In an era of extremely low interest rates, is paying off the mortgage early a mistake? Or could it be a wise financial decision to be completely debt-free?
Like me, Rob from Mustard Seed Money, the author of the post below, chose to be debt-free rather than carry a mortgage in spite of the math that would suggest it’s not the smartest financial move.
He runs the numbers to evaluate what could have been if he had instead invested in the stock market rather than aggressively paying down the $400,000 balance in under a decade. Does he have homebuyer’s remorse?
Rob shares why he paid off the mortgage and what, if anything, he might do differently today. This updated post was first published in 2018, but seems especially pertinent in light of exceptionally low interest rates in 2021.
I think most of us would agree that money gives us security. With enough money, you don’t have to fret about the little things, and you can freely make spending decisions. However, more specifically, I believe that being debt-free gives me a heightened sense of security.
Buying a Home
Shortly after I graduated from college, I felt ready to buy a house. I was earning a decent paycheck, I planned to stay in the area for the foreseeable future, and I had quite a few friends who were eager to move out of their parents’ basements who could be potential housemates.
So in 2004, a little over a year after I graduated from college, I bought my first home at the age of 23. What could go wrong?
I thought I knew everything there was to know about finance. After all, I had graduated with a finance degree in college. In reality, I had no idea what I was doing. I took out what seemed to be a huge, but reasonable, mortgage. Trying to be aggressive, I selected a 15-year mortgage in order to lower the interest rate to 3.5%.
At the time, the real estate market was on fire. I figured that if I didn’t jump in then, I might never be able to afford a house. Looking back now, 2004 was close to the peak of the market. Had I needed to sell the property in 2010, I would have done terribly. Fortunately for me, I didn’t need to sell the house and still live here 17 years later.
Astoundingly, a mortgage company loaned $400,000 to a 23-year-old who barely made 10% of that. Keep in mind, this was the early 2000s. The downside was that I could only afford my monthly payment if I brought in some housemates. As an introvert, I felt both terrified and excited. In one sense, I would essentially gain built-in friends to hang out with. On the other hand, I would become an instant landlord with additional burdens and responsibilities.
While the home could accommodate everyone, four grown men under one roof felt slightly crowded at times. However, it was definitely worth it as everyone contributed to the rent and the various monthly bills.
If you’re thinking about taking on a few roommates, especially if they are all men, I’d encourage you to contract a regular cleaning service. Otherwise, you run the risk of your place morphing into a frat house.
A cleaning service will force your housemates to pick up a little bit, so you don’t eventually find a rat’s nest under one of your roommate’s clothes. I probably ended up saving money, even with the cost of the cleaning service, by avoiding household damage due to neglect.
15-Year vs. 30-Year Loan
It was an easy decision for me. I have always hated debt, so I wanted the shortest loan possible that I could afford. Plus, I had plans to make extra payments each month to pay it off more quickly. I didn’t want this debt to limit me in the future.
Too many of my friends carried student loan debt. I saw first-hand all of the ways that debt hindered them, all because of a decision that they made at 18. I didn’t want a decision made at 23 to come back and haunt me years down the road. Instead, I chose to be proactive by eliminating my mortgage as quickly as possible.
Investing vs. Paying Off Mortgage Earlier
Many financial advisors promote investing money in the stock market instead of paying off your mortgage. Historically, the stock market has yielded greater returns over time compared to the historic lows of mortgage rates.
In fact, since 1928, the stock market has had an annualized return of about 10%, including dividends. Unless your interest rate is over 10%, which we haven’t seen since the 1980s, it would make sense to invest in the stock market.
Even with this knowledge of the stock market outperforming my interest rate, I decided that I would rather lock in and pay off my mortgage. No matter what, there is a risk with the stock market. It made more sense at the time to diversify my portfolio and treat the saved interest expense from paying off my mortgage early as a treasury bond with a guaranteed rate of return.
So I locked in a guaranteed rate of return of 3.5% right? Not quite. When you factor in the mortgage tax deductions, it drops from 3.5% to 2.9%.
What If… I Didn’t Pay off the Mortgage Early?
Let’s explore what would have happened if I had invested that money into the stock market instead of paying off my home. If I had purchased the S&P 500, back when I bought my house (June 2004) and held it until I paid off my mortgage (December 2012), the total return from the S&P 500 would have been 46.04% with dividends (Source: DQYDJ). On face value, that would have been a higher compounded annual rate of return at 4.6% with dividends reinvested versus the 2.9% from paying off my mortgage early.
I went a step further with huge help from ERN, from Early Retirement Now, who calculated that if I had dollar-cost averaged the $900, the actual return would not be 4.6%, but actually 5.8% when you consider all the dips and dives that the market took during this period ***
Therefore, given the difference between the two figures, I theoretically would have had double the return if I had invested in the stock market (5.8% vs. 2.9%).
Some days I wonder how much further ahead I’d really be. However, I am confident with the decision I made. While daunting and strenuous to pay off the mortgage, by the end of 2012, I was able to breathe a sigh of relief. I had reached my goal of paying off my house and felt an incredible sense of accomplishment. I finally had some excess cash at the end of every month that I could freely choose how to spend. It was at that point that I felt like I could start enjoying my hard-earned money.
More importantly, no longer having debt allowed me to relax at work. I was no longer uptight or worried about losing my job or a demotion. Therefore, I took more chances at work, which involved taking riskier positions in order to move up.
Unburdened by the mortgage, I was able to implement changes that I felt were necessary to do the jobs correctly, which in some cases ruffled some feathers, but ultimately proved to be the right decisions. My bosses ultimately rewarded me with multiple raises and promotions.
