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Debt’s a Funny Thing // Plus: Why We’re Not Prepaying Our Rental Mortgage

We had a fun weekend of skiing, and felt all kinds of lucky to look up at one point and see that incredible starburst effect in the header photo, a combo of the sun, cloud and tree all being in the right place at the same time. If you look closely, you can Mr. ONL in that photo in the upper right, about to come down. And you can actually see him come down in the video we posted on Instagram. (Follow us there for lots more photos than we share here!)

Last week we shared that we’d paid off the mortgage on our house in five years and change (take that, banks!), but also that we’re not going to pay down the mortgage on our rental property any faster than we have to. Which prompted a lot of you to ask the totally reasonable question:

Why not? 

Today, we’ll get into those reasons.

But first, let’s have a larger discussion of debt, and how much our mindsets around it can differ based on who we are, our life experiences, what kind of debt it is, and a whole slew of other factors.

OurNextLife.com // We paid off the mortgage on our home, but aren't paying off the mortgage on our rental, because debt is a funny thing. Let's talk about why that is!

Debt IS Funny — and Diverse

Something that’s always struck us about debt is how differently people view it. For some people, it’s a HOLY CRAP THE HOUSE IS ON FIRE! emergency. For others, it’s something to be dealt with, but not urgently. And (we’ve heard people say…) there are those who don’t think they can ever get out from under their debt, and so they don’t bother trying, or — much worse — they get depressed or even suicidal because of it.

What’s even more interesting to us is that a person can be all of those people at different times. When I was a few years out of college and $30,000 in debt between my student loans, car loan and credit card debt (and earning barely more than that total before taxes), I went from feeling slightly hopeless about it all, not seeing how I’d ever be able to pay off the credit card debt especially, to realizing I needed to deal with it in a real way, to going into full blown emergency mode and throwing every dollar I could at it.

At the same time, not all debt is the same. Without going into the “good debt” versus “bad debt” debate (and, full disclosure: we’d probably fall into the side that thinks some debt is good — without it I would have had a hard time graduating from college, and we’d still be renters with a far lower net worth, not free-and-clear homeowners), it’s still safe to say that there are types of debt that can help you reach important goals in life, and there’s debt that comes at a higher price and sets you back from reaching your goals. Most of us who have had multiple sources of debt in our lives have had the sense that some of that debt was worse than others, and was more urgent to deal with.

Related aside: There’s also the national debt, which it turns out is not really like debt you or I might have at all, and — this was mind-blowing to me — most economists don’t even think the national debt is bad, and some actually think we should have more national debt. As Paul Krugman writes, comparing the national debt to household debt is a false analogue:

This is, however, a really bad analogy in at least two ways.

First, families have to pay back their debt. Governments don’t — all they need to do is ensure that debt grows more slowly than their tax base. The debt from World War II was never repaid; it just became increasingly irrelevant as the U.S. economy grew, and with it the income subject to taxation.

Second — and this is the point almost nobody seems to get — an over-borrowed family owes money to someone else; U.S. debt is, to a large extent, money we owe to ourselves.

Even the IMF, which used to be austerity central, has changed its tune on national debt for countries, and now says it’s fine to carry a significant national debt so long as it grows in line with or more slowly than the country’s overall economy. So national debt is debt that feels bad because we compare it to our own debt, but which economists say we should stop freaking out about because it’s actually quite different. End of aside.

There’s also a whole mindset that debt is good, especially for businesses, but even sometimes individuals, so long as you can borrow at lower than the rate of expected growth. Like if a company can borrow at 5 percent but expects to grow at 10 percent as a result of whatever they were able to make by borrowing that money. Or a home buyer might take that same point of view when opting not to prepay a mortgage, arguing that investing the money in the markets instead is likely to pay a higher return than the lower interest rate they’d be saving on the mortgage.

It’s Never Just a Numbers Game

We’ve just shared a whole bunch of stuff about debt that’s interesting, but what is by far most interesting to us about debt and people’s relationship to it, is that people talk about the decision to prepay or not prepay a mortgage, or to take out student loans or not, or to finance a car or pay cash, or any other number of debt-or-none decisions, as though they were purely mathematical. When we were thinking about paying off the house very early, we felt the need to justify our reasons in financial terms. People who hold on to their mortgage for the full term usually do the same, talking about historical averages for equities markets, rates of inflation and expected income growth.

All of that stuff is true, but this isn’t just about the numbers.

We all carry within us a ton of emotions, a lot of them about money, and some of them about debt. For me, even though I was okay enough with debt to incur it at one point, I hate it. I sleep better at night when I have less of it, and going into early retirement with mortgage debt hanging over us was never, ever on the table for me, regardless of what the math said. Sure, I could back up that argument with a bunch of solid arguments, especially if any form of the Affordable Care Act stays intact (not holding our breath, but still TBD), but fundamentally that is a gut-level emotion.

For me, debt equals uncertainty and inflexibility, and I want to have as much certainty as possible when we pull the plug. Now, with our house paid off, we can live on very little if we have to, so we can weather nearly any storm that comes our way. With debt, our minimum threshold to survive would be much higher. That just feels bad to me.

Debt could equal something entirely different for everyone else. Clearly some people view it as a tool, and it certainly can be. Others might view it as a necessary evil that they’re willing to tolerate. It could symbolize mistakes you saw your parents make, especially if they overleveraged themselves, or it could symbol possibility, if you watched your family ascend up the socioeconomic ladder, aided by mortgages, small business loans or student loans.

Debt is neither inherently good nor bad. In too great a sum, it can be crushing, but without it, many of us would miss out on important opportunities in life (not to mention that business as we know it could not function). Instead of arguing that it’s all good or all bad, or justifying our preferences in purely rational terms, let’s acknowledge that we all come to this with life experiences and emotions that impact how we view debt and how we feel when we’re in debt. And those experiences and emotions might very well be just as important as the math.

Psst. Let’s talk about all this stuff in the comments. We’d love to know how you think about debt — but also how you feel about it. 

