In 2011 we were at a crossroads. Approaching $200,000 in total debt, we were sitting in a bank lobby getting ready to take out a home equity line of credit because two bathrooms in our home were leaking into the basement. Unfortunately, we didn’t have enough money in savings to cover the repairs. It was one of those rare moments of complete clarity.
At that moment, we realized then that we could either continue going down this road of taking on more debt or go on the attack against it. If you ask yourself, “should I pay off my mortgage” maybe this post will give you a few ideas on why it might make sense for your family.
Pay Off Your Mortgage Instead of Invest Elsewhere
Why would we pay down a 30-year fixed 4 percent or lower home mortgage when we could invest the money in the stock market, real estate, or a business with potential returns of much more? Even someone who isn’t financially savvy can do the math here. To top it off, what about the tax benefits of the mortgage interest deduction!?
Should I Pay Off My Mortgage?
In 2016 we decided to go all in to pay off our mortgage. We had worked our mortgage balance down to $93,000 by making extra payments over the years. While we continued to live below our means, we didn’t have a real plan. So making a firm decision to pay off our mortgage felt good. Finally, we had a goal again.
We immediately pulled $30,000 out of our savings to pay the mortgage and then paid about $3,000 extra per month. Finally, after nearly two years of making these payments, we officially became mortgage-free in August 2018. Shortly after, we made a transition from two incomes to one.
Since we paid off our mortgage, the stock market has increased significantly despite recent bumps. In hindsight, we would have made more money by investing that in the stock market. However, hindsight is 20/20. I estimated that we lost out on about $15,000 in stock market gains by paying off the mortgage instead of investing in the market.
Below are additional thoughts on why we moved to the dark side to (gasp) pay off the mortgage early. Remember that the below does not mean stopping investing to pay down your mortgage ultimately. Before paying your mortgage, you should be free from all other debt, have an emergency fund, and put 15% into retirement savings.
Only after that does the advice below apply. This position may seem out of reach, but becoming mortgage-free can be achieved. As with anything in this space, contact a certified financial planner to discuss what works best for your family.
1) The Behavioral Aspect of Being Mortgage Free
A few years ago, I was listening to a podcast from biggerpockets.com. Co-host Brandan Turner discussed how financial independence unlocks the freedom and creativity inside us to pursue our purpose in life. There is a similar effect when paying off debt, though maybe to a smaller extent.
There is absolute freedom in not being shackled by debt or owing another person or institution a dime. I’ve talked to several people about this and never met anyone who has regretted paying off their mortgage early. Everyone says the freedom of being debt-free is something you can’t put a price tag on.
The behavioral benefits of being debt-free spill over into all aspects of life. There is less stress and worry by eliminating the most significant bill in most households. I also believe there is power in knowing that a bank can’t call my home loan if I miss a payment. While life may be good now, the next recession, unexpected death in the family, job loss, or several other events could change our financial situation in a flash.
Personal finance is a behavioral game more than a numbers game. Good luck putting a price tag on the incredible feeling that comes with a paid-for home.
2) Guaranteed Return on Investment
The low mortgage interest rate environment we’ve been in during the past ten years has pros and cons. Many of us have secured fixed mortgages between 2 and 4 percent on the pro side.
By paying down your monthly mortgage, you are getting a guaranteed return on the amount of your mortgage rate. While the S&P 500 may result in higher returns long-term, you never know when the next 30 percent drop will happen. If you are already putting 15 percent into a retirement plan heavily invested in stocks, then offsetting that with a fixed 3 or 4 percent return on your money from paying down the mortgage doesn’t sound so bad.
3) Decrease in Monthly Expenses
For those pursuing financial freedom, the goal is to have passive income that exceeds monthly expenses. You will need less monthly passive income to achieve financial independence by eliminating the mortgage payment. Housing expenses can amount to 30 to 40 percent of your budget, with most accounted for in the mortgage.
Achieving financial freedom is a relatively simple equation. It would help if you spent less than you earned and invested the difference until you get to 25 times your expenses. While you can undoubtedly increase the earning side, lowering the expense side is also beneficial.
