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. We didn’t have enough money in savings to cover the repairs. It was one of those rare moments of complete clarity. In 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.
I immediately started reading up on strategies to pay off debt. I realized after reading books such as The Millionaire Next Door, Total Money Makeover, Lifeonaire, Rich Dad Poor Dad, and Your Money or Your Life that everything I was led to believe about wealth building was wrong. While debt has become normalized in our society, there are millions of people out there living life differently.
Pay Off Your Mortgage Instead of Invest Elsewhere
Dave Ramsey is the gateway drug into the financial independence community. I know a lot of people don’t like him or his advice, but it’s tough to argue with his track record of helping people become debt free. Once people get to debt freedom they often look for what’s next, which for many is complete financial freedom. His approach is much more behavioral than technical and almost nobody is better at getting regular people interested in personal finance. The baby steps listed below lay out the plan that many have followed to become completely debt free.
Step 1: $1,000 in an Emergency Fund
Step 2: Pay Off All Debt With Debt Snowball
Step 3: 3 to 6 Months Expenses in Savings
Step 4: Invest 15% Of Income into Roth IRAs and Pre-Tax Retirement Plans
Step 5: College Funding
Step 6: Pay Off Your Home Early
Step 7: Build Wealth and Give!
initially, we were onboard with Dave’s approach until Baby Step 6.
Why would we pay down a fixed 4 percent mortgage loan when we could invest the extra 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 deduction on mortgage interest!?
It took us a couple years to move through baby step 2 and pay off all our non mortgage debt. Though that was primarily because we ended up refinancing our personal residence to get a lower interest rate (good move) and also rolled in our remaining $30,000 in student loans (bad move).
Investing Our Excess Money
By 2016 we had built up more than $50,000 in savings and were ready to invest in buy-and-hold rental property. In order to get the best deals we made a decision to buy with “cash”. By cash what I really mean is we took out a home equity loan on our primary residence to purchase the property. We planned to use our savings to fund the rehab. After careful deliberation we ended up backing out of the contract.
I knew the property was a good deal, but couldn’t get over the thought of going further into debt to buy this property using home equity. If something were to go wrong with the property, it could mean running out of money or even worse losing our personal residence. I was starting to think that Dave Ramsey was right after all about paying off the mortgage.
In another moment of clarity it was evident that by taking on more debt to invest we weren’t making any real progress to become financially free. In the past 9 years we had refinanced our mortgage twice, used money that was pegged for real estate to purchase two nearly new cars, and were now getting ready to go further into debt to invest in real estate. Where would it end? We realized that if we wanted to achieve financial freedom, it was time to ditch the debt completely. Even the mortgage debt.
Our Decision to Pay off the Mortgage
In 2016 we made the decision to go all in to pay off our mortgage. We had worked the balance of the mortgage back down to $93,000 by making extra payments over the years. While we continued to live below our means, we didn’t have any focus or a real plan. Making a firm decision to pay off our mortgage felt good. We had a goal again.
We immediately pulled $30,000 out of savings to pay down the mortgage and then paid about $3,000 extra per month. After about 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.
I share this story so you understand how we moved from one side of this argument to the other. Below are additional thoughts on why we moved to the dark side to (gasp) pay off the mortgage early.
1) The Behavioral Aspect
Recently I was listening to a podcast from biggerpockets.com. Co-host Brandan Turner was discussing how financial independence unlocks a freedom and creativity inside us to truly pursue our purpose in life. I believe there is a similar effect when paying off debt, though maybe to a smaller extent.
There is a real 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 that comes with 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 largest bill in most households. I also believe there is power in knowing that a bank can’t call my loan if I miss a payment or two. While life may be good now, the next recession, unexpected death in the family, job loss, or a number of 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 interest rate environment we’ve been in during the past 10 years has its pros and cons.
On the pro side many of us have been able to secure fixed mortgages between 3 and 5 percent. On the con side, it has been challenging to find low risk investments above 3 percent.
By paying down your mortgage you are basically getting a guaranteed return in the amount of your interest rate. While stocks 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 account heavily invested in stocks, then getting a fixed 4 percent return on your money from paying down the mortgage doesn’t sound so bad.
3) Decrease to Monthly Expenses
For those of us in pursuit of financial freedom, the goal is to have passive income that exceeds monthly expenses. By eliminating the mortgage payment you will need less monthly passive income to achieve financial independence. 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. You need to spend less than you earn and invest the difference until you get to 25 times your expenses. While you can certainly increase the earning side, there is also benefit to lowering the expense side. There is a balance, but if you’re able to knock out your largest 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 quickly ramp up your investments.
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. Being in my mid-30s, I knew families that completely fell apart due to the aftermath of the housing bubble. By aggressively paying off mortgage debt we make ourselves more resilient during a recession. Another recession is coming, and probably soon, so hopefully people don’t make the same mistakes as last time. Having a paid for house will significantly reduce the amount of stress during the next downturn.
5) Are You Really Going to Invest the Extra Money?
Humans are irrational creatures and the toughest part of personal finance is the 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 I do, but I was constantly pulling money out of my investment account to buy new vehicles or to fix up our house.
I’ve had this discussion in person with several individuals who tell me how you need to have a mortgage because of the tax benefits (which have been greatly diminished in the new tax law). When I find out what they’re doing with the extra money it’s usually contributing to some factor of lifestyle inflation. Given my personal experience, I really question if that extra money will go towards investments. Again, personal finance is more of a behavioral game than anything and many of us will find reasons to spend that extra money on something else.
Of Course You Should Pay Off the Mortgage! (Maybe)
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 mortgage with a low 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 accounts. It’s hard to put a price tag on being able to sleep 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 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.
Mortgage Payoff Stories from Other Bloggers
I really love reading through a good mortgage payoff story. That’s the money nerd in me speaking, but I know how much paying off the mortgage has meant in our life and I’m excited to see others be different and find a way to do the same. Below are a few other articles from other personal finance bloggers that you should check out.
- Jackie Beck: How We Paid Off Our Mortgage 10 Times Faster Than Normal
- Chief Mom Officer: WE’RE DEBT FREE
- Northern Expenditure: The Mortgage is DEAD!
- Phia – Freedom 101: Lose the Mortgage: Our Best Money Decision
- Burning Desire for Fire: The Story of How Frogdancer Jones Won Her Freedom
If you have a mortgage payoff story, I’d love to hear more about it below in the comments. Also, we are accepting guest posts for our Young Debt-Free Families interview series. Send us an email at financialpilgrim at gmail if you’re interested in participating!