Before we jump in on today’s topic, a few quick notes. First, some changes are coming to ONL, one of which you may have already noticed: capital letters. I wanted to keep the blog all lowercase to contrast this writing with my work writing, and because lowercase letters just feel more calm to me. But, we heard you loud and clear on the reader survey, and we’re going with normal sentence case from now on, to make things as readable as possible. Second, we’re considering shifting to a Monday-Thursday posting schedule instead of the current Monday-Wednesday-sometimes Friday schedule. We’d love your thoughts on what you’d like better — let us know in the comments! And finally, in case you missed it on Twitter yesterday, we revealed a photo of us with nothing covering our faces!
Haha! (Though while we’re on the subject, you can follow us on Twitter and Instagram, where we chat it up with lots of you and often share things that never make it onto the blog. We’re not super active on Facebook, but you can like us there as well if you feel like it.) ;-) And now, on to today’s topic…
A tension we notice a lot in PF blogland is the question of whether to prepay the mortgage, or sink as much money as possible into market funds, and it’s a question we struggle with, too. In some imaginary world in which we could see into the future and see how the markets will perform, it would be an easy decision to make.
If we just assume historical averages for market returns, it should become a pretty simple question:
Which is greater: the mortgage interest rate or the expected market returns? Put extra money against whichever wins.
But even that’s not an easy question, because it is based on a total guess about market returns, and it ignores opportunity cost, and maybe this just happens to be the time to load up on cheap shares before the market takes off in a few years. Or not. But essentially, it’s kinda hard to do the math on something when you don’t know what the variables equal.
In the absence of a psychic who can tell us these answers, and generally not being the types to try to time the markets, we ask ourselves different questions:
- What will get us closest to our goals?
- What will feel best?
- What will most reinforce positive financial habits?
Prefacing all of this with the assumption (and the truth in our case) that we’re already maxing out our available retirement accounts, we’re already saving a bunch in the markets and paying off our mortgage on time each month, and we’re not dealing with any high-interest debt, and so this question only pertains to the “gravy” money, let’s dive into those questions.
What gets us closest to our goals?
Our primary goal is to retire in 22 months, with a fully paid off house, and a magic number set aside in our Vanguard index fund and cash accounts. To achieve that, we have to put approximately $2 into our investment accounts for every $1 we pay against the mortgage. Our monthly mortgage payment and automatic Vanguard transfers roughly follow this ratio, also accounting for the property tax and interest that are included in our mortgage payment.
Why do we want a paid off house when we retire? We know there are lots of bloggers who would disagree with this basic premise that we should retire with our house paid off. We have three reasons:
- We want to feel totally free. Not beholden to an employer, and not beholden to any banks.
- We want to minimize the amount we need to save, and if we had to build a mortgage payment into however many years of our retirement, that would mean having to save more, possibly by working longer. No thank you!
- Perhaps the most important part of the equation: We want to minimize our income each year, to maximize our Obamacare subsidy. If we had to have enough income to cover a house payment, that would push us into the small subsidy zone, and if we are going to take the subsidy in the first place, then we want to get our health care costs as low as possible.
So back to the goal question, the logical answer would be to follow the ratio that we need to hit: $2 invested for every $1 against the mortgage. But is logic the only factor we should weigh?
What will feel best?
We’ve written before, back in our blog infancy, about making decisions based on what’s best for your soul, not just what’s best on paper, and the mortgage vs. investments question goes right to the heart of that question. Because while you have a guaranteed return of your interest rate when you pay extra against your mortgage, it’s usually a pretty low rate. Whereas, with investments, you have the risk of volatility (a nice way of saying “the real possibility that you could lose money, especially in the short term”), but you also have the chance of a much, much higher return than you’ll get on your mortgage prepayment. But of course it’s not guaranteed. This is not a scientific conclusion by any means, but it sure feels to us like those who argue against prepaying a mortgage also like to take bigger investment risks — they want the thrill of the big win. And that’s cool (if that’s even true — again, not scientific), but we’d rather take a guaranteed return in most cases than the chance of a slightly bigger return.
And there’s something else — it feels bloody good to get rid of debt. Let’s not discount this factor. Anyone who has paid off credit card debt, or student debt or a car loan knows how incredible it feels to make that last payment and feel that weight lift off your shoulders. It only dawned on us recently, like literally last week, that there will come a time very soon when we do not pay anything to anyone on the first of the month to have a roof over our heads. No rent check, no mortgage autodraft. Just utilities and twice-annual property tax. Somehow, in all this planning, we had never thought about how that will actually feel. We’ll have to invent some sort of “first of the month dance” that we do in celebration every time the first rolls around and we don’t pay anyone anything to live in our house.
So even though our mortgage doesn’t feel like “bad debt,” it’s still money we owe to someone else, and there would be a real value to paying it off sooner rather than later in terms of how that would make us feel. We’ve seen some bloggers who’ve blogged about their debt payoff journeys lose steam when they transitioned from debt payoff to savings — it could be that there’s something inherently more satisfying about eliminating debt than saving money. Or maybe it’s just a coincidence.
What will most reinforce positive financial habits?
We’re on the verge of a big mortgage balance milestone — we’re about to drop below a meaningful number, and sometimes we talk about paying extra against the mortgage just to see that drop. That would feel like more momentum, which would reinforce what we’re doing. But then again, we like seeing our investment accounts go up in balance, and we all know the markets themselves aren’t any help on that front lately. We need a high savings rate to make sure we see any actual growth in our funds. But right now, with the markets all bajiggity, if we pay extra against the mortgage, that’s a guaranteed boost to our net worth. If we sink more money into our investment accounts, it’s a coin flip about whether we’ll actually see that money reflected in the short term in our balance sheet. (That’s not a reason not to save — we’re talking about the gravy money, on top of the big percent we’re already saving each month.) We’re so motivated to get to early retirement in strong financial shape, that we see any money going against the mortgage or invested in our taxable accounts as money well spent, but it’s still a question worth asking.