Mr. ONL skiing

Mr ONL enjoying the slopes, feeling a little more carefree post-mortgage payoff.

Why We’re Not Prepaying the Rental Mortgage

So with all of that stuff said, it probably seems like a contradiction that I hate debt and was in a huge hurry to pay off our house (thanks, Mr. ONL, for going along with that!), and yet we’re both completely comfortable letting our rental property mortgage live out its full term. Here’s why:

It’s not our home. This one is just purely emotional. We felt (or, really, I felt) a compelling need to have the roof over our heads paid off and secured, so that we’d know we’ll always have a place to live even if we mismanage our retirement funds and can’t travel or dine out or do other things we’d like to do. At least we’ll always have a place to sleep safely. With the rental, I don’t have this same need to secure it for the rest of our lifetimes for the very simple reason that we don’t live there and don’t rely on it for shelter and security.

Related post: Choosing People Over Money // The Story of Our Rental Property

Our tenant is paying the mortgage for us. We’re renting to a relative with a very secure income source, and the market rate rent is enough to cover our mortgage payment plus utilities. So every month we gain equity without any additional cash outlays beyond our initial down payment. Makes us totally understand why some people love investing in rental properties!

We can keep deducting the mortgage interest after we retire. When we retire, we’ll most likely become ineligible to itemize deductions on our tax return, and will default to the standard deduction. This would have made the mortgage interest on our home non-deductible if we hadn’t paid it off, but because the rental is treated differently and all income and expenses are calculated in a separate tax form schedule, that interest will be deductible for as long as we’re paying it off.

We don’t need the cash flow anytime soon. We built the rough outlines of our FIRE plan before we bought the rental, and rental income was never part of our plan. We’re still saving as much as we would have without the rental, so though we’ll be happy to get the rental cashflow once that mortgage is paid off, we don’t need it anytime soon. Plus it’s a 15-year loan, so we’re not waiting out a 30-year mortgage.

We have significant equity in the property. We got a pretty good deal when we bought the rental house three years ago, and the market in that area has gone up a good deal since then. Having significant equity from the price increase is meaningless to us in real terms since it’s not a liquid investment, but it does give us peace of mind that there’s a long way between where we are now and the possibility of being upside-down on the loan. A lot of bad stuff would have to happen in the economy before we’d be at risk of owing more than the house is worth — but even then, we’d still have our fabulous, reliable tenant.

We could stand to lose it. This is probably the biggest reason why we don’t pay off the rental, and it’s the reason why we did pay off our house: we couldn’t stand to lose our home, but we could stand to lose the rental. Not that we want to lose it, but if things truly got that bad that we went underwater on the loan, couldn’t make the payments or pay it off outright and got foreclosed on, we’d still be okay. We’d still have our house to live in, and we could figure out everything else from there. And because our house is paid off and we have ample cash reserves for other purposes, we’d even be okay if going through foreclosure trashed our credit scores. Now that we’re well into financial independence, we don’t truly need credit for anything.

Perfect credit score. Wohoo!

My credit score hit the pinnacle in December, and you know how much I love this as a gold-star addict. So I certainly don’t want to trash our credit scores, but doing so wouldn’t kill us.

The bottom line: Ultimately it comes down to what debt symbolizes for us. Debt is uncertainty and a lack of security, but we don’t need the rental to provide that security and certainty to us, and the uncertainty it creates isn’t enough to hurt our plans. So we leave it alone and let time do its thing.

So Much to Discuss!

We’d love to hear from you guys on all of this stuff! What are your gut-level feelings about debt, and how does that influence how you treat it in your life? If you feel like sharing, what in your life experience impacted how you deal with debt now? And on our rental decision, what do you think of our thought process? Anything we aren’t thinking about but should be? Let’s discuss in the comments!


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117 replies »

  1. Very interesting. If we ever decide to make our current home a rental (likely) and purchase a retirement home (still debating), this is what we hope to do- pay off the mortgage on our home prior to retirement and then just let the rental property tick away in the background, paying for itself. When it eventually is paid off (maybe 10 years post-retirement), that extra income will be a nice cash bonus.

    I am always really reassured when we are on the same page as you guys! It gives me a lot more confidence in our own plans.

    • You’re far too kind! But I’m glad if we can offer some reassurances. :-) I think your plan sounds great to live in a paid off house in retirement and let your rental become an eventual source of new cash flow while letting a tenant do the heavy lifting of paying off the mortgage!

      • I love this retirement plan (as you probably would have guessed!). Another variation is to retire with a bunch of free and clear rentals that produce nice income, and not own a residence at all (for simplicity, lack of hassle, flexibility, etc). Just use the income from those rentals to pay for your nice retirement living. If inflation hits and your residence-rental goes up in cost, your rentals would likely keep pace to cover this increased cost of living.

        Love the post and debt discussion, too! I’m very similar to you Ms. ONL – I don’t like the personal debt, but I’m fine with safe, long-term investment debt that makes me money.

      • You already know you’re my rental property hero, Chad. :-) We talk about adding more rentals to our portfolio to do some of this, but definitely missed out on the bargains in our area and aren’t sure yet if we have the stomach to be long-distance landlords — maybe we’ll do more after we retire and have a little more time to think it all through.

        And re: debt, it’s so interesting how we one loan can feel bad, while another very similar loan can feel totally fine! :-)

      • You made by day by naming me a “rental property hero.” :) Real estate is very cyclical, but it’s also very inefficient. So keep your eyes out for deals in any market – they’re just hiding under more rocks right now. And more time will definitely help. Can’t wait to follow your plans this year!

        You definitely captured the nuances of people’s varied responses to debt. Very interesting!

  2. Great post, and very good points on the rental home. I’ve always hated debt. I hated it when I took out a car loan – had planned to pay it off quickly but then my husband lost his job in the great recession. I had to take out student loans to finish up my MBA after my husband almost died of septic shock. I was determined to destroy them both and managed to do so in less than a year. In fact my student loans were fully paid within three months after graduation-before the interest even capitalized. Now I’m committed to getting rid of my mortgage for the same reasons as you did – security. I want to own this home, and to know if anything happens to me or my family the house is paid for. Taxes and insurance are small compared to the mortgage, and could be easily managed on a minimal income. I’m working toward destroying it in under 5 years.

