I paid off my mortgage last year. Why did I do it? The time was right for me and it still might be the right time for you to do the same thing. I'll explain why.
I've been on a rampage against the mortgage lately. In my last article (more reasons to pay off your mortgage), I responded to a few comments from readers. This article led to another comment from Jeff. Here's the part that really hit home:
I agree, right now, there doesn’t seem to be a short-term low-risk investment that will return an after tax return in excess of most 30-year fixed mortgage interest rates. About a year ago, several online savings accounts were offering 6% APY, and PenFed had a 6.25% CD promotion. Those might have tempted some of the more risk adverse people, as they were probably safer than paying down your mortgage.
Jeff is making a good point here. Interest rates (for investors/savers) are terrible. That is the number one reason I paid off my mortgage.
I realized that I hadn't properly explained my motivations for paying off my home mortgage.
My wife is very risk adverse. I fall into the conservative category also. So we're not about to start investing directly in the Russian stock market. We had a sizable amount of money in various high rate savings accounts. After the rates starting dropping, we decided that it was a good time to pay off our mortgage.
- Don't get the impression that we paid off a small fortune. Our home is modest, so paying off the mortgage wasn't as big issue. Considering that our income had at least doubled since we moved into the house, it was relatively painless.
- The money it took to pay off our house represented a fraction of our net worth. We didn't stop investing in stocks, bonds, etc. We simply decided to move some money from savings to pay off our house. The money we used wouldn't have been in the stock market anyway.
- We decided to invest in ourselves. I have the perpetual American dream of owning my own business. I figured that by reducing the monthly outflows, of which the mortgage was the highest amount, I had a much better chance of starting and staying in business. I wish I could do the same for health insurance, etc but it just doesn't work that way.
- I really couldn't stand the thought of our money sitting in a low interest bank account. So in a compromise with my wife, we decided to pay of the mortgage instead.
So I hope this helps those who are agonizing over the mortgage decision. The answer is: do whatever makes sense to you. Our situation is unique to us, our risk tolerance and our goals in life. Your decision should be the same.
I'd make the same decision today. I didn't count on the level of freedom and the extra cash flow we have. I'm closer than ever to striking out on my own.
Tags House & Mortgage Interest Rates Investing Mortgage mortgages Pay off Your MortgageRelated Posts
- More Reasons to Pay Off Your Mortgage
- Debunking Mortgage Myths – Should You Pay Off Your Mortgage
- Should I Pay Off My Mortgage? The Easiest Test Ever
- Best Investments in a Depression
Comments
17 Comments so far
Sounds like you made the right decision based on your risk tolerance and remaining balance. Not to mention that you had other reserves to cover unforeseen expenses.
A quick question: how far would your mortgage interest rate drop before you would have been tempted to keep your mortgage?
For instance, I have student loans fixed at 1.625% for the next 26.5 years. If 6 months from now, I couldn't get an after tax return of 1.625% on extra money I have lying around, I wouldn't be tempted to use it and pay them off. I would be willing to take a short term loss (investment return < student loan interest) to keep the student loans around and let my invested money beat my student loan interest rate long term.
Jeff,
Short answer:
If my mortgage had been at 1.625%, I would have kept it.
Long answer: I'll cover that in a full post. I paid off my student loans b/c they were consolidated at around 6%. At the time (before high rate savings accounts and right after the bubble burst) it made sense to us. If they had been below 4% I probably wouldn't have worried about them, but my wife might have.
Sorry that it took me so long to track down article # 3 … hopefully, you'll see this comment:
You articulated very well the # 1 reason to pay down your mortgage – you are highly risk averse. Which is fine.
You've also seen my blog, which is specifically targeted at people who want to dramatically increase wealth, which usually precludes diverting scarce cash resources to paying down one's mortgage.
Not that such people can't be risk averse: they just have to recognize that leverage is a requirement for real wealth and manage risk within that framework.
Interestingly, these strategies CAN come together: when you retire e.g. I have no mortgage, but do have a HELOC for occasional investing purposes, and I'm not afraid to use it
Thanks for triggering this debate with a series of well thought out articles.
AJC.
I am 47 now and paid off my house last year. People came out of the woodwork to tell me that isn't a good idea because I should be able to make more money in the market and I should have thought about pulling equity out to invest as well,this is there version of getting rich. Well I did it for peace of mind and I would do it again. A friend of mine that did invest his equity into the market lost it and just forclosed on his home. I guess I am just dumb for having a peace of mind.
@ Ryan – In the current market, you are indeed very, very smart … particularly if you are also on track to have the retirement of your dreams by way of additional funds / investments outside of your house (presumably, safely sitting in cash/bonds and the like, right now)?
If not, then my question is: how will having paid off your house help you get there, or will you be able to time the market as brilliantly again the second time and know just when to draw down your home equity and hop back in?
@AJC – I think Ryan isn't shooting for a "retirement of his dreams," but merely trying to avoid a "retirement in his nightmares," like the one that his foreclosed friend is well on his way to realizing.
@ Jeff – Aah, paying off your mortgage as a risk-avoidance strategy, then? I like it …
But, then the question still need to be answered:
How will having paid off your house help you get there (i.e. 'a retirement devoid of nightmare'
)?
@AJC – It depends on your definition of a retirement nightmare–my definition is lacking financial independence when you no are capable of working. I believe that owning your own home can be a good step in gaining that financial independence.