Related: Minimizing Your Housing Costs // Don’t Let the Banks Set Your Budget
So what do we do with our extra?
Despite that two-to-one investment-to-mortgage payoff ratio that is our general target, in 2015, we ended up going a bit higher than three-to-one in favor of investments. Part of that was because we got ahead of schedule, and still hit our mortgage payoff targets, so invested the rest. But that imbalance would tend to argue for putting more against the mortgage this year, relatively speaking. We’ll keep you posted on what we decide!
We know this is a topic that brings about lively debate, so let’s hear it — are you more predisposed generally to paying off your house early or investing more? Has anyone focused more on prepaying your mortgage, or on investing while letting your mortgage go to full term, and lived to tell the tale? Please share in the comments!
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Categories: we've learned
I am 100% for paying off the mortgage myself. There is another reason. Unless there is a housing bubble and property values take a nose dive, a paid off house becomes an asset that you are not constantly being taxed for. Money in savings is subject to tax. And now with talk of negative interest rates everywhere and some countries actually doing it, savings will cost you not make you money. And there is no feeling like having that house paid off. You can always get a mortgage again if you really need one.
If only there were no property tax. :-) But still, your point is a great one! With Obamacare health coverage (I know this doesn’t apply to you in Canada), we have to actually be careful about the capital gains we incur, which could mess up our subsidies. So we’re not actually looking to grow our invested savings to the moon — we’re happy with having just enough. :-) And, like you said, that FEELING of having the house paid off! Can’t wait.
Obviously dealing with the Canadian situation I can’t comment on property taxes. Ours are $250 a year.
So maybe that’s the trade-off — you can’t get a fixed rate mortgage like we can, but you don’t have thousands of dollars to pay every year in property tax. :-)
Depends on where yo live. We live in a small won. In the big cities people pay can thousands a month.
Ah, okay. I feel less jealous of Canadians now. :-)
I like both the USA and Canada. Both have so many great things going for them.
What’s the perfect number for maximising Obama Care benefits?
Pay it off! While using the lense of potential market returns seems useful, it completely ignores financial risk. How does your mortgage interest rate compare to a similar risk-free investment like a CD (0.5%) or Bond (1.5%)? It is a FAR better investment to pay off your mortgage, even with only a 3-4% mortgage interest rate. As you can tell, we are BIG proponents of living DEBT free – including the mortgage.
We’re with you — there is zero risk in paying off your mortgage early. And you may fall into this category, too — for those who talk about the mortgage interest deduction as though it has magical powers, I want to shout, “Ever heard of the AMT??” :-) We get essentially zero “benefit” from carrying a mortgage, because the AMT offsets that deduction, so we’re in the camp of wanting to get that mortgage monkey off our backs as soon as possible. :-) Thanks for the backup!
We are in the home stretch of paying off the mortgage, and we’ve definitely struggled with this question a lot. We agree that being debt-free really appeals to us. It feels more free, and it just feels right to us. We live in a relatively low cost of living area so it was a manageable goal, and we aren’t super closer to retirement, so it was much more within reach. Sometimes you just had to do what you are motivated about. We do hope to keep up our savings rate and invest that gravy as soon as the house is paid for.
Your comment reminds me of the saying, “The best budget is the one you’ll follow,” or “The best investment strategy is the one you’ll actually do.” The motivation question is HUGE, and we love watching that mortgage number shrink possibly a little more than we love watching the investment number grow. So yeah, do what you’re motivated about — great advice!
Pay down that mortgage, baby!
I am completely, 100% behind your decision to get your house paid off as quickly as humanly possible. After seeing what a devastating mistake it was for me to buy my own home in 2007, I am less enamored with the idea that a mortgage is “good debt” to begin with. Personally, I HATE home ownership. I hate mortgages. In my view, paying off your home early is a huge benefit to the early retiree. Like, super duper huge. Maintaining no debts should never be overlooked or downplayed in favor of pure investments – in my humblest of opinions.
If we were going to stay in a traditional sticks and bricks house, we’d be doing the exact same thing as you guys – trying our best to pay off this place as quickly as possible. Since that isn’t the case, it doesn’t make sense for us to plow more money into our homes at the moment only to up-and-sell them in a couple months anyway. The nice thing is the money we get from both of our home sales will go into both buying our Airstream AND truck in cash as well as fund our entire first year’s living expenses, which will be a huge benefit as we begin our full-time travel lifestyle.
Mortgages blow. Get that sucker out from underneath you and you’ll be sitting even prettier than you already are. :)
Yeah, we totally respect that some people believe in and are comfortable with leverage, and maybe mathematically they’d come out ahead in the end. But you can’t put a price on freedom! We are going about getting there a little differently from what you guys are doing, but it’s all the same goal — owe nothing to anyone. I think it’s awesome that you’ll get enough equity out of your places to fund so much of your early retirement lifestyle!
After getting slaughtered in the markets this past year, it’s hard to be too excited about extra investing as a newbie. We will keep maxing out our Roths and putting 10% into our pensions (because we have no choice – decisions made easy!). Other than that, for this year, we are aggressively paying down our mortgage. Last month was the first time we paid more than double our payment and it was so exciting, I can’t imagine NOT doing that ever again.
I think your plan sounds great (congrats on the double payment!), although if you need a nudge in favor of investing when the markets are down, I’ll gladly provide that. Just let me know! :-)
We are struggling with this topic right now. We are thisclose to having our mortgage paid off, but with the market where’s it at right now, we are so tempted to put more money there and extend our house payoff by 2-3 months. 2-3 months is not a long time in the grand scheme of things, but when you are working towards being totally debt free it feels like an eternity.
Oh, I can totally relate to Wanting. That. Debt. Gone. Now. But yeah, it’s also a really good time to be investing! Good luck figuring out what’s best for you. :-) Keep us posted!
