Paying Off the Mortgage Early is a Mistake I’ll Never Regret

Today, we have a guest post from a co-nominee for the Best New Personal Finance Blog at FinCon last year. Neither of us won the Plutus Award, but the nomination alone was an honor.

That recognition is not the only thing we have in common. There’s also the fact that both of us 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. Why? I’ll let Rob explain, after a brief introduction, which he kindly supplied.

Rob of Mustard Seed Money is an accountant for the federal government with a passion for all things personal finance.  He created the website Mustard Seed Money and the course Reaching FIRE.  Both of which emphasize sound financial education and advice. 


 

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 13 years later.

Housemates

 

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.

Start earning the free vacation you deserve with a rewards credit card today. Top Cards by Category
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.

 

Quick tip:

 

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 almost 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 ***

cough cough

Great Recession***.

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%).

 

japanese house hilo

what if… we lived in hawaii?

 

Regrets?

 

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.

The Chase Ink Business Cash Card

No Annual Fee, a $500 welcome bonus with $3k spent in 3 mo. & up to 5% cash back on certain purchases. More on why it's one of my favorite cash back business cards here.

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.

 


Track your investments for free with Personal Capital. That's how I track the PoF portfolio

 

[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 several 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.

p.s. Pictured above is one of the homes we actually stayed in during our recent 23-day trip to Hawaii.]

 

 

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:

  1. No PMI despite a down payment of only 0-10%.
  2. Special treatment for the student loans (usually that they only take required payments into consideration).
  3. 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.)

Physician Mortgage Lenders

BMO Harris Bank:

AZ, FL, IL, IN, KS, MN, MO, WI
Contact: Marc Evans (NMLS #362579) at 920-831-7721 or [email protected]

Cadence Bank:

CO, FL, GA, NC, TX
Contact: Stephen Moore (NMLS #268781) at 512-785-5354 or 713-871-4057 or [email protected]

Chemical Bank:

IL, IN, KY, MI, OH, PA, and WV
Contact: Darick Hensel (NMLS #1177936) at 810.245.9609 or [email protected]

Citizens Bank:

All States except AK & HI
Contact: Michael Keithley (NMLS #29261) at 513-607-0850 or [email protected]

Fifth Third Bank:

FL, IL, IN, KY, MI, OH, TN, WV, GA, NC, SC, WI, PA
Contact my business manager Cindy ([email protected]) for contact information by sending her an email with Fifth Third in the subject line.

First Citizens Bank:

FL, GA, MD, NC, SC, TN, VA, WV,
Contact: Valerie Leonard (NMLS 415176) at 864-630-0921 or [email protected]

First Federal Lakewood:

OH, MI, KY, WV, IN, FL
Contact: Eric Veronica (NMLS# 83197) at 419- 318-8985 or [email protected]

First United Bank:

OK, TX
Contact: Brian Pratt (NMLS #310252) at (512) 632-1731 or [email protected]

Fulton Mortgage Company:

MD, DC, VA, PA, DE, NJ
Contact Jim Webster (NMLS # 658933) at 240-620-1414 or [email protected]

Horizon Bank:

MI, IN, and IL,  (call for specific counties served)
Contact Barbara Reamer (NMLS #783173) at 517-816-4124 or [email protected]

Huntington Bank:

OH, IL, IN, MI, WI, WV, KY, & PA.
Contact Sandi Jameson-Frith (NMLS#564023) at 586-749-8355 or [email protected]

Loan Depot: 

AZ, CA, CO, FL, HI, IL, KS, MA, MI, MO, NV, NJ, NC, OH, OK, OR, PA, TX, VA, and WA
Contact: David Henderson (NMLS#1183120) at 916-549-9916 or [email protected]

Regions Bank:

AL, AR, FL, GA, IL, IN, IA, KY, LA, MS, MO, OH, NC, SC, TN, and TX

Contact: Lance Johnson  (NMLS #93035) at 704-770-3644 Office or 704-975-3033 Cell or [email protected]

Suntrust:

AL, AR, CA, DC, DE, FL, GA, MD, MS, NC, OH, PA, SC, TN, WV, VA,
Contact: David Hager (NMLS #595259) at 904-208-1349 or [email protected]

Synovus:

AL, FL, GA, MS, NC, TN, SC
Contact: Paul Rainer (NMLS #116670) at 706-410-6434 or [email protected]

UMB:

AZ, CO, IL, KS, MO, NE, OK, TX
Contact: Doug Crouse (NMLS #363861) at 816-728-3631 or [email protected]

**U.S. BANK:

All 50 states
Contact: Hunter Finley (NMLS #950092) at 916-302-6408 or [email protected]

Washington Trust:

CT, MA, RI, and NH.
Contact David Fay (NMLS #513224) at 617-429-2059 or [email protected]

*Arvest Bank:

AR, KS, MO, OK
Contact: Jim Secrest (NMLS #1104170) at 913-634-2323 or [email protected]

BankMD:

TX
Contact: Moses Luevano (NMLS #1426259) at (855)4BankMD (422-6563) or [email protected]

BBVA/Compass Bank:

AL, AR, AZ, CA, CO, FL, GA, ID, KS, LA, MA, NM, NV, OH, OK, OR, PA, RI, TN, TX, VA, and WA.
Contact Michael Wagner (NMLS# 801156) at 817-310-4017 or [email protected]

*Arvest Bank
**Equal Housing Lender. Member FDIC.

 

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.

 

122 comments

  • Amy G

    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!!

  • Subscribe to get more great content like this, an awesome spreadsheet, and more!
  • 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.

  • Pingback: FOMO, Cancer, and the Practice of Medicine - Physician on FIRE

  • Pingback: Blog: FOMO, Cancer, and the Practice of Medicine – My Blog

  • Adrian Singh

    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.

  • Pingback: retired mortgage - Mortgagelendersinohio

  • Pingback: 300K Mortgage On - Fhaloanlimitsillinois

  • Pingback: How Much Will I Make Off My House | Buyingahomeforthefirsttimetips

  • Pingback: 80000 Mortgage 15 Years | Bed-bike

Leave a Reply

Your email address will not be published. Required fields are marked *