t go into each month assuming it will produce as much as the previous month, and each year will be as good as the average of the previous years – all at the risk of starvation.

      • Bryan says:

        But you guys wouldn’t even trust a 30 year treasury? In my situation, a 30 year treasury purchase instead of paying off my mortgage would put me ahead $150K over 30 years… that’s a lot of money, would pay for one of my kids college education!

      • Bryan –

        I understand what you’re saying, but there are a few things still to be considered. As previously mentioned, the US treasury bonds have been downgraded from AAA to AA. In my opinion, this isn’t just posturing by Moody’s and the rest of the ratings reports. The Fed and legislative branch have proven to be, shall we say, hesitant to commit on their payments. 10 years ago, no one would have believed that the US T-bond wouldn’t be AAA. 30 years is a long time, so who knows where it will be. Perhaps you’ll get all your interest for those 30 years, perhaps you won’t. Sure, the Fed can print more money, but that only works for so long.

        Also, do you plan to live in your same home for the next 30 years? What happens if 10 years from now, you want to move. You’ll have to open a new mortgage (because you didn’t pay off the current one, and your money is locked up in T-bonds). If interest rates are at 7% then, now what? Your gamble with using T-bonds to pay your mortgage (and then some) no longer works out to be positive cash flow. So now that $150K that was going to pay for your kids education is no longer there. It might even be negative.

        Of course, you can sell your bonds. But no one will pay full price for them, because they can buy new bonds for 6-7%, similar to your mortgage rate. So now you have to sell them for 50 cents on the dollar, to effective give the buyer the higher interest rate that they can get elsewhere.

        There are also tax implications. Your bond interest is taxed at the federal level. Your mortgage interest may or may not be a tax deduction, depending on your personal situation. For may people, this will pretty much be a wash, but not for all people.

        This is probably worth an entire post sometime. :)

        Let me know if this makes sense though, or if you still disagree. It’s a good discussion.

      • Bryan says:

        I hear you. All makes sense. I’m just trying to reconcile paying off my mortgage with the advise of several millionaire friends who think it’s financial stupidity to pay off a 3.5% loan. I mean, do we really think the stock market returns will average less than 3.5% over THIRTY YEARS???

        By the way, if it’s easy, I’d appreciate if you could remove my middle and last name from the last few comments, I didn’t realize I was posting with such open identity here… Thanks.

  28. There is no way I would argue with you about paying off your mortgage. There’s more to life than interest rate arbitrage between what you pay and what you earn on your money. If getting rid of a mortgage payment gets you closer to financial freedom, hats off to you! There’s risk in having debt payments, and you make your financial life more secure by having as few of them as possible. Yours is a goal I have as well.
    Mark @ mortgagesbymark recently posted..Beware These Common Advertising Gimmicks Mortgage Lenders Use to Get You to CallMy Profile

  29. FinanceJerk says:

    Just came across you blog. Congrats in paying off your mortgage! I’m about a year away from paying mine off and I love reading blogs like yours that show great stories of people getting it done.

    My motivation is more from that fact that I want to take retirement into my own hands. I have too much of my retirement in 401k (stocks, bonds,etc) and want to diversify into other assets that I can have more control of like rental property and businesses.

    I’ve never met anyone who’s paid off their home and regretted it. The people who tell you not to pay it off are the people who still have mortgages. Maybe they’re way smarter than me. That’s ok. Next year, I won’t owe them or anybody anything. Its hard to put a price on freedom.

  30. We’ll have our 15 year mortgage payed off in October 2015. I’m definitely looking forward to this, and at 45 realize that this is something very few accomplish. But in hindsight it would clearly have been better off investing my money instead of making double mortgage payments. I think for a lot of people, it’s mostly a psychological issue. I’ve always not been comfortable with having any kind of debt, so eliminating the mortgage debt will provide a lot of peace of mind. We can debate the pros and cons of such decisions, but at the end of the day, having lost out on some market gains because I paid off the house definitely is a first world problem.

  31. Congratulations!!!! The whether or not to pay off my mortgage question is a difficult one and highly personal. Even with all the number crunching pushing one way or another (usually toward not paying it off early), the intangible psychologic benefit is difficult to value and certainly varies greatly. Regardless, congratulations! I hope you had a huge smile on your face when you hit the enter button to transfer that last payment.

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