We were all about paying off our home ASAP b/c we hate having any debt. We did pay it off in about 7 years, but were left feeling kind of disappointed when we didn’t have the next big goal (this was a few years ago before we were serious about figuring out how to FIRE). Having all this extra money and no plan for what to do with it led us to our worse spending habits ever.
As long as you have a next step, goal or plan it is a huge boost to be mortgage free and have a ton of extra money each month. I don’t think you guys have to worry about making our mistake, but less savvy newer readers could set themselves up for a trap if they don’t understand this so I thought worth pointing out.
I’m so glad you chimed in with this! That ties into our last question we try to ask: What will reinforce good financial choices? And hitting a bit milestone with no “What’s next?” is a recipe for bad financial habits. (We had this same experience after we saved for our first place. As soon as we recovered from the down payment and initial renovation costs, we went our our worst spending spree ever. Took a few years to get back to committed saving.)
I’m not incredibly enthusiastic either way, because both are good. I do think that you should shoot to get the mortgage paid off before you quit, and get it done like 6-8 months before you quit. Then you can really focus on piling cash in the last stretch. Doing it this way adds extra fun because you can enjoy both major milestones independently. If you pay off your mortgage and quit the next week, you only get one happy dance.
I had never thought about that — that our current timing just gives us one big victory, and if we pay off the house sooner, we can get a second victory. Hmm… let’s see if I can convince Mr. ONL of the value of shifting the timeline. :-)
We plan to not have a mortgage in our post work Lifestyle Change realm, however, we may be renting for a few years. While we’re still building equity and growing our savings our mortgage has been an afterthought in regard to paying it off early. We don’t pay extra towards it, and we aren’t working toward paying it off. However…. We also don’t plan to be in that house in 2 more years, 3 tops, maybe less than 2 years. So, for that main reason we didn’t see the advantage in throwing a lot of money towards the mortgage, especially since we haven’t realized a profit from home ownership ever. Therefore, we put it in the stock market, where at least if it lost money, eventually, it will gain it back. :)
That being said, when we settle somewhere for a long chunk, kids in school times and the like, we will be doing it mortgage free. Like others said, as long as it fits in your goals and financial profile, then I don’t think there’s a bad choice between the two options.
In your case, since you plan to move soon, it makes sense not to throw any extra money at your mortgage! We plan to stay put (we think — downsizing could be in the long-term future), so the payoff calculus is totally different. Plus we bought at pretty much the total bottom of the market, so we still feel like we got away with something. And if we pay off the house fast, we can say “no backsies!” Ha! (That is not actually part of our decision-making calculus — don’t worry.) ;-)
Great and thoughtful post as usual, ONL! I am surprised that everyone else seems to advocate so strongly for paying off the mortgage first. We are not putting any extra payments toward the mortgage, or toward my student loan, at this point. Both interest rates are quite low (below 4%), and we know that over the last 10 years our average market return has hovered around 8%. So we’ve taken the emotion out of the equation and followed the math.
We haven’t always operated this way. My largest student loan was from my parents (lucky me) and the interest rate they gave me was variable, but averaged about 2-3%. Logically we should have just let that ride as long as possible, but instead we paid it off ASAP. And we don’t regret that at all.
With the outstanding debts we will have when we retire, and also the college costs we’ll face after retirement, I’m planning to have the full amount we will owe saved separate from our regular living expenses, such that they could be paid off immediately if needed. How much of those funds will be in short-term investments and how much will be in higher-risk stocks will depend on how soon they will be due.
Thank you, LG! :-) I think there is something deeply ingrained about people’s perspective on this stuff — there are those who are anti-debt at all cost who lean toward paying off the mortgage (that would include us), and there are those who are comfortable with leverage, and are fine with carrying debt if it lets them do other things. There are pros and cons to both approaches, so it’s just good to figure out which camp you fit into. In your case, it seems like you straddle both, since you are comfortable carrying your debt long-term, but also valued paying off some previous debt early. Great example of the upside of both approaches!
Let me first point this out: “first of the month dance” <— YES. I can always count on you guys for a dancing moment (and even have a reference to our virtual dance parties coming this Wednesday)! I am very glad you wrote about this topic, and can't wait to dig into the comments. It almost seems a vast majority of posts dig into this debate – and since we do not own a home yet, it's something we tend to think about. We invest quite often now, so how will we balance that with a mortgage payment as well. Will we try to pay off our mortgage as fast as possible, or hope for a great interest rate & still continue to invest heavily. Only time will tell (and same with the market, and the housing market too)! It seems like an incredible amount of factors to me. I think you nail it though when you say making decisions on what's best for the soul and not just best on paper. :)
Can’t wait for the virtual dance party reference! Someday when we unmask ourselves, we may feature some actual dancing. :-) What’s great for you guys, not having bought a home yet, is you can bake some of this thinking into the front end, perhaps by making a bigger down payment than you need to, or by getting the shortest mortgage term possible (we’ve heard of 10-year mortgages, and *wish* that had been available when we bought, instead of our 15, though in the end we’ll have paid our house off in a little over six years, so kinda a moot point). OR, if you don’t mind having mortgage debt, you can go for the longer term, smaller down payment, and aim for bigger investment gains. You get to make the choice that’s best for you!
This is HILARIOUS because I was going to write the exact same post for this morning with maths. All the maths. But ultimately came to the same conclusion as you: who cares about the maths?! NO DEBT! So thanks for writing it up for me (though I’m sad you didn’t include more maths!).
Haha — I started with the math, but it was getting super weird without real numbers, other than maybe our interest rate. Because there’s also tax bracket, which impacts mortgage interest deductions, and it was either going to go into TMI territory, or would be some ridiculous formula with lots of variables. So you should still do the math post, because I bet it will make a lot more sense! But yet again, mind meld. :-)
Mine was less TMI and more a “how do I accurately factor this over the next three years? The market could stay low the entire time. And then it could shoot up. Or it could shoot up next month.” It was complicated.
