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.

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. 

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.

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!