    • Thank you! That is SO awesome that you paid off your MBA loans so fast, especially given all that you guys were going through during that time. Kudos! And so stoked for you that you’re working to pay off your mortgage in under 5 years — the feeling of paying it off makes all of the hard work to do so worth it! :-)

    • Hi there,
      I picked on something you said there – ‘I want to own this home, and to know if anything happens to me or my family the house is paid for’.

      In Ireland, you must take out life insurance for the mortgage, and if either husband or wife dies, the mortgage dies too. Is it not the same in the US?

      • As usual, other countries are showing us up! ;-) No, in the U.S., homes are often foreclosed on when someone dies, or the family quickly sells the home in a probate sale to be able to pay off the mortgage. The only debt that dies when you die is student loan debt (or at least the government loans, maybe not private loans).

      • Ah ok. I can understand someone’s need for security for the roof over their head regardless. Though we have this mortgage protection ourselves we are also trying to pay it down early, since we want to reduce the cost of the credit. If we pay 500 euro (about $550) extra a month off it every month we will have another 11 years to pay instead of 22. I hate interest!

      • It never even occurred to me that you could be required by a mortgage lender to have life insurance. So interesting to learn about different systems and rules in other countries!

  3. I remember my Econ Professor delivering a similar message about the national debt – saying “It’s a good thing” and having all of us sit there with a confused look until he explained it. Now we just need the media to stop drilling that as a big deal.

    We have had similar talks about not walking into retirement with a mortgage on our primary residence – it would be nice to have the home base free and clear. Right now we are working on killing my student loans which have a rising interest rate over the last year.

    • I think it’s smart that you’re attacking your student loans first, and the mortgage only after that. Obviously you guys have the make the choice that’s right for you, but I know we already feel much lighter having the weight of our mortgage lifted off our shoulders! And knowing we get to carry that feeling into retirement is pretty priceless. :-)

    • Debt can be a problem if it gets so big that investors are worried the country will default (demanding higher interest rates) or hyperinflate to pay it off.

      That’s also why having anyone associated with federal govt talking about defaulting on us debt is so dangerous.

      • Amen to that, sister! Especially because defaulting on our debt means defaulting on *us*… Americans and our retirement plans are the largest holder of U.S. Treasury Bonds, and how does screwing Americans serve the country well?! (Not to mention the problems that would come from worldwide lack of confidence in U.S. currency and economy strength.)

  4. I am right there with you on debt aversion. We’ve had student debt and mortgage debt, so we think there’s an okay time and place for it, but absolutely wanted to pay it off quickly rather than the maximum term. I agree that it’s emotional. I grew up seeing my parents in too much debt and never wanting to be in the same boat. It was all pretty “normal” as far as Americans go but for whatever reason I didn’t want that. And like you said, we love the flexibility of low expenses, a not having a mortgage wipes out the biggest single expense.

    I also can understand why you’d have less aversion to the rental property debt. And I think we’d finance our first rental property, too, if we choose to buy one at some point. Like you said, it’s different than putting a roof over your own head; you could sell it & still have your house to live in. It’s so true that there is an emotional as well as mathematical side to personal finance, and any time you’re debating between two good options, you have a lot to be grateful for!

    • You are SO right that we have almost too much to be grateful for. :-) Being able to make this choice is such a huge privilege. We love that flexibility of low expenses, too, and having the mortgage gone will mean that we can live soooo cheaply if we have to. But since our tenant is paying the mortgage on our rental, we don’t have that same feeling about that at all — it’s kind of a wash. It’s great you recognize that your own feelings about debt are so impacted by your upbringing and what you witnessed. I think that’s true for a lot of us!

  5. National debt is not a bad thing until it is. At a base level the fact that our currency has value is partially tied to that debt since the government’s willingness to pay defines money’s worth. Still like with an individual there is a tipping point. Too much mortgage could be the same thing. If debt payments exceed a little to pay your hosed. So it’s important to deploy in moderation. My mortgage doesn’t cause me concern because it’s moderate. As such my excess mortgage payment are a question of bonds or mortgage, not equity or other questions. Which fixed equity gives the best return gets that allocation. Today that’s mortgage.

    • Hey FTF, I like my mortgage too. If our incoming president has his way, many of his policies will be inflationary. No matter how much prices go up, my mortgage will stay at 3.25%. I love the debt.

      With that said, I can see ONL’s point of view too. Not having that $1200 sucked out of our bank account every month would make me a little happier.

      • I totally see that view and have zero problem with it! But come Feb 1 when we can sock a whole bunch more into Vanguard, I think we’ll be feeling pretty good about our choice. :-)

      • Yep. I’ve thought about that too. In the end, I don’t think it makes a whole lot of difference if you’re socking that money away.

  6. The only thing I want to know is how you attained 850! I just ran over and checked mine and I’m at 828. That is nothing to sneeze at, but certainly no 850.

    The service I use to check it, Credit Sesame (CS), stated that I need improvement in the “Account Mix” area. I only have accounts open for credit cards and a home loan. CS states that if I took out a car loan (no way!), student loan (too old for that!) or a loan with Lending Club (sorry, don’t need it), I’d have a higher score. Do y’all have some other kind of debt?

    Oh, and we spent yesterday on the slopes too. It was glorious.

    • I have no idea, and still kind of think Experian was playing a joke on me. ;-) I think any score over 800 is essentially the same, and it’s just a computer fluke whether it happens to be 805 one month and 840 the next. I can tell you that I don’t churn cards, so I don’t have the ding of multiple credit applications — I’ve generally opened a new one only every year and a half or two years, sometimes even less frequently than that. We definitely do not have any of those other types of accounts (car loans, student loans, etc.), so I think CS gave you some bad info.