Please please post it anyway! I bet we’d learn something. :-)
Its funny to me that so many people are obviously smart, intelligent people, but when it comes to analyzing the raw data, can’t understand its better to invest than pay down the mortgage.
I get it if you want peace of mind, all that stuff. But from a raw numbers perspective, assuming your rate is low (under 5% or so), its not even CLOSE long term. You should be plowing every cent into the stock market.
I have 28 years to go on my mortgage, but at a rate of 3.8%, have decided to invest every single penny in the stock market and not pay an extra dime to the mortgage. In 10-15 years, I am extremely confident I will come out ahead in this scenario, and then heck, if I want to pay down the rest of the mortgage I’ll have that option.
I guess I just look only at the data and take the emotions out of things….
I would argue that it’s not a matter of understanding, it’s a matter of weighting factors differently. And on your long timeline, carrying a mortgage probably makes a lot of sense. On a much shorter timeline, it’s a different calculus. I’ll tell you that we’re patting ourselves on the back for prepaying our mortgage last year instead of investing all the extra dollars into our 0% netting investments. We’ll take 3.75% over 0% any day. But then again, that’s why this stuff is personal finance, not just finance. And what matters is that you’re happy with your choice!
I wanted to get rid of my mortgage, so I sold my condo and invested it all. :)
I feel like it’s given me a lot of “location freedom”…..that I haven’t chosen to use yet.
I don’t have a strong opinion either way. I like the idea of being debt free AND throwing a lot at investments, so I guess the solution for me, absence the knowledge of knowing that I want to stay in a single place for several consecutive years, was to take equity out of a place of residence, and to rent. But I also expect my income to drop, so the “subsidy” of mortgage interest and property taxes against income would been fairly negligible, especially since I was already a few years into my 15 year mortgage and not all that much was going towards interest.
That seems like a perfect solution — no mortgage, big investments! :-) And that’s a whole other thing that has value: location freedom!
Ok, so I can’t comment on my non-existent mortgage, but this general principle is super applicable to my ongoing question about whether I should prioritize debt payoff or saving for retirement. And I think that in trying to answer this question, math can get me only so far. There’s a huge psychological component to issues like these, as you point out. And I think that the fact that it would feel good to pay off debt is, I think, worth considering.
At this point I’m in the “both” camp. I think I’ll put more money towards the loans than towards retirement on a monthly basis — it’ll probably be a 7:3 ratio, or thereabouts.
I think the “both” camp is the right place to be — and 7:3 is so specific! But I’m sure you have good reasons for those numbers! The psychological piece is huge, as is the question of what will best reinforce good habits? I’ve seen this first hand with family members who made the right “math decision,” that but decision didn’t reinforce good habits, and they ended up worse off despite doing what’s best on paper. So I have strong opinions that we can’t underestimate those squishier parts of the equation!
Based upon the raw numbers, The logical conclusion could be: invest! in the long run, these investments should get you 9pct per year. I assume your mortgage is lower than that. So, the numbers scream INVEST.
We had that choice also about a year and half ago. We went to pay off a part of the mortgage. Why? It feels good to have less debt, it feel good to be debt free sooner and it feels good to have to pay less each month as well. BONUS: As the markets are now barely above the level they were at that time, also that part feels good.
Would I do it again: YES.
Even if it goes against the numbers and the hard investment logic. I know we are supposed to take emotions out of the equation. That is why we automate and invest each month. We do assume that over the long term, these investments will yield a lot.
Maybe paying off the mortgage should be our guilty pleasure?
Good luck in making up your mind
small note: a retention bonus? You get paid to not change employer? Can you tell this to my boss?
I love the idea of mortgage payoff as guilty pleasure! :-D If everyone would take up that “vice,” the world economy would be in better shape! And yeah, good move paying off some of your mortgage during a down market year — even the low interest rate return is better than the 0% the markets made last year!
And yes, I’m lucky that my megacorp offers a few staff a bonus for sticking around each year, and luckier that I’m in that pool!
There are worse guilty pleasures… In non financial terms, I have that with deserts…
Sounds like a great megacorp! Why quit? ;-)
Haha — We have about 10 worse guilty pleasures. :-)
Both ideas make excellent financial sense, but I’d go with investing in the markets. My reasoning is this: the timeline for paying off your mortgage, without any additional “gravy” principal reductions, is twenty two months. The timeline for living off your investments, with or without any “gravy” additional deposits, is fifty years (more or less). Unless you believe we are in a fifty year bear market, your investment while stocks are on sale stands a much better chance of yielding long term, positive returns than paying off a debt with a twenty two month end date. Additionally, the time to pad your investments is when you’re both working and earning substantial incomes; once you’re living off investments and paying income taxes on withdrawals, no matter how great the market’s doing you may not be willing or able to take advantage of a buying opportunity without serious tax implications (let alone ACA subsidy issues). While being mortgage free is incredible (I’m grateful for it every day), in your enviable position of having extra money to invest and a clear twenty two month timeline on your mortgage debt, I’d invest for the (very) long haul and buy in a down market. You can always change your mind and pull the money back out if you don’t like the outcome, but the only way to get money back out of your house is to borrow against it.
Such great points! We should have made clearer that our 22 month timeline on the mortgage requires us to make lots of extra payments — that won’t happen automatically. So we do have to pay some of any excess cash against the house if we want to retire mortgage-free. But your point is so important that we need those investments to support us for a long time, so we want to make them as big and strong as possible, and might as well get after it while the markets are down!
I would absolutely stick to your twenty two month plan for the mortgage, utilizing the gravy funds for your very long term benefit. You’ll get the tax benefit of the interest write off in the years you need it, and you’ll get the ACA subsidy and asset growth in the years you need them. Win/win! And you can change your mind and reallocate if need be, if the funds are invested, but your lender isn’t going to cut you a check if you decide six months from now you’d rather have that gravy money back!
