A few years ago, my wife and I paid off our mortgage early.
This is the first we’ve broadly shared it.
We purchased our home for $185K and made a 25% down payment (effectively allowing us to avoid PMI). That left us with a 15-year mortgage of about $140K. The interest rate on the balance at the time we took out the loan was 5.83%.
We could have gone with the standard 30-year mortgage, maximizing the overrated mortgage tax deduction we all hear about.
We could have re-financed once or more, at the cost of a few thousand dollars each time, to lower our interest rate.
And we could have done as most others do and “up-sized” to another home after a few years (on the contrary, we had already done the opposite and down-sized after buying too big of a home the first go-round.)
Thankfully, we did none of those things. Instead, we executed a mortgage payoff with 11 years remaining. Let’s call it the “4-year mortgage”.
Here’s why we did it:
1. Paying Off your Mortgage Early Results in Guaranteed Returns
Guaranteed returns, even if small, are still guaranteed.
If we had kept our mortgage for the full length of the loan, we would have averaged 5.83% in interest payments per year (or about 3.25% if we had paid the fees to go the refi route).
That’s far better than the near zero interest rate returns we’ve seen on CD’s, savings accounts, and money market accounts.
And it looks even better when you consider interest versus principle payments for the first half of the loan. Amortization schedules lead to you paying nearly one-third (15-year mortgage) or two-thirds (30-year mortgage) of your monthly payments towards interest instead of principle for a number of years. Banks win, you lose.
2. No Mortgage Payoff Penalty
Many mortgage lenders will pre-emptively try to block you from paying off a mortgage early by putting in a penalty-clause for early mortgage pay-down. This can be negotiated away by simply saying, “I won’t sign if all mortgage payoff penalties are not removed from the contract”. We did, and removing this negative reinforcement penalty freed (and motivated) us to pay off our mortgage as early as we could.
3. Enhanced Cash Flow Brings New Opportunity
By making the move, we were strengthening our balance sheet considerably. Paying off the mortgage early effectively wiped out almost half of our expenses. This allowed us to save more than ever before. This went a long ways towards my wife being able to quit her job and go back to school to become a nurse.
We had already known how tough things can get when you unexpectedly lose a job. If one of us had lost a job after paying off our mortgage? We’d have gotten by just fine with the enhanced cash flow. It’s a game changer. And a huge stress reliever.
4. It Helped Prevent Lifestyle Creep
If we had ever had the urge to “upgrade” and move in to a bigger, nicer, sexier home, it would have come at a big expense – going from zero mortgage back to a mortgage. We rather liked our new less-burdensome lives. Paying off our mortgage early created a massive disincentive to get sucked in by lifestyle creep.
Last, but definitely not least, paying off our largest debt was an incredible weight off our shoulders. The liberation in doing so is hard to describe in words.
Note: many financial gurus will encourage you not to make this move, and invest your savings instead. In hindsight, if I had instead invested 100% of what I put into paying off the balance, I would have financially come out ahead. But there were no guarantees that would be the case. And if I had gone that route, I would have missed out on all of the lifestyle improvements highlighted here. So, crunch the numbers for your own analysis and factor that in to your personal decision – we have to choose what is best for us individually.
We started with a small house and over the last 38 years added to and remodeled it six times. However we only financed one of those and cash flowed the rest. We also paid off the mortgage early and have owned the house which started as 1440 .sq ft single story and ended at 2850 sq ft two story for many years now. I agreewith paying it off early for all the reasons you mentioned although with three teenagers and low housing costs we did upsize as we went.
Congrats, Steve! Feels good, doesn’t it?
But if you measured #1 against the return of a diversified stock portfolio (not bank interest), which is where you should have had your money, you’d come out way ahead by keeping the low interest mortgage. My mtg int rate is 3% and the stock market has been averaging double digit returns. I’m happier! Do the math with those numbers and see where you would be now.
I addressed in my last paragraph. There are never any guarantees you will do better. Hindsight is always 20/20!
I saw people loose their jobs after the 1987 crash, the early 2000’s dot com bust, and the 2008 crash. In all these cases, people lost their jobs at the same time their investments were significantly under performing. Some lost their homes, others liquidated investment assets at the worst possible time to make the house payments. Every one of them would have been better off paying down their mortgages earlier and maintaining more liquidity while putting less into the market.
You can pick and choose what historical details to use when trying to convince someone of a particular financial position to take. The people who have lost out don’t get trotted out as examples.
Years ago, people would have mortgage burning parties, a party where they burned their mortgage papers once it was paid off.
Sounds great, but the Navy moved me from Norfolk to Boston and then next to D.C. Hopefully we stay in DC for 10-14 years, but a $600k house isn’t getting paid off in 4 years. Home ownership is great, but only in a very specific set of circumstances.