      Glad you all got out on the slopes! Best part of winter. :-)

  7. Great tips on debt!

    I agree with your points on why you don’t have to pay for mortgage off sooner. It’ll make more sense for you with the cash flow and tax deductions.

    Also, congratulations on 850! I’m curious to how you got it. I’m hovering between 750-830 because of all the cards I open for airline and hotel points.

    • Thank you! Couldn’t tell you why my credit score magically bumped up to 850 — it has hovered in the 820s for years. I do know that I don’t churn credit cards, so have very few credit applications that bring the score down. And I do use my cards all the time, especially for work travel expenses that get reimbursed.

  8. I think debt payoff is a very personal journey, plus I’ve never had a mortgage so it’s hard for me to weigh in. I remember when I had about 1,500 left on a cc debt this past year and had the money to pay it off, but I was advised to just pay the minimum because it was at zero interest. To me that tested my patience because I could pay it off, but my coach had a good point that I had been cash poor before, so just in case it was good to leave that in an account which was collecting interest. I know someone else who also paid off the last of their debt with their emergency fund, because they hated debt so much and guess what happened? Yup, an emergency!

    • So, so true! And you make such an important point that the rest of your financial context matters. If we didn’t have a (probably oversized) emergency fund, other cash savings, investments that can cover us for many years, etc., we’d almost certainly have made a different choice on paying off our house. Because I’m totally with you that you HAVE to have that cash cushion for emergencies. We would never want to be cash poor, even if it was for a good reason like paying off debt! That would be way more stressful!

  9. Seems like an entirely emotional decision. You somehow believe that paying off one debt will “release the chains”. I don’t think it will.

    Try not paying your property taxes sometime…you’ll find out very quickly who really “owns” a property.

    In the same vein, unless you own your rental as part of a private business, you as individuals are personally liable for anything and everything that happens in your rental.

    From a legal perspective, it’s all the same. No renter to pay the mortgage? The mortgage owner is going to come after YOUR finances.

    • Ohhhhhh! You mean I actually have to PAY that property tax bill that keeps showing up?!?! ;-) Fortunately we’re responsible people who have zero intention of ever not paying our tax or mortgage bills. :-)

  10. I wouldn’t pay it off either for many of the reasons you described. The main reason being a numbers reason and the fact that your cash on cash returns go down as you gain equity in the house. And as long as the debt doesn’t bother you, you’ve definitely made a good choice in my mind.

    • Thanks, pal. Funny how the decision on the rental was a lot easier to make from a rational perspective, while emotions ruled on our house. Either way, we’re super lucky to have no bad options on this stuff. Investing more or paying off the mortgages — either way we’re putting ourselves in a stronger position.

  11. I’m kind of Meh, on debt or no debt. It’s more about the interest rate associated with it rather than the feelings. For instance, my student loans were locked in at 2.6% for their life, so I didn’t see why paying them off early was a big deal, I even calculated the total interest to show Mrs. SSC how little we’d be paying over maybe 30 years? Her response was more in line of, “I don’t care, I just want it gone.” So, now it’s gone and we don’t have a recurring monthly bill for another 20 years, regardless of the interest. :)

    Even with Mrs. SSC’s car, we had the money set aside to put 20% down, and then get a loan, and then pay it off in a year or so. That was the plan until we got offered 0% interest for the life of the loan. This was 11th hr offer from the dealer after we’d already negotiated the price, and had a loan in place thru another credit union. We put the money we would’ve put down on it into Index funds and called it a day. We paid off the remaining $3k or so this past year, so it’s now gone too, but again, I think it was just Mrs. SSC wanting to streamline things rather than being anxious about debt.

    It’s definitely more about feelings rather than numbers. You can’t put a price on feelings. Actually, wait. Yes you can, for you, it was whatever amount your mortgage was, hahahaha. :)

    • “I don’t care, I just want it gone.” That’s what I should have written for our mortgage payoff post, and just left it at that. Hahaha. Because if you have a strong feeling about something, it’s not like the math actually matters. How many times have facts changed anyone’s mind? (I’m kind of kidding, but in our post-fact political space, I’m also not kidding at all. People think and vote based entirely on feelings, like the feeling that the national debt is bad, when actually people don’t understand it at all. Okay, I’ll get off this soapbox/tangent.) ;-) And to your point, there’s definitely value in streamlining things, too. I know how much more stressful our finances felt, regardless of debt, when we had more bills. Having fewer bills now just makes me happier, regardless of what we owe whom. And you’re right — you CAN put a price on feelings, because we just paid that amount off. Haha!

  12. Sometimes it makes sense to pay off debts and sometimes it makes more sense to ride out the loan. I know there are plenty of people who think ALL DEBT IS BAD HOLY COW, but there are some debts that are better left not paid early.

    For example, Mr. Picky PIncher and I did the math and realized it didn’t make sense to pay off our car loan early. We have such a low interest rate on the car that, compared to the interest rates on our student loans and mortgage, it makes sense to tackle the car loan last. But since the car loan will mature while we’re paying off the mortgage, that means we’ll pay off the car exactly when the bank wants us to.

    On the flip side, many times it’s more important to have a large cash buffer instead of paid-off debt. We saved alot of cash to buy and renovate our home. We could have used those funds to pay off debt, but we would have been up a creek without a paddle without liquid cash.

    • You raise such an important point about the cash buffer! And I should have said in the post: all of our decisions, including the one to pay off our home early, are point-in-time decisions based on us having sizeable investments and liquid cash buffers at this point. If it were five years ago and we had less saved and invested, we’d obvious make a very different choice (and we did!). So all of this was contingent on us having the cash to cover many years of living expenses, and STILL being able to pay off the mortgage above and beyond that. Thanks for chiming in with that!

  13. I hate debt too and the only debt we have are the mortgages on our properties. I’ve learn to accept mortgages, though. Paying down early is good, but it’s not necessary with this kind of rate. We still have income so the deduction comes in handy. I’d definitely pay off our primary home mortgage if we both retire and don’t have any income. That’s probably a long way off, though. Even when Mrs. RB40 retires, we’ll still have income via Roth conversion. We’ll see how it goes.