While I may not have come out ahead when you solely compare paying my mortgage off versus investing the stock market, I believe I came out ahead when you factor in my salary increase and bonuses that I received.
I also factor in the peace of mind of never having to worry about a mortgage payment again. Hence, there are more variables involved than just stock market returns and mortgage interest rate figures. This is why I am still an avid proponent for paying off your mortgage early.
[PoF: If I was still carrying a mortgage, I’d probably celebrate the arbitrage of carrying tax-advantaged low-interest debt while investing in index funds with a higher projected return. That was my line of thinking for years.
However, now that I have been debt-free for six-plus years, I better appreciate the “sleep at night” factor and behavioral finance aspects of living a life indebted to no one.
If you enjoyed this post, be sure to check out more great articles from the author at Mustard Seed Money.]
It’s a great feeling to pay off a mortgage loan, and it’s also great to get the mortgage you need at the best rate possible when first starting out.
Physician mortgage loans are being offered by more and more banks. Whether it is a good option for you really depends. I discuss my experience using a doctor mortgage in this post. The three main features you will see with most physician loans are:
- No PMI despite a down payment of only 0-10%.
- Special treatment for the student loans (usually that they only take required payments into consideration).
- Will close before you start working by accepting a contract, instead of paystubs, as evidence of future earnings.
Are you interested in a physician mortgage loan? The individuals listed below offer physician mortgage loans for these lenders and are paid advertisers on the blog. We appreciate hearing feedback on these advertisers, both good and bad.
Thank you for supporting those who support this site and our charitable mission. Some of these lenders also offer loans for other high income professionals such as dentists, veterinarians, attorneys, podiatrists, optometrists, accountants, and others. (Lenders- if you would like your name and contact info listed here, contact us for a quote.)
Select Your State
AK | AL | AR | AZ | CA | CO | CT | DE | DC | FL | GA | HI | IA | ID | IL | IN | KS | KY | LA | MA | MD | ME | MI | MN | MO | MS | MT | NC | ND | NE | NH | NJ | NM | NV | NY | OH | OK | OR | PA | RI | SC | SD | TN | TX | UT | VA | VT | WA | WI | WV | WY
CA, CT, FL, GA, MA, MD, NC, PA, SC, TN, TX, VA
Contact: Chris Minear (NMLS #273313) at 330–790–1511 or [email protected]
UFCU Mortgage Services:
Contact: John Varner (NMLS# 1615725) at 512-828-2988 or [email protected]
Contact for approved states (email preferred)
Contact: Jonathan Brozek (NMLS #850168) at 916-788-7982 or [email protected]
AR, CO, KS, MO, OK, TX
Contact: Bo Brown (NMLS #499414) at 816-309-5571 or [email protected]
Contact: Moses Luevano (NMLS #1426259) at (855)4BankMD (422-6563) or [email protected]
All States except NY
Contact: Marc Evans (NMLS #362579) at 920-831-7721 or [email protected]
AL, FL, GA, MS, NC, SC, TN, TX
Contact: Charles Felgner (NMLS #659182) at 205-835-6679 or [email protected]
Consumers Credit Union:
Contact: Greg Wierenga (NMLS #1636813) at 616-446-2567 or [email protected]
First Federal Lakewood:
FL, IL, IN, KY, MD, MI, NC, OH, PA, SC, TN, VA, WV
Contact: Brent Bartlett (NMLS #913802) at 216-239-5845 or [email protected]
Frandsen Bank & Trust:
Contact: Brandon Reinarts (NMLS #769600) at 507-353-7427 or [email protected]
Fifth Third Bank:
FL, IL, IN, KY, GA, MI, NC, OH, SC, TN, WV
Contact: Tony Lupescu (NMLS #224410 ) 708-351-6416 or [email protected]
First Citizens Bank:
FL, GA, MD, NC, SC, TN, VA, WI, WV
Contact: Valerie Leonard (NMLS 415176) at 864-630-0921 or [email protected]
First National Bank of Pennsylvania:
GA, MD, NC, OH, PA, SC, TN, VA, WV
Contact Ken Roos (NMLS# 436834) at 412-951-6793 or [email protected]
Golden 1 Credit Union:
Contact: David Mikkelson (NMLS #2436928) at 858-294-7989 or [email protected]
AK, CO, CT, DE, FL, GA, ID, IL, IN, IA, KS, KY, ME, MD, MA, MI, MN, MO, MT, NE, NH, NJ, NM, NC, ND, OH, OK, OR, PA, RI, SC, SD, TN, UT, VT, VA, WA, WV, WI, WY, DC
Contact Sandi Jameson-Frith (NMLS#564023) at 586-749-8355 or [email protected]
Iberia Bank/First Horizon:
AL, AR, CT, FL, GA, LA, MS, NC, NJ, NY, SC, TN, TX, VA
Contact: Tony Umholtz (NMLS #377409) at 813-603-4255 or [email protected]
AK, CO, CT, FL, ID, IN, ME, MA, MI, NY, OH, OR, PA, UT, VT, WA
Contact: Colin Ruffner (NMLS #340475) at 703-615-5934 or [email protected]
States: All 50 States and Washington, DC
Contact: Americo Mendes (NMLS #108768) at 203-842-8921 or [email protected] or visit Laurel Road
IN, MD, MI, NY, OH, PA
Contact: Tad Kuhn (NMLS #501901) at 614-581-2727 or [email protected]
AL, AR, FL, GA, IL, IN, IA, KY, LA, MS, MO, NC, OH, SC, TN, TX
Contact: Lance Johnson (NMLS #93035) at 704-770-3644 Office or 704-975-3033 Cell or [email protected]
FL, NC, PA
Contact: Babita Vashist (NMLS #203282) at 703-283-7251 or [email protected]
^ NMLS # 399797
**Equal Housing Lender. Member FDIC.
*All loans are provided by KeyBank National Association, Member FDIC and Equal Housing Lender. (NMLS #399797)
Have you ever thought about paying off your mortgage? What are your reasons to do so or not to do so? Share your thoughts below.