There is a balance, but if you can knock out your most significant payment every month, it will accelerate your chances of achieving financial freedom. After paying off the mortgage, your monthly cash flow will go through the roof, and you’ll be able to ramp up your investments quickly.
4) Recession Protection
Remember 2008? The further we get away from the great recession, the more people seem to forget about how rough of a time that was. I knew families that completely fell apart due to the aftermath of the housing bubble. We make ourselves more resilient during a recession by aggressively paying off “good” debt.
As we are on the brink of another potential recession in 2023, those with the least debt and highest savings will have the best chance of surviving. Having a paid-for house will significantly reduce stress during the next downturn.
5) Are You Really Going to Invest the Extra Money?
Humans are irrational creatures, and the most challenging part of personal finance is discipline. If you have a significant amount of money sitting in an investment account, you’ll continually be tempted to spend it. Maybe you have more discipline than me, but I constantly pulled money out of my investment account to buy new vehicles or fix our house.
I’ve had this discussion with several individuals who tell me you need to have a mortgage because of the tax return benefits (which have been greatly diminished in recent tax law changes). When I find out what they’re doing with the extra money, it usually contributes to some lifestyle inflation factor.
Given my personal experience, I question if that money not going towards an additional mortgage payment will be invested. But, again, personal finance is more of a behavioral game than anything, and many of us will find reasons to spend that money on something else.
The Answer to “Should I Pay Off My Mortgage?”
I fully concede that from purely a numbers standpoint investing excess funds in stocks, real estate, or a business makes more sense than paying off your low mortgage interest rate. However, personal finance is behavioral, and there are many other benefits to paying off the mortgage compared to investing above the 15 percent you should already be putting into retirement savings. It’s hard to put a price tag on sleeping well at night or not fearing the possibility of losing your home.
Personal finance is just that, personal. In the end, if you are fortunate enough to be in a position to either pay extra on your mortgage or maximize your investments, you’re way ahead of most people, and you should give yourself a high five. I’ve been on both sides of this argument and decided to go the behavioral route instead of following the numbers.
Mark is the founder of Financial Pilgrimage, a blog dedicated to helping young families pay down debt and live financially free. Mark has a Bachelor’s degree in financial management and a Master’s degree in economics and finance. He is a husband of one and father of two and calls St. Louis, MO, home. He also loves playing in old man baseball leagues, working out, and being anywhere near the water. Mark has been featured in Yahoo! Finance, NerdWallet, and the Plutus Awards Showcase.
Thanks for this! I’m trying to pay mine off as well and it seems there is always something else fighting for my attention! This month is a leaky shower in an upstairs bedroom! My biggest “issue” is I’m retiring in 10 years and would love to sell my current home early and just rent for my last few while I buy my home for retirement. I can’t swing (nor would I want to) two mortgages, so would be nice to pay this one off in advance!
Paul – Thanks so much for the comment, and best of luck as you pay down your mortgage. We had a few years where things were constantly coming up. Two vehicles bit the dust and we were constantly making upgrades to our home (some needed, some not). I wish you the best of luck on your journey!
I like your reasoning in deciding to go the ‘pay off the mortgage’ route. Yours was more mathematically-based than mine. My decision was a pure “I have to make sure my boys always have a secure base” feeling.
I have to say, buying at the bottom of a property bubble and selling at the peak worked out very well, but it could never have happened as it did unless I’d paid off the house first. That’s the follow-on from my story.
Thanks for including me!
That sounds like a great “why” to pay down your mortgage! It sounds like the timing probably made your decision a pretty good one financially as well. And big kudos to you for paying down a mortgage while raising four boys – what an accomplishment!
There no freedom quite like owing no one on the planet for anything! Debt has become so “normal” in our society that few people know the freedom of having none. Thanks for featuring our story!
So true! I was so excited to see your recent mortgage payoff success. It is a great feeling and it took months for it to really sink in. Hope to see you this week at FinCon!