    • I don’t blame you for not paying off the mortgages now, and I also think it’s smart that you’re going to re-assess once you’re both retired. I know for us it’s totally a peace of mind thing, and we just hate the thought of being retired with a mortgage (plus our plan was based on having ACA health care, and with that, there was an extremely clear financial advantage to not having to pay a mortgage… we’ll see if any of that still applies once Congress and Trump figure out what the new law will look like).

  14. We’ve lived our time together always with a plan to pay off debt as soon as possible. I hate the thought of being tied down by a piece of paper of all things. We’ve paid off two homes over the course of a couple of decades and will pay off the current one (and last one) this year. The more we experienced the “high” of paying off a major debt, the less debt we wanted to incur, leading us to then hold off on buying large items, like cars, until we could pay in cash.

    I do have to admit that I’ve come to appreciate the benefits of good debt over the years – low rates, sometimes the deduction can help keep you in a lower tax bracket, “you can’t eat your house”, etc. – but there’s no way we are carrying any debt into retirement! Mentally, the weight of that monthly payment in retirement adds too much stress for us. Speaking from experience, don’t be surprised if you get the itch to pay off the rental debt in the near future too (although the expense helps your tax loss on the rental if you need it): imagine being able to pocket all of that rental income instead of paying the mortgage with it.

    • How exciting that you’re about to pay off house 3! Woot woot! :-D I can definitely identify with that debt payoff high — once I experienced it with my car loan and student loan, I was hooked and wanted to crush any and all debt! But it’s interesting to see how differently I think about our home vs. a rental, and how I let emotions win with one but rational math win with the other. And you’re totally right — we could absolutely change our minds and pay off the rental ahead of schedule. Changing our minds on that is totally something we would do. ;-)

  15. It’s funny how even good debt is sometimes tough to swallow. I agree wholeheartedly with your decision not to get the rental mortgage paid off early. All the reasons you stated make perfect sense on keeping it.

    Regardless, the mortgage is still out there which is can eat at you if you let it. I’m working on rental property 3 now, but I would love to not have a mortgage on any of them. Every reason you mentioned makes logical sense, but for a guy like myself who’s dug his way out of debt, it’s still something that you wish just wasn’t there.

    I’ve committed myself to just make one extra payment a year on my properties to try to knock down the length, but that’s about as far as I’ll go with it. Let the tenants pay it off! :-)

    On another note, do you have the house in your name or did you form an LLC to put up a little bit of a divide between it and your personal property?

    — Jim

    • I can relate to all of this! We *wish* the rental mortgage wasn’t there, but not enough to pay it off ahead of schedule. The tenant is paying it, so it will get paid off without us having to dip into our other savings, which is a pretty great deal for us if we just leave it alone. And re: your Q, no LLC (at least not yet), so the mortgage is in our names. But since we *could* pay it off tomorrow if we had to, that doesn’t worry us as it would if we were overleveraged or in a earlier place in our FIRE savings journey!

      • I think what Jim at Route to Retire means about the LLC is that it is a buffer to protect your personal assets if someone sells. We have four properties paid in full, all in an LLC. We have 3 properties with mortgages in our names, which means we can’t get LLCs for these. We’re selling one and I’m debating paying off the mortgages, just to get them into an LLC for personal asset protection.

      • What do you mean by “if someone sells”? We certainly understand the appeal of LLCs for liability protection (we’re big on protection — we’re big advocates of umbrella insurance and lots of contingency plans, for example), but I’m not sure I understand your point about selling. Either way, our rental is currently under a mortgage in our names, so being able to put it into an LLC would be years down the road, best case.

  16. Sadly, I wish we had seen the light much, much earlier. Mired in debt, but surviving, and slowly climbing out of it.

    • Good for you for taking stock of things and working your way out of debt! A lot of people never see the light, or see it and never change their ways. Sending you good vibes on your journey!

  17. I’m weirdly apathetic towards debt as long as it is good debt (as you briefly describe). I don’t get caught up in the emotion of owning our home. I can appreciate others’ feelings of freedom of owning their own home, but just don’t feel it myself.

    For whatever reason, I never felt as if we didn’t own it, just that we have to make payments on it just like anything in our life. I don’t want to make those payments, but will as long as it makes mathematical sense. Getting solar power and eliminating our energy bill was a higher priority with a break-even point of 7 years and another 18+ (at least) of gains.

    For me, if I want to pay off one, I’d want to pay off both. My argument for paying off the rental would be to turn it into a secure income stream (as you say, it’s relatively safe due to that tenant). If it’s $1000/mo. (as a nice round number), it’s a good safety net. That would be my emotional thought about it, but mathematically, I’d simply just keep it going as is.

    • It’s great that you know your own feelings around all of this stuff — I think sometimes people justify a decision in purely rational terms, and don’t even understand their own emotions that are driving that decision. ;-) And you completely nailed it on the emotional vs. rational decision on our rental. The emotional choice would be to pay it off, like we did with our house, but we don’t have the same emotional needs with the rental that we do with our home, so rational thoughts win on this one. ;-)

  18. In our personal life, we are debt free. We do not have any rental properties, but I would not be a shame to have a mortgage on them as long as I wasn’t overleveraged. A rental property, in my mind, it is a business and businesses operate under different rules. I think it would be important to still have some contingency plans for the market downturn, but as long as I felt like the investment was covering the debt that would be a good way to run the business.

    • Yeah, that’s pretty much our thinking! No shame in a mortgage on a rental so long as the math works out. And you know we still have a gajillion contingency plans, so all the stuff here is truly just worst case scenario. :-)

  19. Super picture! Great when all comes together…

    Thx for the post. It explains a lot on how you deal with debt.

    My view has been different before. The cash I had was thrown at my rental mortgage and not our house… I guess at that time I was wanting to protect my interest: when we would split, I would have a paid off appartement.
    That being said, once sold, a lot of that money went to home improvement and the mortgage.