126 thoughts on “Paying Off the Mortgage Early is a Mistake I’ll Never Regret”
I paid off my $400,000 6% interest mortgage in 4 years after residency. The feeling of being completely debt free was liberating, as the author stated, and allowed more freedom regarding work obligations. The main reason, however, was to ensure that my family would be free of the burden should something happen to me. Predicting possible net-worth or good health is NOT as valuable as knowing your net-worth.
Objectively your principal residence is just another one of your investment assets and should be treated as such. Therefore the cost to purchase it (including the cost of servicing the dept, or mortgage as it is called for property) and maintain it until sale should be balanced against the “holding period” and potential selling price. So, for your personal residence, since the debt servicing costs are so low compared to all the other alternative investments you should maximize your mortgage amount (at all times, not just the initial purchase date) and NOT pay it off until the sale is complete. BUT: most humans attach a sense of “happiness and calm” with being in a specific dwelling at a specific location and thinking that it cannot be taken away from them (the “nest” syndrome which follows Maslows pyramid). Go figure? Investors are just humans divided into 2 categories. The “traveler” ones that founded many countries and the “stay at home” ones that developed farms and cities. If you are a “stay at home” person then pay your mortgage off: you will be happier and poorer but likely will not need the money before you die since you do no traveling. If you are a “traveler” type person then don’t pay your mortgage off: you will be happier and richer to allow you to spend more on traveling. If you are in the middle then flip a coin and like it.
Loved this post, Rob! While personal finance is often described as a numerical endeavor, what you explained conveys that it truly is a marriage of numbers and emotions. While I planned for a 30 year mortgage and took one out, I refinanced to a 15 year recently after 4 years in simply because I wanted to eliminate the debt. Plus, dropped the interest rate by over 1.5%. Thanks for the read, I enjoyed it thoroughly.
The feeling of being totally debt-free even no mortgage is incredibly satisfying. We knew relatively little about investing back then (2007) when we paid off our $154,000 mortgage and feared debt like crazy. I grew up with my dad always being in debt to the bank or a relative for business loans which is a different situation yet cast a fearsome pall over any debt. We are blessed to have our hard work rewarded and have plenty to share now.
The Chase Sapphire Preferred Card
The Chase Sapphire Preferred is my top pick for your first rewards card. Welcome bonus of 60,000 points worth at least $750 when used to book travel (after a $4,000 spend in 3 mo) and other great perks you can learn about here.
I am a little late to this thread but admit to having primitive instincts which can be less than optimal in making the most of my hard-earned cash. I am a UK GP, qualified in 1994 and took advantage of free hospital accommodation for 8 years, paid a 20+% deposit on a home in 2003 (bank didn’t demand this), worked 6-7 days a week and paid off a mortgage of £130K in 6.75 years on a property costing $170K which is now worth £450K+. I have about £150K in cash savings and zero debts now and this has allowed me to quit working under the unbearable pressures of the NHS whilst giving me the option of working as and when I choose as just getting more savings is not a prime motivator. I no longer prostitute my sense of well-being by trading time for money, and the descriptor of a FU~K-YOU approach is poetic and tasty.
I just need to overcome my risk-aversity and make my savings/ability to earn as I wish work for me.
I just paid off my mortgage for a home a bought in 2009. at age 22. I have no debts . No car payments. I paid off my mortgage at age 31. Love my home it was built in 2005 so its still new . I practically live off of $10,000 a year I make $30,000 after taxes a year and my partner works as well. So my household income is about $80,000 a year and just using $10,000 from that. The rest goes to savings and traveling. We live minimally. Waiting for housing market to go on sale so I can buy some properties debt free and get some passive income. Now I am free to go part time which I will next year. I will work 3 days and rest of the days pursue things I enjoy like being a trainer or work couple hours at the gym. And keep going from there. Debt free is the way to go. I also had the same experience at my job. I have taken riskier positions and higher pay. Before I was in the same place because I felt safe. Now I take risks.
I am with you – after much back and forth, taking this year of volatility and paying off our mortgage hopefully by Q1 next year. Cutting about 12k of annual expenses (still considering taxes, maintenance and insurance) is huge! That said we do max out on our 401k first and I would not pay that off unless I had that covered. We are just skipping our after tax savings for now though we already have a decent 150kish in there earning some dividends…
Love reading stories like yours.
I love this post and all comments! I agree that personal financial decisions are not always entirely math driven. We will pay off our mortgage this year. 5.5 years total. Each year we have also maxed out the HSA account and saved about $25k in retirement accounts. My job is 100% commissions and my husband’s job is so stressful we fear a heart attack or stroke is inevitable. Eliminating all debt payments will allow us the peace of mind for him to “retire” from corporate, once we hit our mortgage free goal. Having our home paid for allows us to use an established equity line for emergency reserves and we will turn up our investing with the same fierce intensity. With good but highly unstable income and health reasons to consider, it was never a question of lost opportunity costs. Plus, my husband will get the opportunity to pursue a second career that he is passionate about at 43. The alternative would have been staying in a job he despises because of debt hanging over our heads. In our personal financial world, this was a no brainer we intend to celebrate thoroughly by Christmas!!
Interesting post. We are just starting to throw a little bit extra at the mortgage. I think you don’t have to over extend yourself personal finance is a balancing act with your priorities. But I have found that you don’t notice a gradual change and have applied that. If I pay $1510 this month $1520 the next will I really notice ? Will an extra $10 a month be a hardship? Especially if income is increasing annually. I don’t think we are in a hurry to pay it off but the goal of reaching retirement with no consumer debt is huge.