@ Jeff – I understand your point completely (!) – and, please stop me if the answer is not something that you want to discuss here – but, I think I am missing something:
Once you have paid off your mortgage, exactly how does that help you get "financial independence when you no are [no longer] capable of working"?
[I inserted 'no longer' because that's what I assume you meant in your response to my earlier versions of this same question?]
@AJC – I did mean to say "my definition is lacking financial independence when you are no longer capable of working." Thanks for catching and correcting it.
Do you think owning your home outright increases your chances of eventually having to live through a retirement nightmare? If not, your question is answered. If so, I'd love to hear (read) your explanation.
@ Jeff – I don't mean to be disrespectful, as this is your blog and I'm just visiting, however, I asked first … and, three times!
Given that my mother-in-law died 'penniless', living from welfare check to welfare check, EXCEPT for a house fully paid off … I'm don't personally subscribe to the 'pay off your home' idea.
All the 'solutions' that I can to her financial situation involve reversing her decision at some point … so, I'm suggesting to make the reversal at the earliest point possible.
But, it's actually not the 'nightmare' or 'rich' scenarios that I'm asking about here …
So, I'd still be interested in your thoughts as to how paying off your home early can help one live 'comfortably' in retirement?
And, if you had to peg me for a definition before you can answer: common financial advice seems to define 'comfortable' as 75% – 125% of pre-retirement salary (but, I can be swayed on this, too).
Any thoughts?
@AJC – This isn't my blog…I'm just visiting also.
AJC said "So, I'd still be interested in your thoughts as to how paying off your home early can help one live 'comfortably' in retirement?"
The key word in your question is "help." I believe that any asset (having shown long-term historical appreciation and transferrability) can "help" one to live comfortably in retirement.
When dealing with a paid off owner-occupied home, the asset commonly "helps" by reducing the amount of income you need each month in retirement, as you don't need to pay a mortgage (or rent). The (higher) equity in your home can also provide an increased or prolonged income stream in retirement, e.g., through a HELOC or a reverse mortgage. You could also sell your house and then use the proceeds to "help" you provide your comfortable retirement income.
@ Jeff – Oops, sorry for my confusion. And, thanks for your comments!
I would also be interested in Wealthy's view since he raised the subject. Wealthy?
AJC,
Dying old and penniless is the default state. You literally don't have to do anything to die broke.
The problem with debt is that it's a "screw-up" amplifier. What happens when you lose your job (if you are dependent on wage income)? A mortgage is a loan against you future income stream with a home as collateral. A bank doesn't want your house, the bank wants your future income stream, which is much more valuable to them.
As of right now I'm recession/depression "resistant". I could live off my savings for years even if both my wife and I lost our day jobs.
That's obviously not my goal. My goal is to take my part time software business to the next level. Without debt, the transition is going to be a lot easier.
I don't understand the fear of paying off one's mortgage these days. Decades ago it was simply common sense to do this.
I'm within three months of having my house paid off, and it feels pretty darn good. I'm 48 years old, and have always lived well within my means. The house we live in was a dump when we got it six years ago, but we were able to buy it for a song and renovate it ourselves. I simply hate debt of any sort, I have one car loan at 0.9% that I'll pay off after I get done with the house. I even go so far as to pay my entire credit card balance every two weeks, when I get paid. Capital One's gotta love that. I figure that by August 1 I'll be able to say that I don't owe anybody anything. Everything I've ever read that argues against paying down your mortgage has always come from somebody who is trying to get their hands on my money. I find the tax write-off argument laughable. I've taken the standard deduction for two years now. Even if I could itemize, it still looks like paying a dollar to get 28 cents back. About the same time as the financial meltdown started, I started attacking my mortgage with a vengeance. I told my family to bear with me for 18 months, because every time I got two nickels to rub together, it was going to the mortgage. Another big part of it was because I was mad about the bailout. There was nothing I could do about it, but I knew that the sooner that Chase quit making 5.875% off of me, the better I was going to feel. My goal is to put my two teenage kids through college without having to touch my investments or rely on student loans.
Wow, I guess I am really blessed to pay my second house off in my lifetime, and I am only 38! My 1st house we bought over ten years ago and paid it off within 4 years. I rented that house out for a year and had enough for a very sizable down payment for my current house, which is a rather large house coming in at 6 beds 4 baths. I was putting that rent money towards the mortgage of the new house for about a year. Once the old house was sold and got the check, I took that money as well as money I had locked into a CD that was up and paid my current house off. So it took me 1 year to be mortgage free again, and I did all of this before 40. I am not a CEO or anything. I am an individual working in testing IT for 13 years now, and my wife is a teacher. My wife and I have been very conservative, but I do have some stocks (Which were bonuses, so it's money I never realized and not worth that much anymore), 2 Roth IRA's we contribute to every year, 401K's as well as a nice nest egg in cash that I search for the highest rates on the internet for. So we are now banking the money that we are saving from the mortgage and then some instead of spending more. We live very frugally but splurge once in a while. And to add to this we have bought 2 new cars in the past 7 years one of them being last year, and we paid cash for those as well. So we have no debts what so ever. We only use 1 credit card and pay that off every month. So we are paying interest to no one. When the interest rates go down, it actually hurts us saving wise! I feel very fortunate to be so young in the position that I am by the choices my wife and I have made through out the years. We have been married 12 years. I would say that we are wealthy but not rich if that makes any sense. I am not a millionaire (yet), but we are striving for it conservatively. Slow and steady wins the race.