    I would be OK now to take a mortgage on a rental. I have learned a lot overtime.

    With regards to debt: I aim to only have mortgage debt.

    • Thank you! One of my favorite pictures ever. :-) And I think it’s good that you’ve been able to evolve your thinking on debt generally and mortgage debt specifically. I’m definitely with you on only finding mortgage debt acceptable, and it’s so interesting that your reasons for paying down one or the other of your loans had more to do with other interests than strictly the math. That’s how most of us think, but we often don’t realize it!

  20. Loved that video btw! It didn’t look real. :) I hear what you’re saying about debt. It has so many layers and considerations from national down to personal. For us, the only debt that we feel is okay for us is our house since we’re paying a 2.875 % loan rate. That’s less than the typical 3% inflation rate.

    In general though, I think most debt is bad since you could have your little dollars busy making more little dollars for you instead of them working for someone else. Also, the other big consideration is cash flow. From poor to wealthy, a lot of people can’t wrap the cash-flow issue around their head and borrow to their limit with no emergency fund. There’s no backup plan there and is so risky! You guys have it figured out though!

    • Hmm… for some reason you keep going to spam! So weird! Oh well… I’ll keep approving your comments… it might just mean a slower response. ;-) But wow! You have such a low mortgage rate! That’s super awesome. Not that ours was high (3.75%), but still… sub-3% is amazing. (Did you buy points to get that? I know when we bought our rental, when we saw 3.25% with no points, especially considering that you usually get a higher rate on an investment property, we were convinced it was a mistake and locked it in as soon as we could click that button.) ;-) I don’t know that we have anything figured out… we just don’t like the idea that someone could come knocking one day and say “Pay up!” ;-)

      • Thanks! I think because we’re still new to commenting on blogs, I’m guessing Akismet and other programs haven’t figured it out yet.

        No, we didn’t do anything special. We just got lucky on the timing. I think we had a 6% rate, PMI on top of that, and then interests rates plummeted so we refinanced with a 15 year. We could have done 30 (which would’ve been safer), but it forced us to pay it off sooner. The payment wasn’t that much more though so it felt like a no-brainer. It’ll feel nice though not having a bank over us with a lien one day. Either that or we might go the renting places in fun locations several months of the year! I keep hearing the renting vs buying and how it costs the same, but we’ll see!

      • It’s super weird… and this one went to spam too. :-( Re: your rate, gotcha! Well it’s awesome that it all worked out so well, and forces you to pay it off faster. I’m sure you know all about this, but the amortization differences between a 15 and 30 are crazy huge, so it really is a massive difference from an equity-building perspective, too.

  21. Your decision not to pay off the rental property makes sense to me. You’ve obviously thought long and hard about it (as you two seem to do with everything).

    I have a love-hate relationship with debt. I despise the current balances that keep me working in a job that is stressful and draining. However, I believe that everything happens for a reason. We used to be irresponsible and ignorant about money. The debt has taught us frugality and made us adopt new priorities in life. I highly doubt that we would have the same goals for the future if we had somehow floated along in a state of not having so much debt. We would likely be satisfied sticking to the standard path of long-term careers. Maybe not, who knows? But I’m always trying to be optimistic.

    • Thanks, Harmony — I think the word you were looking for is “overthink”… hahaha. ;-) I love your perspective on your debt, and I totally admire how focused you are on righting the ship. It would be easy to just resign yourselves to being in debt forever, but you’re working your butts off to put yourself in a position to semi-retire and have more time with your kids, all while keeping a positive attitude — I love that. And what a great example you’re setting for your kids with your actions and optimism!

  22. We are planning to sell our house (that’s paid off) this summer and we’re considering how to use the proceeds now. We are likely to pay off two rental properties to improve cash flow since I am doubting I will go back to work in the fall. One of those rental properties will become our home – so we’ll be down to only one debt too – our 8 unit apartment complex. It is at a higher rate than I would like (5.25%) but we didn’t have to pay any origination fees (owner held) and they would have been expensive on a commercial loan. The other idea is to throw all of the proceeds from our house at that loan but it wouldn’t pay it off. Luckily my brother is monitoring and looking at our options too – so he’ll chime in with his thoughts too. It will be tough for us to get any more mortgages with no jobs ;)

    • Good luck figuring all of that out! I know I’d be inclined to make sure the house I was moving into had a paid-off mortgage, but that’s just me. I think as long as you look at both the math and how it all makes you feel, you can’t go wrong. ;-)

  23. I don’t have much experience with debt. Credit cards were unheard of in India when I was growing up – nobody had one and nobody had credit card debt. My parents bought our scooter outright (we didn’t have a car till I was well into my teens). My college education (~$3200 for four years) was paid for by my parents. The only debt I’ve ever had in my life is our mortgage for the house we currently live in, and I’m in no hurry to pay that one off earlier than we need to. I think my feelings about debt are based on what I grew up with. The only loan my parents and everyone else I knew ever took was to buy a house and so I’m comfortable with that one. That debt seems ‘normal’ on an emotional level and all other kinds make me all sorts of uncomfortable.

    • That’s so interesting that you grew up in such a different environment with regard to debt and credit availability. Absolutely mortgage debt is “normal” and not necessarily bad, so I think the decision to pay it off on schedule or prepay it is completely personal and often based on completely emotional reasons. But sounds like you don’t have any of that baggage. ;-)

  24. Debt is so personal and it always varies. For me, I always go back and forth on paying it all off or keeping the low interest rate stuff. A low interest rate of something like 1% or even 0% is tempting!

    • #truth! And totally with you on going back and forth! Our mortgage had a low rate, and we understood the math of paying it on schedule, but also wanted it gone. ;-)

  25. Look at that credit score!

    We are choosing to keep the mortgage at this point and focus extra money on investing (real estate and equities). We have a really low interest rate, plus we plan to have enough saved for FI to pay off the mortgage if we absolutely need to. That said, I go back and forth on my comfort level with this plan. As we get closer to FI, we may just decide to pay it off. It’s really a personal, somewhat emotional, decision.