Incremental increases towards your mortgage is a great way to pay things off. I had a friend that did this with their 401k. They increased it every couple of weeks until they finally hit a pain point they couldn’t handle anymore.
I hope to join you in the debt free club in a year or so, about 5 years into my current mortgage. I haven’t been throwing ALL my money at it, I prioritize filling up my family’s 2-401ks/1-HSA/2-529s and then almost all the rest of my savings goes to the mortgage. Once it’s paid off I’ll put more into my taxable accounts and/or start making backdoor Roth contributions (which will be easy for my wife but difficult for me due to other IRA accounts).
Sounds like a great plan Zac!!! I wish I had made enough money to fully fund all those first. Unfortunately I had to make a decision, which meant for me paying off the mortgage first. Now I’m maxing everything out 🙂
Interesting story! Wild that you were able to get a significant loan amount at such a young age. But I guess, those were the days in the early 2000s. 😉
Been going back and forth with this issue myself. But haven’t pursued it. The interest rate being so low has not made much sense to do it. Though I guess, it depends on each person’s risk tolerance.
Has given me some things to think about. Thanks for sharing your story!
I’m glad you enjoyed the story and yeah it’s crazy the amount of money they lent me back in the day. That definitely wouldn’t happen today 🙂
I’ve come to the conclusion that one should either have a 30 year mortgage or a fully paid off house. In the end, if you save the or invest the money you would have been using to shorten the mortgage you will come out about the same, but if disaster strikes it is better to have 100k in savings and a 300k mortgage than zero in savings and a 200k mortgage. As long as you have a mortgage you still are required to make payments on it. I’ve actually known people who have been burned by this brutal reality. They were aggressively paying off the house and lost their job and had a difficult time servicing the debt.
I think paying off a mortgage is great, especially for early retirees as it is a form of deleveraging. It lowers the need for taxable income and can not only lower taxes, but can increase subsidies for things like health insurance. The math actually becomes quite complicated.
Thanks for sharing Happy Philosopher!!! I definitely agree that it’s not smart to put all your eggs in one basket. If you don’t have an emergency fund that you can tap into in case of an emergency it probably doesn’t make sense to fully pay off your mortgage until that’s set up 🙂
I couldn’t agree more. There is very little benefit in a partially paid off mortgage. The benefit is only apparent when the mortgage payment disappears.
I understand that some mortgage companies, for a fee, are willing to recast a mortgage that was being payed down aggressively but not fully paid off. This is a possible alternative for those who must pay it down ASAP but some calamity happens making continued payments difficult for a short time frame.
Cannot you recast the mortgage to lower the payment if you have been paying off aggressively?
I am trying to aggressively pay down principal on our mortgage. We refinanced to a 15 year loan a couple years ago and the benefits are really starting to show. I like the idea of treating the mortgage as a bond, however your capital is locked up until you sell.
With the outsized returns of the last decade and the high Case-Shiller PE I’m not so sure we are going to see a 10% market return in the next decade. I’m going to make the same decision as you. Time to kill the mortgage. Great article!
Thanks for sharing Shawn!!! Like you I think 10% returns over the next decade might be hard to match. I was definitely glad to diversify when I did 🙂
These regrets which require a spreadsheet to calculate are meaningless, and the reality is that anyone who can afford to pay off his/her home early:
1) Will generally be fine financially
2) Is probably of a cautious nature and this will probably manifest elsewhere in the financial realm (it’s not an isolated behavior, it’s a pattern)
3) Might be responding to inputs and concerns in his/her life, at the moment, that are not universal and cannot be known to those observing (ie. concern for job loss)
Those are great words Vagabond MD!!! You are absolutely right. If you have the will power to pay off your house, the chances are you will probably be fine financially in the long run 🙂
I think this is a great post but it’s not what I did.
I had a 15 year mortgage and kept it for about 13 years. When the interest write off got piddly small I settled the debt. The analysis here involves a “feeling of security” by being debt free, but I always felt secure. I was putting away another $1000 a month into a investment that was paying me 6% instead of 3%. If I ever had to pay the mortgage, I’d just get some money out of the 6% account, the point being I had the money so I had the security, plus I had another 3% growth beyond the security. In my case things worked out. I paid off the loan and kept the interest arbitrage. In my case I paid something like an extra $191K in interest by not paying off early, but made an extra $250K in the market. Plus I had 13 years of the tax write off. The arbitrage paid for a new retirement car one for me, and one for my wife which I stagger purchased about 3 years apart, so it was definitely worth doing.
W.R.T. taxes on a brokerage account v taxes on a mortgage, it’s not too hard to streamline a brokerage acct for tax efficiency.
Thanks for sharing Gasem!!! For whatever reason I have a hard time with debt. I know for some people they can handle it very well while others like myself have a bit more difficulty dealing with it. I realize that I could be further ahead but the peace of mind is worth it 🙂
Great job! One of my friend got roommates for quite a few years too. That gave him a lot of experience. Now he has a few rental houses and he’s doing quite well.
You can’t go wrong paying off debt. It’s guaranteed returns. The stock market was better over the last 10 years, but it won’t always be that way.
Very true Joe!!! I have a feeling that the stock market will be correcting in the next couple of years. So it’ll be nice to have a little diversification during this time 🙂
Thanks for the post.