Good point! No getting the gravy back from the bank. :-)
I debated this very question about two years ago. Ultimately, I decided to pay off my mortgage early (just over a year ago) for a few reasons: 1. I have a hard time focusing on multiple goals all at once, so taking the mortgage out of the equation has made it much easier to save for ER. 2. It’s hard to get ahead if you’re paying interest, no matter how little it is or if it’s tax deductible. It seems like wasted money to me. 3. The feeling of truly owning my house is like nothing else. No matter what happens with the economy or my job, I will always have a place to live. There’s a lot of peace that comes with that.
The math is probably trivial once you factor in risk, so the decision will likely be more of an emotional choice. Maybe try adding more to your mortgage payments for a few months and see how you feel doing so? You can always switch back to investing if you feel a bigger payoff.
Regardless, you have two great options of how to proceed and either would be beneficial. It’s a great place to be :)
Wow — congrats on paying off your house! That’s so awesome! I think it’s easy to assume that we’ll always make perfect decisions, but we all know that life ha a way of getting in the way of perfection. :-) So I love your point that paying off the house helped you focus more clearly on ER. The best plan is the one we’ll stick to, after all! Thanks for the great input on our situation. :-)
Have you considered refinancing your mortgage to lower your payment and interest rate (maybe) to free up cash for investing?
Never in a million years. :-) And here’s why: There’s no gain in a refi for us, because we’re so close at this point, and our interest rate is already so low, that it wouldn’t be worth the refi costs, even if our monthly payment went down a little. Plus our goal is to pay off the house, not stretch out how long we have our mortgage, so a lower payment is no help. That choice is much smarter for those who plan to keep a mortgage long-term, but going that way is very much the leverage mindset, which we are not all about. :-) BUT, we totally respect that others don’t mind being in debt, and would even gladly take on debt to invest more. Maybe we were too scarred by the 2008 recession, and saw too many people lose their homes because they’d borrowed against their equity (HELOCs, second mortgages, etc.). We’d rather know that no one can ever take our house away from us, no matter what (well, okay, we still have to pay our property taxes, but there’s no getting out of that one). It’s so personal, though, and we love hearing when others approach the same question but get a very different answer. :-)
I take it that’s a “no” then. :) You make a lot of really great points–all the reasons I want our home paid for ASAP. I want to know that we have our own roof no matter what happens, whether it’s health problems or financial troubles.
Haha — yes! I was just having one of those days of just saying things, so sorry if that came across as snarky — I didn’t mean it to! :-) And SO with you on wanting to be sure we always have that roof over our heads! That’s something that we’re not willing to put at risk.
Mortgage versus investments: a classic personal finance matchup! I debated this myself when I bought a condo a few years ago — I could have financed it, but I also had enough saved to pay cash. There are plenty of good, rational arguments on both sides, so I’m of the opinion that it comes down to what makes you the most comfortable. For me, that was not carrying debt.
As a thought exercise for those who would put the money into investments rather than the mortgage: following the same logic, would you take out a mortgage on a paid-off property today to put that balance into the market? If not, why?
Haha — investment vs. mortgage — the cage match! Agree with you that there are rational arguments both ways, and smart people can disagree. LOVE your thought experiment suggestion! Great question. You already know how we would answer. :-)
I’m far from an expert, but agree with going after what feels best. We will be paying off our mortgage, but that’s because we can’t fully retire. We want to get our expenses as low as possible, so we can just work enough part-time, more-enjoyable work to cover them. We don’t want a mortgage to be one of those expenses. Of course, there is more to our story (we do have investments and a rental property), but I think you should go with your gut. It seems like you two are doing really well, so either way will probably be a win.
PS – I can’t believe you revealed yourselves!
Haha — yeah, such a revealing photo. :-)
Your reasoning is about the same as ours — we want to be able to live as cheaply as possible in our next phase (semi-retirement for you, full retirement for us), and having a mortgage payment would make that impossible. And yeah, same story here in terms of investments and a rental property (whose mortgage we will NOT be paying off early — totally different math there). We agree with you — do the research, think through the math, and then trust your gut!
My husband and I are fans of paying off the mortgage sooner rather than later. That pace is different for everyone. For us, it means we’ll have our place paid off four years from now (14 years after buying it rather than the original 25). I’ll be 39; he’ll be 41. It will feel amazing to have both our childcare expenses and mortgage expenses disappear in 2020. We will be free to chart what our family life and working years look like after that. I can’t wait.
However, we agree with your preface – saving as much as we can in retirement accounts at the same time. It’s difficult, but it’s especially important for those in their 20s and 30s to understand. You can’t get time back. Make sure your investments are reaping the benefits of compound interest right from the start. Save, save, save.
And leave a bit room for fun money too. It’s easy to overlook when you’re so focused on a financial goal as big as paying off the mortgage early.
I feel like your comment could be an excellent, standalone blog post. :-) So much good advice in here! Make sure you take advantage of the time value of money by investing plenty in your savings, while also paying off your mortgage early, and leaving some room for fun. I’m excited for you guys about the prospect of getting rid of your mortgage and childcare expenses — we don’t have the childcare part, but we can’t wait until life gets a whole lot cheaper, and we can chart our own course. :-)
Pay it off seems to make more sense to me. You can’t guarantee your investment rate of return but you can guarantee the mortgage interest rate.
We agree with you — mortgage payoff is basically the best *guaranteed* rate of return out there. And while, sure, we can HOPE for a better return from the markets, nothing is guaranteed on that front.
Lively debate indeed. When I advise, I note two things.
One, you’ll likely ask this again in two weeks or so, with the next round of extra money. So choose one. Switch to the other when you decide it makes sense. Ping-pong back and forth if it amuses you.