    We haven’t purchased our first rental property yet, but do plan to keep the mortgages on our properties – for the exact reasons you detail in this post.

    The photo is beautiful! Thanks for sharing.

    • Still no idea why my credit score magically jumped up to 850 from the 820s, where it had been the month before! ;-) And I totally understand your approach to your current mortgage and any future rental property mortgages — and you know I can relate to just getting to a point and wanting it gone. ;-)

  26. Here’s my funny story. No soon after my husband asked me to marry him, he asked how much I owed on my credit card and wrote me a check to pay it off. Thankfully, it was under $3000 or he might have changed his mind. He has always said he wants to be able to sleep at night so we’ve never had debt outside of our mortgage for the 18 years we’ve been together. My folks paid cash for everything and still do in their 70s so they were/are good role models.
    I totally agree with your logic on your rental house. Sounds like you have a great tenant and it’s a win-win for both parties. We never bought real estate so we’ll keep paying on our low-interest mortgage until we semi-retire for 5 years (or is that more like semi-FIRE) to have cash on hand to buy land. We will live comfortably, not lavishly, and watch the sun set over the mountains every night. Life will be good.

    • What a nice gesture for your then-fiance! In our case, I really wanted to get rid of my debt before we got engaged, and did that — but I think we’re similar in both wanting to go into marriage debt-free! That’s great you had such responsible role models growing up — I think that makes a huge difference.

  27. Debt=inflexibility. That’s my camp. But I’m also with you on your rental property… it feels more like an investment than a debt. Also, I told Mr. T you’d hit 850 and he was like: where we at? Fellow perfectionists unite! (I had to tell him he’s only at like 818… he loses this round.)

  28. First, great photo!

    Ah, yes, debt is personal and complicated. I hate owing people anything. I want to return favors and I return all borrowed items ASAP in even better condition than they were when I borrowed them, so having foreclosure as a backup plan goes against my conscience.
    As for tax deductions from mortgage interest, it doesn’t make sense to pay X thousand per year to the bank to save X/3 or X/4 in taxes. I’d rather have the extra 2/3 or 3/4 of the money in my pocket.
    With respect to opportunity cost of investing the money in the stock market instead, I can see it both ways. I’m risk-averse so you know what I’d choose.
    Sometimes it helps to increase the scale to see if we’re internally consistent in our decisions. If you want to keep more money in the market instead of paying off the mortgage, then why not refinance to take out even more money and extend the term to 30 years? Or to look at it from the other direction, if the house were paid off, would you take out a mortgage to invest the money?
    We’re probably losing at math, but winning at peaceful sleep and simplicity.

    • I would definitely not say foreclosure is our backup plan — we just always tend to think of the worst case scenario for anything, and in this case with our rental, the worst case scenario (foreclosure) would not be the end of us. So we can live with keeping the loan active instead of paying it off. And I think the questions you posed are good thought experiments, but we rarely fall on the extremes that though experiments like those pose. We DO want the rental mortgage gone at some point, which is why we financed it with a 15-year loan, and we have zero interest in paying the fees associated with refinancing (though we’d consider it if we had to, of course, because we are pragmatists first). I do think most of us make financial decisions in that middle gray area, and this is definitely one of those cases for us. All of that said, I totally relate to your anti-debt philosophy, and have that in many areas of our life… just not all areas, as it turns out! :-)

  29. Government debt is indeed different than personal debt. It is true some of the USA debt we owe to ourselves (we also owe a lot to China, Japan and others). The situation is fairly odd now for the USA in that the interest rates are extremely low. That makes the huge amount of debt less painful – but even now 15% of the spending by the government is just paying interest. And that could easily double without interest rates really even getting high. That is a real problem. To the extent we owe it to ourselves it is less of a problem but we owe lots to people overseas which means we are going to be paying back hundreds of billions of dollars to people in China, Japan… At these rates it might be fine (or even a good deal) sometime in the next 20 years it is likely to be very costly.

    I wrote about the issue of government debt and the different impact of it being held overseas or within the country http://investing.curiouscatblog.net/2014/12/10/government-debt-held-within-the-country-versus-that-held-externally/

    Japan has far more debt than even the USA. But it is also much more owed to themselves than is true in the USA.

    The USA also has significant advantages over other countries. We can hold more debt safely than other countries due to the perception of the safety of the US$ and the size of the USA economy.

    • I won’t pretend to be able to debate this, but in researching it, it did seem that quite a few economists don’t seem to think we’re anywhere near problematic national debt levels. And several made the point that we are also hugely invested in the countries that are largest holder of U.S. debt (China, Japan, Saudi Arabia), so it’s not like they could just demand we pay up one day — it’s actually fairly close to balanced. But now we’ve reached the extent of my knowledge on the subject. :-)

      • You are correct that several very prominent economist do say that the USA is not in danger yet. My guess is many more say that the USA is far from safe levels. One huge problem is the stated budget debt leaves off a large amount of future obligations that have been promised but everyone agrees won’t be covered by current taxes. We don’t save nearly enough to pay for future health care costs, social security etc. so the most useful debt measure is higher than the quoted level. But the economists that suggest we borrow more know this.

        It is true the USA is safer than many other countries in relation to government debt level. Not just based on our amount of debt but also our status as safe haven and a very strong economy. So, I would agree we have bigger problems than the federal government debt level. But we are not totally free from worry, even at these levels. Some economists think we have plenty of room, but most worry if interest rates go up (which is very likely in the next 20 years) we could quickly get into a bad situation.

        So if we do take on more debt it should be done intelligently. Spending to improve the infrastructure may well be wise, even if it increases the debt load. But even there spending it on low value projects (bridges to nowhere, giving billions to telco companies that then don’t spend the money actually providing cheap broadband internet, etc.) isn’t wise. But wise spending in that area could well be helpful and not be too big a risk due to added debt. To increases the debt load to give big tax breaks to those in the richest .1% of citizens doesn’t make any sense in my opinion.