We are the exact opposite and have held unto debt while investing. We started with a significantly negative portfolio do to school loans and only made monthly payments for years while maximizing our pre tax accounts and investing the rest in taxable. We celebrated when our investments were equal to our debt and had saved up 20% for a home down payment. We bought a home putting 20% down. We continued to pay the minimum on our debt while maximize pre tax accounts and investing the rest in taxable. Eventually we hit a net worth of zero and continued with the plan. Today we still have 10 years on our mortgage and 16 years on our school loans. We also have about 24x in expenses in investment accounts (those expenses exclude debt (I know.)) Due to the amazing growth the market has given us we are very close to having enough to retire and looking to go part time at the end of the year.
Retrospectively not paying off the mortgage has been an amazing decision for our financial well being. Over the last few years having enough cash in investment accounts has allowed me to take on more risk at work which has payed of handsomely and allowed even more taxable account contributions.
Once we hit our goal we will consider maybe paying down the debt sooner. Though my brain says don’t do it. I just saw a post on bogleheads about a Sharonview CD that is paying 4% on a max of $250k. That is already higher than any of my debt. Plus the fed is talking about raising rates more this year.
Thanks for sharing!!! I love hearing views that opposite side of the coin 🙂 I wish I had the risk tolerance for debt. For whatever reason, I’m not wired to feel comfortable with it. I know the advantages of leveraging debt on paper but for whatever reason have a difficult getting my mind to wrap around it 🙂
Here is the thing:
Paying off low interest rate debt over long term is a poor financial decision. Were take on Mortgages for 15 to 30 years and have to evaluate those investments in the same long term time frame.
We constantly talk about taking emotion out of investing. We need to stay the course, we need to rebalance, and we need to not let emotion control our financial decisions. Paying off low interest rate debt is an emotional decision that for many is worth 100s of thousands of dollars. That is a big deal.
Now if one is so emotion driven that they need to be debt free to stay the course and to be happier then paying off a low interest rate mortgage is an appropriate decision. Similarly if a person is in a volatile job industry then being debt free may be the right risk adjusted decision.
I’m not saying you paying off your mortgage early is the wrong decision. It very well might have been the right decision for your needs. But I hate it when people in the finance community advocate being debt free because of the emotional feel of it.
At some point we will have the wealth to afford the luxury of being debt free. That will occur when we are financially independent and do not need the debt any more. Similarly we purchase cars in cash because we are willing to forgo the $2k-$3k arbitrage in carrying such a small loan for the simplicity of not having an extra monthly expense and allowing for lower car insurance. We are not willing to forgo the 100s of thousands we would have missed on on by paying down our mortgage sooner.
I totally agree with you. Personal finance is personal for a reason. What makes sense for one person is absurd to another. I know for me it was the right move from a psychological standpoint whereas for others I know it would have been the wrong move.
Could not agree more. Its annoyingly bald face hypocrisy to tell someone “ignore all emotions, dont sell at the bottom, but think of the feeling you get by paying off your mortgage”!
Also a bit odd is the ‘risk’ portion of the debate. There is very little risk in a mortgage, it is probably one of the least risky ‘debts’ one can have. I dont know a lot of debts that get wiped away by transferring ownership. If its that risky just sell, never buy in the first place.
Anyways, you’re not doing anything about risk anyways, you’re simply changing risks from one that is very tolerable to one that is much less palatable and much much more likely, ie, longevity risk that you run out of money.
Would love to start seeing some more rational takes on this subject, but it has become personal finance canon.
Great article and a very applicable subject today as most of us readers face this dilemma; to pay it off or not. I’ve personally decided to wait, however I do make triple my actual stated mortgage payment each month. So in a way, I’m pay8ng it off, just not in one lump sum as I l8me havin* excess liquidity. Regrdless, this was a fine article.
Sounds like you definitely have the opportunity to pay it but have the risk tolerance to invest it now. That’s awesome to hear and I definitely wish I had a bit more a debt tolerance. Unfortunately the way I’m wired…I can’t stand debt so I lose out on some of the leverage 🙁
Thanks. Here’s one way to look at my situation. My rate on my 7-year ARM is 2.80% and I receive the tax deduction. I have an amount equal to my mortgage payoff in a high savings savings earning 1.60%. Soooo……the effective rate I’m paying is only 1.20%. Anyone would jump at the chance to only pay 1.20% for a mortgage.
Interesting article and I really liked the comparison of returns.
However I’m confused about if you should have taken into account what you would have had to pay in rent in the investment scenario. You have to live somewhere…..and would likely make the difference in returns smaller.
Thanks for stopping by!!! Sorry if I wasn’t more clear in the article. I was hoping to show in the comparison what the difference of the extra payments that I made towards my mortgage. Since the mortgage was fixed…I was trying to determine how the extra payment towards the mortgage impacted my rate of return 🙂
I treat our mortgage as part of our bond allocation. The payment ahead is ultimately a psychological question of your risk tolerance. How much you pay should consider that tolerance in some way. When it comes to psychology the right answer is unique to you.
You are absolutely right Full Time Finance!!! I love finance because of the psychological element. Everyone is wired differently and what makes since on paper is hardly ever the outcome 🙂
Great blog! When I joined my practice, a wise senior partner advised me: “You can tolerate a lot of financial turbulence if your house is paid off.” So I made this my goal. (Another partner advised me that $4M was needed to retire, and I made this another goal.)
I paid off our house in 2010, and while it would have been mathematically more advantageous to pad the nest egg with the house overpayments, math does not keep me up at night, but debt does/did. Debt free from that time, no regrets.
Thank you for sharing your experience and wisdom.
Sounds like we have a similar mindset with debt 🙂 I am so glad that I don’t have to worry about debt anymore and it’s one less thing to think about before I go to bed 🙂
Great post! We are six years into a 15 year mortgage at 2.875%. I am not in any rush to pay it off at this time. In about five years, as we approach retirement and get close to a decrease in cash flow, we will likely pay the whole thing off.