“Personal finance is a behavioral game more than a numbers game. Good luck putting a price tag on the incredible feeling that comes with a paid for home.”
Couldn’t agree more with this statement! Great article – and thanks so much for featuring our story as well 🙂
I hear alot of poeple saying you should stick to your fixed rate mortgage and invest any extra cash due to better returns. Great idea in principle, but as we all know, there are never any guarantees with investing. Get the mortgage paid off and if nothing else, it will be such a HUGE weight off your shoulders for the rest of your life. Congratulations.
We are in the middle of this pay off early process for our mortgage. Before I get back into that, let me tell you a few things.
On point 5, I think much of the country is in the situation where itemizing is no longer beneficial. The SALT cap of $10k hit us as our property taxes alone are higher than that. Our home is modest for our area at about 1850 sq ft. This is the price we pay living in the NY area. I think a lot of Americans are in the same boat.
With that in mind, and my desire to be free, we took a lot of cash and shaved like 12 years off our mortgage. We are also paying about 15% of our P+I extra each month against the principal to shave another 3 years. That means ours will be done in 10 years, which is about when I want to stop working so hard and down shift to FIRE. I will keep working but at something that pays less for less stress. I suspect we will pay off the last bit sometime in the last year or two as the amount will be small enough.
Our plan is to split the difference, but going from a 25 years left to 10 or so makes me feel great. Before my kid is out of high school, we will be done with the mortgage. Now we could pay it down faster, even pay it off fully, but our comfort is to keep our non-retirement investments.
Cutting 15 years off of your mortgage is incredible! How great would it be to have a paid for home by the time your child is out of high school!? Best of luck on your journey.
One of my downfalls is being indecisive and paying off the mortgage is definitely one of those darn things I can’t stay consistent on. One of these days I’m going to make a decision and stick to it!
Thanks for sharing your thought process.
You’ll have to let me know what you decide. We waivered between paying it off and not for years. It wasn’t until we decided to go all in did we start to make real progress. Reasons will always come up to spend that extra money.
One should always follow the behavioral approach. To get there you had to go against your set of beliefs and change the way you were conceiving money and finances. In this case, you need to do what your behavior will allow you to do. If, on the other hand, saving money and investing have always been a second nature, it may be easier to follow the number approach. Both cases are right and should just get along.
I completely agree! As someone who is analytical by nature I often want to look at the numbers. However, ultimately our actions have to be driven by behavior to make progress. Some of us are more disciplined than others. Thanks for commenting!
Thanks for sharing! I can relate to learning more about personal finance first through Dave Ramsey. We just paid off our mortgage on Friday and so far it feels great. I still listen to Dave podcasts and the part he says about if you hate being debt free you can always go get another mortgage stood out to me. It’s been a whole couple days so far but I can’t see us going back into deb. It’s more than just the numbers!
Hey great article. I just refinanced and want to pay off ASAP. However I’ll probably stack extra cash then pay it down in annual chunks rather than every month.
Thank you! Paying it down in annual chunks is not a bad idea. For us, once those chunks of money started adding up we were finding reasons to spend it. Automating and paying extra monthly was what worked best for us. However, personal finance is personal and everyone has different ways of doing things. Best wishes on your journey!
We went the split the difference route on ours. We paid about 20% of the home’s value off this year, and make a 15% extra per month towards the principal. We will be mortgage free in 10 years or so. That’s hopefully when we will be able to retire. Time will tell. One thing for us is that I also make another equal extra payment to my investment account. It’s automatic, so I never see it. It’s just not part of my income. We have enough assets to pay off the remaining 40% of our home’s value, but I’d rather let it earn. For me, the math goes the other way.
Sounds like a good plan. Everyone’s situation is different. For us one of the big reasons we paid off the mortgage is because we weren’t able to just let the money sit in an investment account without being tempted to spend it. Kind of sad, I know, but so much of our financial journey is about knowing ourselves. Plus with markets at all time highs, I don’t think a guaranteed return of 4% is looking all that bad. This run we’re on will come to an end at some point and I feel that the recovery will take some time.