      • Thanks for sharing this perspective, John! I’m not an economist, and I don’t even dabble in monetary policy, so I can’t say anything intelligent back! ;-)

  30. Very interesting post. I like the comparison you made about the national debt and household debt. Also the IMF change in perspective on debt. Your right the term good debt and bad debt is so limiting. Congrats on the paid for house

    • Thanks! And thanks for the congrats. :-D We hear people talk about debt in such black and white terms (like so much in personal finance!), and there’s so much more gray area. :-)

  31. We prepaid our mortgage when it was a larger risk because we had less savings and less income. We wanted to not have to shortsell should we hit another recession and putting money toward the mortgage was a better value than in savings (stocks not being a safe investment in a recession). Then we got higher incomes, a higher net worth, and a much smaller mortgage. So we stopped prepaying because the mortgage was no longer a risk– with a job loss we could reamortize payments to close to escrow alone.

    Plus early mortgage payments are worth so much more than later since your regular payments are mostly interest at the beginning but mostly principal later. So mathematically that made more sense even though at first thought it seems like people should pay it off near the end when it is easy. Instead we stuck money we could have used in the stock market.

    • Sounds like we think similarly about this stuff — of course I know that during a recession is exactly when we SHOULD be putting more money in the stock market because stocks are on sale (assuming, of course, that we have ample cash savings and contingency plans in place!), but I tend to do as you did and batten down the hatches when things start feeling riskier. And you really can never go wrong paying down debt, even if it’s not technically the optimal decision.

  32. Being out of debt is probably one of the best feelings you experience in life!
    We became TOTALLY debt free 6 years ago, Yay!!That has enabled us to save like crazy! We own some land in which we lease out to a local farmer and that pays our insurance and property taxes. Kind of like a rental. Definitely a win, win situation. We plan on resigning from our grocery business in June. I thought we would do it about the same time as you around the end of the year, but we can’t wait. Way too excited!!!!
    And like you two, we know we can live on a lot less if we have no debt.
    What a fantastic feeling…

    • So awesome, Darlene! You’re way ahead of us… I can’t even imagine what it will all feel like when we’re six years into owning our home free and clear.

      And that’s big news that you’re going to sell your business mid-year! Wow! Congratulations on making what must have been a huge decision. So excited for you!

  33. Who cares about debt or money with powder like that. Nice turns Mr ONL. The snow looked really nice and the lighting is really cool. Glad you were able to get out and enjoy the snow and sun.

  34. Great read about debt! I recently started a blog about my law school experience check it out if you have a chance.

  35. I would not have been able to attend anything but community college without debt. Even that would have been difficult. With grants and student loans and scholarships, I was able to attend one of the most prestigious colleges in the country and professional school. I have tripled what I am earning in the past ten years. It also positioned me for a life that is just more bearable. Without debt, I would have been stuck with my abusive family in a terribly unsafe part of the country for LGBT people like me.

    I would feel a lot more free now if I did not have the debt to repay, but I would be in a fundamentally worse position having not had access to it.

    • What a fantastic testament to the power (and importance) of debt. For so many of us, it’s the only tool we have to better ourselves and our situation, and you’d certainly made a good use of yours! Now sending you lots of good thought to tackle that debt as fast as you can. I know you have a lot of it, but I also know you’ll get out from under it faster than most people could ever dream. :-)

  36. I think you guys made the right choice! Debt free on a personal residence is far more liberating than debt free on a rental….I am in your shoes now

  37. From strictly finance point of view, it doesn’t make sense to pay off the mortgages on investment property, as long as:
    A. you have neutral or positive carry.
    B. your mortgage is fixed or you have the ability to pay off if rate jumps at the next reset.
    C. You don’t need the cash flows now.

    The reason is as follows: your rental investment is basically an option (long equity(house), short bond(mortgage). Like all options, it has positive convexity: head you win (housing price appreciation), tail you don’t lose (positive carry). If you pay off the mortgage on such investments, you basically give up the option and turn it into a stock, and in strict financial term, you’re leaving money on the table.

    The other downside of paying off mortgage is more subtle: since you already have positive carry, once you pay off the mortgage you’re likely to report income. This is not a big deal since you can claim depreciation, but that still affects tax rate when you sell the property (not a really big issue since you can always do 1031 exchange). Just something to keep in mind of.

    We’re using very similar strategies as you, or what Nassim Taleb called “Barbell Strategy”: a few (very conservative) investment condos that covers basic expenses, plus a very aggressive portfolio (almost 100% stocks/mutual funds) that we don’t expect to touch except in emergency to provide long term appreciation. Our target date of retirement is 2022 (when our kid goes to college and when I’m 55.

    • You described in vastly greater detail the good reasoning for not paying off a rental. The other big reason for us is that any additional money we put against that mortgage is taking away from our ER savings without providing a benefit anytime soon.

  38. One comment above mentioned turning a primary residence into a rental. A large pitfall of turning your primary residence into a rental is losing the capital gains exclusion after 2 years. Better to sell the residence, keep all the money, then purchase your rental property.

    • The capital gains should definitely always be a factor, but depending on the market, interest rates, overall price and tax bracket, etc., it could also be just fine to convert a property. It’s always worth doing the math on your own situation, though!

  39. Funny, because we’ll more likely pay the rental mortgage off first. Sure, it’s also smaller debt but here where we live (in Northern Europe) investment mortgage is more expensive and we can simply put the rent towards home mortgage afterward.
    Might be the difference in viewing the home itself – we don’t really plan to stay in a bigger place after kids leave the nest so we might sell our home even before paying off the mortgage. Switching to a smaller place will pretty much eliminate the rest by itself.

    • It sounds like you are doing what makes sense for you, which is what you should be doing! ;-) Technically investment properties have a higher rate in the U.S., too, but we just happened to buy our rental at pretty much the low point for interest rates, and we got a 15-year mortgage which has a lower rate than a 15-year mortgage. It sounds like you have a great setup!