Two, there is no “excluded middle” here. If one choice isn’t obviously better than the other, they’re probably equally good. So put half to paydown and half to investment.
My household mostly went half to paydown and half to investment. Then we moved someplace much cheaper, sold the old place, and bought the new place outright with cash. :-)
Ha — SO true that we keep asking this question over and over and over, basically anytime we have a few extra dollars sitting in the bank. And we definitely do the ping-pong decision. :-)
I love what you were able to do — buy your current home with all cash. If we ever decide to downsize, we’re only doing it if we can buy outright — no more mortgages!
I am due to receive a lump sum of about $300k. I am currently torn between 3 options:
1. Payoff home mortgage (~$230k) Throw the rest ($70k) into Investments
2. Put all $300k into investment accounts. right now my retirement accounts are very small, $300k now could grow a ton over the next 15 years.
3. Use that $300k to leverage purchase more rental properties (currently have 4 doors producing about 20k/year net profit. Could aquire 4 more doors and double that passive income to 40k/year. Which is higher than my yearly expenses thus technically “FI” would still work to grow retirement accounts because they are small but would have flexibility because of the large passive income). I would still have ~$100k
What a nice problem to have! We would never pretend to be experts and tell you what to do, but it sounds like you have three great options, and it’s a question of what will help you sleep at night and what will give you the most momentum to make other great financial decisions. But being in a position to knock off your FI status in one fell swoop sounds awfully tempting! :-) Keep us posted on what you decide!
When I hit my magic FIRE number, I plan to invest in a separate account earmarked for the mortgage. When the money I throw into it, coupled with the gains, equals my mortgage balance, I’ll pay it off.
That sounds like a great plan! One question: Have you done the Obamacare math on your expected income in FIRE? Worth it just to make sure your plan doesn’t take big healthcare subsidies off the table!
I’ll still be earning a small income from a family business, assuming oil recovers. So until that dries up, I won’t qualify for the subsidy. But great question!
Okay, gotcha! Just checking. :-) And hey — good for you to have that income in place! That’s gotta help you sleep at night.
It will, assuming we survive the downturn. Currently it’s keeping me awake!
Fair enough! Happy thoughts for oil prices. :-)
We’ve typically just been paying our monthly mortgage payment and everything else was being thrown into investment. The long term plan had been pay the minimum on the mortgage and invest the difference. Once our investments got to a self-sustaining level that would have us reach FI on its own then we’d switch to aggressive mortgage pay down. It’d be difficult to get the timing down right but I think that would be the best of both worlds.
But lately I’ve been having the itch to reduce fixed costs and our mortgage is the highest fixed cost that we have. I think later this year we’ll probably swap to adding at least some extra mortgage payment each month to try and get ahead of the game a bit on reducing that balance. There’s something to be said about the safety/security of not owing anyone anything.
I can totally see us in your story and thought process — on paper, it makes total sense to invest the money, but yeah, we hit a similar point when we wanted to reduce our fixed costs and not owe anyone anything! Hope your plan works out as you want it to!
Great post. I think about this a lot too. I accept the rational arguments about putting it towards investments but like you guys I can see a direct and risk-free increase in our net worth when we pay down the mortgage. I also value flexibility in our financial (and life) options and not having payments (eventually) gives us flexibility.
I read somewhere recently that people would give up a 2.5 x potential gain for a 1 x certain loss ie we as humans are highly loss averse.
Under the law in Australia, employers have to pay a minimum of 9.5% of your income to retirement accounts (and mine pays more) so I feel that is enough for our non-taxable accounts and like you guys, the estimated number will give us a comfortable retirement once we can access it.
Plus we have an investment property already too so I think we have most bases covered.
Looking forward to seeing your 1st of the month dance :)
Thanks! That’s so interesting — and believable! — how people will accept bad math in exchange for lower risk. I’m sure I’d fall into that camp from time to time. :-)
Wow, that’s so incredible that employers in Australia must contribute to your retirement. If only we could have that in the U.S., along with, oh, wage equity, a minimum wage that could actually support people, paid maternity leave, etc., etc., etc. :-)
Yes I fall into that camp too. I will dig up the source and might be a future blog.
Yep Australians are pretty lucky with those policies, I’ve taken advantage of many of them. We have a great social safety net. But it is an expensive part of the world to live (in a major city anyway) but if your strategy is to get a good income and lower your expenses then it can be a good place to pursue FI. But I’m biased as it is my home!
There are pros and cons everywhere, right? Much of the U.S. might be cheaper than Australia, but we have more than our fair share of crazy cons. :-D
I am a huge fan of having the mortgage paid off before retiring. I would need to have more saved in order to make my mortgage payment than I need to pay my mortgage off. For people who don’t plan on retiring early, I’d probably make sure they’re on track to pay off their mortgage by age 60 and then invest the rest.
I’m paying extra on my mortgage because I do want to retire in my thirties with no mortgage and my housing costs without the mortgage are expensive enough that I would prefer to not also keep paying the mortgage if I switched to a lower paying career. I have an ARM, so it will recast the payment automatically when the rate resets if I haven’t paid it off before then. I also have a short enough timeline to retirement that my contributions matter more than the returns and I’d rather be selling shares with less in capital gains than old shares with a huge tax burden.
I joke to my boyfriend some times that by the time we decide to buy a house if we ever do, we might be able to buy it entirely in cash and then he’d never have to take out a mortgage! That would be cool haha.
Oh, come on — everyone needs to go through the pain of getting a mortgage. It’s a rite of passage. Ha!
Ha! I think buying a house is enough of a rite of passage ;) That was stressful enough I’d love to never do it again!