If future inflation and interest rates go up, a 2.875% loan will be very cheap money!
Thanks for sharing GXA!!! I love hearing the other side of the coin. Sounds like you are very comfortable with the debt you carry and have a great plan in place. For whatever reason I was kept up late at night by my desire to pay off my mortgage and could only dream of the day of paying it off 🙂 I definitely wish I was more comfortable b/c using debt as leverage can be a huge wealth booster!!!
Fun post! I too am debt averse and love reading (relatively) contrarian ideas like this.
One question I have that maybe PoF can answer: In one of the last couple of guest posts PoF has had, the author wrote about investing with a 100% stock portfolio while paying off his student loans because he treated his loans as bonds. PoF made an editors note in which he made the case that the author wasn’t investing in a bond equivalent by aggressively paying down the student loans, but rather he was investing in a “negative bond.” Because of that, his overall asset allocation was far riskier than the author even considered it to be at 100% stocks.
The question is: Would someone who is aggressively paying down a mortgage also be considered to be investing in a “negative bond,” and perhaps have more exposure to stocks than he intended?
I guess the follow up question is, “Does that even matter, or is it only semantics?”
I’ll defer to PoF but since I know what the rate of return was for my mortgage calculated with the interest rate I would think it was positive based on the final rate of return. But I’ll have to round back on that article 🙂
Debt is a negative bond so paying it off is making the investment less negative, which is a positive. To go more negative with a negative bond would be to sell more bonds (take out bigger mortgage). Mustard Seed is right.
Both are correct. The asset allocation in question from The Physician Philosopher was > 100% stock, making it riskier than a 100% stock portfolio.
By investing in the mortgage, the negative bond, both MSM and I state that paying that off makes the overall portfolio less risky.
It makes more sense if you read the linked post and my explanation there, I promise.
That’s an interesting question, and I’ve heard a similar argument in favor of cash value life insurance (not that I bought it — the argument or the product). But the fact that it’s forced savings.
If you’re worried you’ll spend any money you have left over, I’d work on a budget and read a few books on basic personal finance — much cheaper than buying whole life. But I have no problem with the 15-year mortgage. I think it’s preferable. Lower interest rate, more money going towards principal from the get-go.
Do you think that you would have invested the difference had you chosen the 30 yr mortgage?
I totally understand the math makes sense to go with the 30 and invest the rest but the 15 yr option is enticing to me not solely because of the math but rather it forces you to save more (save meaning pay down debt) per month and leaves you with less to spend. Did you feel like that aspect helped or do you think you would have been diligent enough to have saved the extra each month and invest it?
I’m with PoF on the 15 year loan. You pay a lower interest rate and get to sock away more into your forced savings account (principle) from the get go 🙂 Plus I’ve found that most people I know aren’t disciplined enough to save the difference and end up spending it 🙁
I’m in my 60’s and I was thinking the other day, I’ve only had 2 years I paid for a mortgage. The rest of my life has been renting or owning homes outright.
My credit was bad when young, so the only place I could afford was very low cost and a crappy house in crappy area. I paid cash. It provided a huge stepping stone to buying other properties.
Thanks for sharing Mike!!! I am hoping if I ever move into a new home in the future that we can pay cash for it. I’d like to avoid mortgages if we can 🙂
Great post Rob – Even though we just chatted about this on our podcast episode, I’m still inspired how you are free to do what you want with your time and money now.
Congrats on the PoF feature as well!! 🙂
Thanks Erik!!! I had fun doing the podcast with you as well 🙂
I bought a multiplex and paid off the mortgage very quickly. I live in a high cost of living area and I think my home increased in value 6x since I bought in 2003. Having a multiplex affords many options but most of all I love having my home paid off. I refuse to carry any debt that I have to pay myself. I have been happy to use debt for my real estate investments however.
Wow your home increased by 6x is incredible. My home has unfortunately has been stuck in a rut for the past couple of years since it’s a townhouse 🙁
Great story, Rob. I’m currently in that situation as I face the same dilemma. I have a $770,000 mortgage at 3.625%. We can aggressively pay it off in 5-7 years. But that would mean my wife and I would have to be ultra frugal and make only small contributions to our investment accounts; it would be like living our residency and law school days all over again in which we felt like we were barely scrapping by. Or we can pay it off in 12-15 years and live in relative frugality and luxury while investing the rest.
One the one hand, there is a huge psychological benefit of having no mortgage debt. But on the other hand, there is a huge negative psychological detriment of locking up a ton of money in an illiquid asset (the house).
Decisions, decisions. We will probably plan on the 12-15 year relative frugality plan since both of us don’t ourselves retiring in the next 5 years 😛
Personal finance is personal for a reason 🙂 What’s right for one person doesn’t make sense for another!!! I’m in the camp of you need to enjoy the financial journey along the way, within reason 🙂 Sounds like you have a great plan in place!!!
That seems reasonable. We paid off our home in 11 years. No reason to suffer. We are also an MD/JD couple, not too many of those around here.
Hi VagabondMD! Yeah, you’re right… I don’t find too many MD/JD couples around here either. Nice to be with great company.
I see you comment quite a bit on PoF and WCI and I’m wondering when you’re going to start a blog of your own. 🙂
I guest blog, here and there, but I have not yet found a unifying theme for a blog of my own. But maybe I just did— “MD/JD couples – Sleeping with the Enemy”. Haha.
LOL!!! I love it!
Given your numbers and to pay off your loan in 13.5 years (average of 12 – 15 years), you monthly payment are about $6025. The interest payed over that time is $204,511
If you pay it off in 6 years (average of 5 – 7 years) that’s $1200 per month with a total interest payment of $87229.