Our mortgage is at 3.25 so that too is a factor. That being said, 4% is a great idea. As time goes by, we will likely pay down more as we get closer. I agree the markets are at highs but I have never been good at timing the market. That is why we did the 20%. I agree our option may not be ideal, but either option is good. As long as we don’t spend the money ,in the long run all will be well.
I always say that anyone in position to either pay extra on their mortgage or invest the extra elsewhere is going to be just fine in the end. We’re fortunate to be in this situation and it’s hard to go wrong either way. A lot comes down to personal preference.
I paid off my mortgage in 2017. We originally had a 30 year mortgage and then five years in, we switched to a 15 year mortgage so it took 20 years instead of 30. So we really did not pay it off early other than cutting the last year short by paying off the balance once it hit $10,000. But now that we are debt free, we are investing a lot more money. With the mortgage, we were probably investing around 10-15%. Without the mortgage, we are investing 40-50%. I think when you have a mortgage, you only have a few hundred dollars left over each month and the last thing you are thinking about is investing. But once you have no debt, you start thinking about what you are going to do with that money and retiring early. Having no debt changes the way you think.
Congrats on being mortgage free, Alan! I agree with everything your saying. Being mortgage free has had more of a positive impact than I would have thought in many areas of life.
My wife and I plan to payoff the mortgage later this month. We will use our tax refund and some of our oversized emergency fund to finish it off. We have one income and 4 boys between the ages of 8 and 1 years old. We paid extra whenever we could and tried to pay attention to our money. The most traction came from tax returns, the two months of the year when we have three paychecks in a month (bi weekly pay) and my current job has a yearly bonus.
I have recently changed my W-4 to cut down on how much they take out for taxes. It was hard to properly guage the right exemptions under the old tax set up. Also we haven had back to back years without a new baby (new tax credit), new job, or a new federal tax set up to get our bearings on the adjustments needed.
Jeff, that is amazing! Especially with four kids. A huge congrats to all of your financial success. How are you planning to celebrate once the mortgage is paid off?
We are planning to take the two little ones with us to pay it off (other two in school) then lunch out. We will plan a date to a nice restaurant when timing and a babysitter work out.
We are still in our first house so we will focus on saving up for a larger house that fits our family better.
Thank you so much for your great article ! we decided to go with the hybrid approach make extra payments on our mortgage and invest at the same time to take advantage of both , since our mortgage rate is at 2.68% and our returns on stocks although it varies but if we’re looking for long term it will beat our 2.68% in miles . I completely understand the benefits of paying off mortgages early ( this is our third mortgage after paying off two already ) but i do believe that over the long haul stocks will come out ahead and in case interest rates go drastically up which i don’t see that happening do to so many factors in a click of a button you can sell your stocks and pay put it down on your mortgage.
2008 bought 2 houses.
2020 sold 1 to pay off my primary.
In 4 and 8 years daughters in college.
Time to save at least 1000 a month for them.
Congrats on being mortgage free! Best of luck continuing to save for your kids education.
Very cool story! I go back and forth about whether or not to pay off my mortgage early or invest more. We have opted to continue refinancing whenever there is an opportunity to lower the rate and the term a decent amount. We started with a 30 year and then refinanced to a 20, then to a 15. Finally, we got down to a 10 year last year and throw a little extra principal here and there at it, but love having the required payments forcing the balance down faster each month!
I’m sure once our brokerage account grows bigger then the mortgage balance at some point, we will start to feel more like paying off the house earlier. Either way, we are at least focusing on growing our assets overall. Thanks so much for the detailed, thought out article!
Hi Steven! Thanks for the comment. Sounds like you all have a well thought out plan. We can debate the pros and cons of having a paid off mortgage, but at the end of the day as long as you’re investing in something instead you’ll likely be fine in the long run. We just happened to think the benefits of a paid mortgage outweighed putting that money in the market.