Due to the amortization schedule, if you can make a few big extra payments on principle at the beginning, you save paying a lot of interest! Overall, I’ve tried to hedge my bets, so to speak, by splitting my money to pay extra on my mortgage and add to my IRA/401K. This way I make some guaranteed returns and capitalize on compound interest in my retirement accounts. (However, going this route can be a bit frustrating, as your debt doesn’t go down quite as fast as you might like, and your retirements savings don’t add up quite as quickly as if you weren’t paying extra toward your debt.)
Nice post. We upsized over and over until we found ourselves in a million dollar home in our early 40s. We looked around and thought – “this stuff isn’t making us happy but is causing more stress”. We sold most of what we owned, including the house, and used the proceeds to pay cash for a much smaller house. That was about three years ago and we haven’t had a single regret. Mortgage (and other debt) free is an awesome place to be! Congrats to you on being able to achieve the goal for yourself so young!
Thanks for revealing so much information that most are not willing to share. I like your perspective. To be devils advocate, if somebody lost their job after many years into a mortgage and a job, wouldn’t having a bigger emergency fund be better insurance than only having to pay property taxes on a paid off mortgage?
If you are in the situation where you’d be spending almost all of your savings to pay off a mortgage, then I can see that scenario. In my case, I had years of living expenses saved elsewhere that I didn’t have to touch.
Investing is risky, paying off debt is not. You made the right choice in my opinion. Kudos to you
I love this comment!!!!!!! Sometimes the result of a decision that results in easing the difficulties in life is better.
Grew up in a 6000 sqft home, after the divorce saw mom spend all her money over the next 5 years trying to keep it.
I’ver now paid off my home which is roughly 1/3 that size, 4 people in my family.
Planning on buying my in=laws (even smaller) home and adding a half-story (1-2 bedrooms, full bath) via the attic.
Nice article. Thanks
I paid off my in February of last year. It was on a 30-year mortgage. I don’t make a lot of money but saved a lot for when I was single. It got down to about $70k and I decided that since I was at the halfway point time-wise on the mortgage, to just close it out. Best financial move I ever made.
If investing long-term in stocks is risky, we should all dump our 401k and IRA. Otherwise, paying off a historically low-rate mortgage is a poor decision.
I didn’t say that. And I don’t agree.
How many people would jump at the chance to put a portion of their money right now in a CD that yielded 4% to diversify their assets? (in addition to improving cash flow, quality of life, reducing stress, and all of the other benefits I listed)
I love this post! I paid off my mortgage on December 31, 2016, hitting my goal of paying it off right before 2017 arrived lol. I paid mine off for the same reason as you. I received a guaranteed return and I didn’t have to worry about life style creep when my wife and I were solely focused on paying off the mortgage. If you are wondering to invest or to pay off you mortgage, I recommend paying off the mortgage.
I considered taking money from 401k to pay off house. I’m over 59.5 years, retired. Feedback welcomed.. Interest is 4.6%
Mortgages have traditionally been the cheapest money (debt) one acquires.
I wish I had two lives, exactly the same, to live, but one I’d never worry about doing anything but minimum on mortgage payments and invest my free cash; other I’d pay off quickly.
See what my net worth was with each life lived.
I’m betting paying off a mortgage is the wrong route for me to have gone down in my alternate reality self.
Perhaps – but do you have any regrets? I don’t.
I have to disagree with the notion that paying off debt is risk free. That’s just not true. Come up to Detroit sometime. A friend of mine religiously paid on his mortgage. By the time it was paid off, virtually his whole community was abandoned and he couldn’t sell it. If he had diversified rather than having most of his wealth in one asset, he would be much better off today. Is it a low risk investment? Sure. But not risk free.
I personally will never pay off my mortgage early. My effective rate after taxes is around 3%. I’ll just pay the minimum and let inflation take care of the rest.
It’s funny how contentious this subject is. It really depends on your individual goals, circumstances and personality is. I used to be solidly on the side of don’t pay it off, invest. But I’m older now and my goals and circumstances have changed and I’m planning to pay off my mortgage in the next few years.
For any 2 people,the best choice will be different.
One thing to consider is if you are investing money instead of paying off a mortgage, the returns are taxed. So there are a whole lot of variables including income, whether the investment returns are capital gains or ordinary income, your personal income, income tax bracket and state taxes, etc…
For me it comes down to peace of mind and lowering the expenses I need to live. If I have no mortgage, then I need less income to live and it’s easier and less risky to become financially independent. Also, I don’t really see a lot of undervalued investment opportunities, like real estate and stock were a few years ago.
is there a strategic way to go about paying off your mortgage to save more? (for instance is biweekly payments , an extra quarterly payment, etc etc most efficient?)