That’s a saving in interest charges of $117,282 !!!
Not sure why I can’t edit my previous post but here’s the revised one.
Given your numbers, to pay off your loan in 13.5 years (average of 12 – 15 years), your monthly payments are about $6,025. The interest payed over that time is $204,511
If you pay it off in 6 years (average of 5 – 7 years) that’s $12,000 per month with a total interest payment of $87,229.
That’s a saving in interest charges of $117,282 !!!
I get the math behind not paying down the mortgage faster if your locked-in rate is below a threshold. But I’m struggling to see the benefit of not paying down if your (the generic “your”) eventual goal is FIRE. Having a mortgage payment in retirement would significantly increase the size of nest egg to draw from, and consequently, delay that start of early retirement.
For us, paying off the mortgage makes perfect (emotional?) sense. I’m sure that some math can easily show us that instead of the extra payments if we invest that in the markets, we’ll probably have enough after stopping work to afford the mortgage payments in retirement.
Congrats Rob! I’m a little jealous of people who have achieved this monumental goal. For us, between 4 to 6 years to paying off the mortgage AND saving enough for life after no 9-5 job.
Thanks A-non!!! It definitely wasn’t easy but I am incredibly thankful that it’s paid down now. Living in a HCOL area I see people struggling to save and pay for their immediate expenses. Living next the Joneses doesn’t help either at times 🙂
Timely article as I am now grappling with the decision of whether to pay off my mortgage. With a rate of 2.5 %, 10 years left (15 year mortgage) and FI the ability to be debt free is appealing. But I keep coming back to the rate being so low and my very real dilemma of actually spending my savings (topic for another discussion).
I actually read an article the other day that said that your savings rate is much more important than your investment rate of return. That it was a bigger predictor of your success. I thought that was interesting 🙂
Agree completely. There is more to it than end wealth. We paid our mortgage off last year and haven’t even bothered to calculate the difference if we were invested.
Hahaha…in hindsight I kinda wish I didn’t know the official figure. But I’m glad that I do so that I have a frame of reference to share with others 🙂
A very inspirational story…especially for someone who is working their way through student loan debt and then mortgage!
Glad you enjoyed the story 🙂 Keep up the hard work and you’ll be out of debt in no time at all!!!
Curious if the “what if” calculation of the sp500 returns of 5.8% take into account having to pay taxes on that investment ?
It seems like the instant return on debt payoff is even better than any bond fund because you aren’t paying taxes on that “gain”.
I could be wrong in my thinking as I am a novice
I like the thinking Seabass!!! The tax situation is tricky as you could go multiple ways. Some could say it could go in a tax advantaged account while others who pay taxes on it immediately have different tax rate structures. So I figured I’d show what the rate of return was 🙂
While we still have nine years left on our mortgage, I am so glad we got a 15-year mortgage. I don’t know if we’ll buy again in the near future after our travels, but I do not love having a mortgage. I’m sure this is a huge burden taken off your shoulders! Oh, and PoF, those Hawaii pictures are mean! I’m in the middle of a snowstorm right now! 🙂
We’re expecting a snowstorm this weekend and those Hawaii pictures are making me wish I was anywhere but here right now 🙂
It’s a mental burden to have a mortgage hovering and if our interest was anything above a 5% or god forbid the interest rates during the 70s and 80s, I would have chucked it so fast.
Our mortgage is a modest 3.75% and it gives me less butterflies. We also don’t have kids and run Airbnb so that helps. It just mentally frames house as a business debt rather than a personal debt.
Having the debt set up as business debt is I’m sure much easier to swallow 🙂 Too bad AirBnb wasn’t around when I was paying off the mortgage…although I’m not sure there would have been much room in the inn 🙂
Our first mortgage rate was about 10%. I’m dating myself a little with that information! I recall that we were getting around 10% from a money market account as well. We focused on paying off that mortgage. It was tough at first but became easier and easier as time went on. We refinanced several times to obtain lower interest rates as they fell. We started with a 30 year and went to a 15 with our first refinance and never went back. Extra payments were made toward principal to accelerate the pay down. Looking back, I would have liked to have saved more but I really do not have any regrets. Being mortgage free gave us a big psychological boost. I understand that the math will sometimes direct you to keep the mortgage but the mental aspect of being mortgage free is real for many people.
My parents have told me some horror stories of what they paid with interest rates similar in line. They too paid off their mortgage and like you described the psychological boost from not having to worry about the mortgage. Sometimes peace of mind trumps dollars and cents 🙂
For me the psychological benefits are worth it. I didn’t know I had a monkey on my back. After I became debt-free, I felt that stress lift.
Hahaha…I’m in the same boat. It took me about six months for it to truly sink in but getting rid of that mortgage was a game changer in my life and I felt the stress melt away 🙂
I know the feeling.
Back in the ’80’s I would buy run down homes for rehabbing. I would get owner financing for most as banks didn’t see me as being capable of paying the 18% going rate on my Eng salary (but we did get very large o/time reimbursements). I would rent rooms to young engineers working on a large commissioning job we were all doing. I would keep either a basement or attic room for myself in each home. In fact one of my ‘rooms’ was the furnace closet & that was before CO detectors. But this strategy allowed me to come & go at will & be there to collect rents each week & there was always beer in the fridge. I eventually sold off many after they more than doubled in price & then used the cash to accumulate higher paying REI.
The rents received were used to aggressively pay down the high int rate mortgages. Today we hold a large portfolio of free & clear properties that allowed me to retire at 49.
That’s incredible Pat!!! I thought I was doing well with house hacking but you took it to another level!!! Sounds like real estate has treated you well over the years 🙂
I paid off my mortgage somewhere between 2002-2006. It was nice to be debt free during the great recession.