Haha — same here! We’ve agreed between us: No more mortgages ever. If we move, we’re paying cash. If we buy another rental, we’re paying cash. I know there are plenty of people who would say that’s financially dumb, and we should use leverage to increase our investments, but blech! No more mortgages! :-)
Totally with you. And your point about capital gains is so important, especially for people planning to get Obamacare subsidies. It’s why we’re not tax loss harvesting — we’d rather keep our basis higher and our gains lower for Obamacare purposes. The value of the subsidies we’d lose more than offsets the tax write-off we would get this year. (Plus, let’s be honest — tax loss harvesting is not in line with our minimalist approach to investing.) :-) A little off-topic, but your point is well taken that the ratio of gains matters for a variety of reasons!
Here’s our prepaying the mortgage question post: https://nicoleandmaggie.wordpress.com/2010/07/31/the-pre-paying-the-mortgage-question/
Right now we’ve stopped prepayments because there’s only 14K left so it’s not a big risk and we’re also not gaining that much from prepayment with so little interest left. (Also a tiny bit is I don’t want to have to refigure out how to get free savings/checking from Wells Fargo once our mortgage package is gone, but that’s a really silly concern.)
While you obviously have great reasoning behind your choice not to rush on the home stretch, my reaction would be, “We’re so close! Let’s just knock out that debt!” :-) (And, admittedly we haven’t shopped for a checking account in a long time, but it seems like plenty of places *must* be offering free ones by now???)
We have a free account at the credit union, but we are living in a different state for the year so WF is convenient. However, interest is still more than a checking fee would be, so it is completely irrational.
There are much better rational reasons to pay off early but to stop prepaying later when it is closer to finish. But the irrational reason still has some influence.
Totally get it. :-)
The plan is to have the mortgage paid off by the end of 2017. This can happen, but only just barely, while still maxing the retirement accounts. If our income is lower than projected then our retirement accounts will be the ones that go without.
Our reasoning is health care related. Dear Husband will be going down to part-time in 2018 in order to finesse the subsidy situation and that can only be done if the mortgage is fully paid off. It will mean working nearly 50% less then only experiencing a 20% loss of income so it is definitely not worth working an extra year (the next open enrollment for the health care) in order to get the last few thousand into our retirement.
There are often reasons outside of the mortgage itself, or the stock market, that affect the choices we make with our lives. It can be difficult to anticipate all the different variables that could, or should, affect our decisions. Everything from other upcoming financial commitments, is the loan variable, what is the job situation like, etc. These are hard choices.
So true that there are a bunch of variables in life that matter for financial decisions, not just the obvious math on paper. Your plan sounds well thought out, as usual! And yeah, I wouldn’t work a whole extra year just for a few thousand dollars in retirement dollars either!
Debt-free is the best thing. I paid off all of my debt (mortgage) and auto loans about 5 years ago. And we set our budget and know approximately how much we spend every month. Without debt payments, our budget is much smaller and is easily manageable. And we have no stress on payments. Remember that many people lost jobs and then their homes back in 2009 and 2010. That is why we live without debt.
Wow, that’s impressive! And yeah, plenty of were scarred by 2008. :-)
I do both. I put an extra $200 a month towards my mortgage.
I know there are some personal finance people that say you should invest instead of paying extra on your mortgage due to the low interest rate, but there’s something about being 100% debt free that’s so damn appealing! Especially in the beginning when most of your mortgage payment is interest – the only way to get ahead is to put a little extra.
We feel the same way! Yeah, we know that the math says we should invest, but the siren call of being debt free is just too strong! So we do both as well. :-)
While we don’t have a mortgage, we have had this discussion regarding our car loan. I know, I know…shame, shame! lol! We bought a new car before discovering the wonders of personal finance and FIRE. Our plan, as soon as our credit card debt and my wife’s student loans are gone, is to ramp up investments, as opposed to paying off the Jeep early. It’s financed at 2.24% and, even if we take a hit in the market in the short-term, I’m optimistic (although not guaranteed, of course) that the market will outperform that in the long-run, providing for extra time in the market in order for the magic of compounding to do its work.
I do, without a doubt, agree with your statement “it feels bloody good to get rid of debt” though! Watching our debt dwindle away, and our net worth increase as a result, is exhilarating and incredibly addictive! However, after achieving debt freedom, we have no interest in incurring more debt to experience it again. Thanks for the thought-provoking discussion!
We had a car loan once, too. No judgment. :-) The great thing about that kind of debt, though, is that it’s relatively short-term. So even if you just make the minimum payments, you’ll still have it paid off in a few years at most. So yeah, keep going with your investment plan! Sounds great!
lol…yeah, we don’t mind at all. We love our Jeep; we brought out son home from the hospital in it and intend on having it for the entirety of its functional life. We even tell him that he may inherit it one day! :)
Love that! That’s how we feel about our Subaru (which we didn’t finance, but we did buy brand new).
This is going to be the question for the ages. The real answer will always start with “It depends on your situation…” As someone who focused on paying off their $320K mortgage over the past 6 years and is now free of it, I can honestly say I love owning my house. Every payment along the way there was doubt as to whether this was the right move. Now that we are free, it’s an amazing feeling. We’re not renting from the bank anymore!
Our family is so new to this that I don’t think we fully get the consequences of what has happened. Yes we could have got better returns if we invested, but we may not have. Being mortgage free is the way to go. You have a cost certainty for the rest of your life and your living expenses drop significantly once it’s paid off. If the housing market crashes, who cares we have no plans to sell until we are very very old.
Totally agree with you on people who say the investing route is better, but they have a different focus than us. It all comes down to lifestyle, personality and what matters to you in the end. Ultimately we didn’t want to pay a mortgage for 25 years, so we did it in 6. The more I look back on it, I wouldn’t change a thing. Great article!
Hi Andrew — Love your story! So great to know that you have no regrets about sinking your cash into paying off your house rather than focusing entirely on investments. Our timeline for payoff will be similar when all is said and done — about six years from moving in to payoff! I always love hearing people’s stories — it totally backs up the “personal” side of personal finance. Congrats on finding the path that’s best for you and your family!