That’s awesome to hear!!! I was paying down my mortgage during the recession and it felt like it was the only thing with a positive return 🙂
I’m right there with you rob, while I know mathematically it might not be the right move, paying off our mortgage is pare of our FIRE plan.
Really great post!
I’m glad you enjoyed the post!!! It’s definitely something that has helped our family 🙂
Interestingly I wrote a similar article considering different scenarios. My conclusions where different . If you get sometime please give it a read.
Should I Prepay My Mortgage?
I’ll definitely have to check it out. Thanks for the read!!!
We’re slaying our mortgage now, baby. No looking back!
Hahaha…that’s the attitude I like to hear!!!
Paid off our mortgage in 2014 and have no regrets!
Hahaha…that’s what I like to hear!!! My parents felt the same exact way 🙂
Hi Rob, You know by now, I am very debt averse just like you. Tom
Hahaha…I know of our mutual disdain for debt 🙂
Great post Rob!!
I am doing the same thing with my student loans, since I don’t have a house yet. Although it makes more sense to invest it, I would rather clear the debt from my name :).
Getting rid of debt doesn’t always make a lot of sense on paper but the psychological benefit for those that hate it is enormous 🙂
We paid it off. Now that my kids are older and my income is higher, I wish we’d completely maxed out our retirement accounts (back when we were both government employees we had required retirement plus 403b plus 457 options and for some of that time the ability to backdoor Roth) first because now that DH no longer has a 457 or required saving we have money leftover each month that we can’t hide from college financial aid by putting it in retirement or paying down the mortgage.
Wow I didn’t even think about the college financial aid aspect of things. That’s a great point to bring up and not something I thought about when paying off since we didn’t have any children at the time.
Love f – fund ideal, does make a nice difference at work, and maxing the 403 funds etc is likely a good idea, however how much fin aid for ( I am assuming your kids ) a physician kid is really going to receive is likely to be low. Maybe 529 money might be an option.
I agree with this wholeheartedly. Having read all the arguments against paying off a mortgage, I just considered it a bond equivalent and did it. It is truly a financial windfall to not have a mortgage payment, and it facilitates and increased savings rate (plus enjoying yourself a little more). I don’t think anyone who pays off their mortgage will regret it.
I’m right there with you. Not having to make a monthly mortgage payment is wonderful and something I don’t regret. From time to time I wonder how much further I would be along if I hadn’t but then I think about all the risk I’ve taken at work and why it was the right move for me 🙂
It sounds like buying a home right after graduation has worked for you on a number of levels. I had a few friends who dove right into homeownership after college only to be faced with a tough decision of whether to take a job offer elsewhere which involves selling and relocating or staying put. Homeownership can often mean we’re putting down roots that can make it tough to leave and pursue other opportunities. In your case it sounds like paying off your mortgage actually opened the door to new opportunities by allowing you to take risks! As you point out, those type of things don’t show up in the numbers. I’m happy to hear your decision has worked out so well!
I was lucky that all of my family lives in the area and I really didn’t have any desire to move anywhere else. If I had been itchy to potentially move I know that it probably would have been the wrong move and really bitten me in the behind 🙂
Excellent post. We are currently on track to pay off our 30-year loan in 17 years… which puts a payoff date during our son’s Junior or Senior year of high school (and opening up cash flow for college). We’ll see if we tweak that or keep the current plan, but the extra we pay towards our mortgage gives us peace of mind right now. Sure, it may not be the best move from a strict numbers perspective, but we are happy with the results so far!
Personal finance is personal for a reason 🙂 Like you paying off my mortgage early felt like the right move and I’m glad that I did it in hindsight. That peace of mind is priceless!!!
Living debt free is a big deal. It’s something I can only dream of at this point in my career while I swim in debt 🙂
That said, I completely get the behavioral finance side of this and living debt free. I love that Rob felt empowered at work to make decisions that “ruffled feathers” when he had the house paid off. It’s the miniature “F off” fund. He knew that he was financially secure enough to do what he thought was right. In my opinion, this is one of the biggest benefits of being financially independent. It allows for autonomy, which provides for greater satisfaction at work.
I’ll have to go check out Rob’s site!
Thanks for the kind words!!! The F off fund was definitely a real mindset that I had. I was much more secure than I otherwise would have been. It made all the difference in the world for me 🙂
In my pre FIRE aware period, I wanted to pay off as fast as possible and threw bonus money at the mortgage.
Now that I am FIRE aware and understand my numbers I want to keep the mortgage. The interest after tax benefits bis close to 0 and we have in the emergency fund and bond like investment the cash to cover all future mortgage payments. I hope not to use them for that!
Sounds like you have a plan in place and are executing it perfectly 🙂 That’s awesome to hear.
I’m living my best life, my business partner who we worked together few months referred me to Fixmyfinance01AT GMAIL dot com when I was very broke because of some bad business decisions and i got a transfers of over $15,000 with their help to settle bills. I was about going homeless but now i can pay my bills comfortably, they also help with credit repairs, bitcoins mining
Great post Rob. I’m still carrying a modest mortgage at 3.30% and am comfortable with it. But I see it both ways, it would be nice in a certain way to say “I’m debt free”. On the other hand the last 8 years of a raging bull and the extra money I had riding that bull has put my net worth in a very comfortable spot. It’s given me enough to consider just writing a check for the rest of the mortgage, which I might do at some point.
Thanks for sharing!!! That’s awesome that if you wanted to pay off your mortgage now that you could with one swipe of a check 🙂 I definitely don’t regret it but I do wonder from time to time how much further ahead I’d be…
Why wonder, just do the math.
Great point! I’ll back into it this weekend.