Thank you! That’s cool that we have the same timeline for payoff. It’s all personal. I think the best thing you can do when it comes to your money is to consider a bunch of styles and ideas and see which ones resonate with you. I have friends that use debt to grow their assets and they are perfectly fine with that. Whereas I wouldn’t be able to sleep. It’s all a matter of what is the right fit for you. Ultimately we all want to be financially free or independent, but we each get to find our own way there. That’s the great thing about personal finance blogs is that you get to see what others are doing and see if it makes sense to you or not.
We’re with you 100% — we know we could leverage ourselves more, but no thank you! :-)
Ya this was a question weighing on my mind for freaking years. The finance person in me knows that my rate is equal to the rate of inflation and thus has a real interest rate of zero… the majorly debt averse part of me with the itchy trigger finger kept making extra principal payments. What I finally settled on is that there is just a whole lot of uncertainty and I’m freaked out a little by sequence of returns risk… and I truly believe that the way I’ve set things up gives me a whole lot of flexibility. I’ve paid extra, so my mortage represents only 30-35% of the value of my home, my payment all in is less than I could possibly rent anything for around here, and there should be some tax advantages for keeping it in place once I earn zero income. By not paying it off, it has allowed me to structure my investments a little differently and I have enough socked away to follow a 3% rule, which should theoretically last 60 years. But still sequence of returns risk looms. I feel better however knowing how much higher my success rate should be at 3%!
I think that’s all totally valid. To play devil’s advocate, a few Qs back: Will you still get the mortgage interest deduction once you’re early retired? (We wouldn’t have, and would only get standard.) What if you needed to refinance to make your payments in a market downturn but there was another liquidity crisis and banks weren’t doing refis? And by needing to continue making mortgage payments, aren’t you putting more pressure on your portfolio to perform in bad times?
I’m confident you’ve thought those Qs through, so I’m mostly putting them in here for consideration by anyone reading this comment chain in the future. ;-) There’s no clearly better answer here, and you’ve weighed the pros and cons of each option and made the choice that feels best for you. That’s how it’s supposed to work. :-)
It’s all good. In this case, let’s use an estimate of real numbers – current house value – $750,000. Mortgage balance – $250,000. Property taxes + interest deduction = $16,000-$17,000 ish. That will decline over time and eventually get below the standard deduction but I still won’t pay extra. I have an unused HELOC for $125,000, I could tap into if having cash flow issues. I’ve lived in the house 10 years and paid extra from time to time, and I estimate it will be paid off in another 10-11 years. My rate is 3.279%, after the tax benefit, my real interest rate is below 3%, lower than the rate of inflation. Long term returns in the stock market are 7% or higher, so you are better off using extra funds investing in the stock market from a pure math standpoint. Am I scared of another liquidity crisis? Not to sound flippant, but no. I refinanced my house 6 or more times (chased rates down) from 2007-2012. I can’t remember when I hit that smoking 30 year fixed rate at barely over 3%. Note that I had a true no-fee mortgage and never was increasing my principal for the sake of refinancing. That’s a pro-tip. Retail banks don’t have the best rates. Rates are still fairly low right now but find a mortgage broker who plays in the true no-fee space. What that really means is that the premium income they receive when they sell the mortgage pays those fees. The most important reason I’m not scared of this is that I don’t use my house as a check book, I owe much less than what I bought it for and much less than what it’s worth. Banks were STILL doing plenty of refis during the liquidity crisis. I was employed but not making anywhere near to what I made prior to the recession; however, I didn’t have any other debt so I was able to refi. My payment used to be double what I pay now! A combination of higher rates and larger principal balance…. I’m not worried about putting too much pressure on my portfolio either, since I have a cash flow stream that is predictable in the form of interest income from private equity and other alternative investments and a HELOC as a back up and frankly, I live a pretty luxurious (but mindful) lifestyle, so I could scale back some of those expenses. On the 15 v 30 year front, I actually Refi’d a couple times to 15 year loans but when I hit that extra low 30 year rate, I did a little calculus and decided the 30 year was better than the 15 year based on the yield curve and inherently the 30 year gave me a bit more flexibility from a cash flow standpoint. I’m glad because I would have needed a larger portfolio to meet those payment requirements. While I have debt averse tendencies, I disagree with the idea that you should be 100% debt free in all instances. That and I’ve pretty much thrown the 4% rule out the window. I think for your money to last in a 60 year retirement (assuming no other income), you had better settle on the 3% rule!
All good answers. And that’s a great pro tip on the no-fee mortgages and brokers. This is an actual Q because I don’t know the answer: Can you refi even without employment? Lots of people have urged us to open a HELOC before we quit our jobs, which we’re not stoked to do, but we’ve heard enough times now that approval would be much tougher without w-2 income, even in our case when we own our home outright.
Tougher to refi without a pay stub. Not impossible but you would likely pay a much higher rate and receive a much smaller line. Open up a HELOC – my regular mortgage was never through USAA but my HELOC is through them. I would shop around and get a competing offer… I’m not in the know about who does the best though. Reframe it to think, “this gives me flexibility and provides me another contingency plan.”
That’s helpful. Thanks!
Oh and I would be remiss if I didn’t say this… those no fee brokers aren’t going to refinance a $90,000 loan for no fees since the income they make on the loan would barely cover their time and effort and all those fees. The last time I refinanced the principal balance was $360,000 or around there. Also it helps if you have squeaky clean credit.
Check! ;-) https://twitter.com/our_nextlife/status/810940984376717312
Note I wasn’t paying any escrow, title or loan fees on all those refinances. There really were no costs.
That’s helpful to know!
I have been reading this blog now for a few weeks now. Started from the beginning and working my way through. Maybe I am the minority, but I preferred the no CAPS style. It’s refreshingly different. Anyway, maybe it will revert back. I will find out as I continue reading to current. Really enjoying the story so far.