Should you pay your mortgage off early? Short answer, it depends.
Home ownership is something you love or you hate. It can seem very costly. But, for many of us, owning a piece of property is the American dream. We bought our house in 2012. It was our 4th time owning a home. Our first, a fixer upper, the second, a 3,000 square foot McMansion that we built, the third a 1,200 square foot townhouse and the fourth (and what we call final), an 1,800 square foot home in Southeast Michigan.
We’ve had the experience of a large home and a small home, and as it turns out, a smaller home is our preference. It helps us feel better connected as a family. We use every inch of our house. Another reason, a pretty big one, is that everything about a larger home is more costly. The utilities, the homeowners insurance, the repairs, the cost of time in upkeep and cleaning. I have been there personally and have lived to tell the story. I have also seen what having a big home does to friends and family, including the added pressure to make the monthly bills, leaving little to no free time to enjoy your family and your overall life. And even if you CAN afford a large home, should you? We can, and we don’t. Everybody does life differently.
In 2020, seven years into our mortgage, my wife and I started to explore the idea of paying our house off completely. There are so many schools of thought on this. One end of the spectrum being that this is a horrible investment choice and the other end being that this is a great choice for added peace of mind.
We thought long and hard and decided to focus on paying our home off many years ahead of its mortgage completion date. This was a psychological choice more than anything. Both my wife and I had early upbringings that were filled with instability, and the feeling of not having our home taken away from us far outweighed the feeling that we were missing out on something else.
Why we decided to move forward to pay the mortgage off early:
- The sense of stability and independence. My wife and I both grew up with scarce resources. Having a paid off home meant that it was ours and nobody could take it away (provided we pay the taxes).
- We were already fully maxing out our retirement savings. I have a 401k with a match from my employer. I fully fund it to the IRS annual maximum. My wife and I both fully fund Roth IRAs. In addition, we fully fund a Health Savings Account (HSA) and contribute monthly to college funds for our two children.
- Paying off our home sooner meant stronger future cash flow for investing. By paying our house off sooner, we could then dollar cost average, meaning invest increments over time (monthly, for instance vs. one lump sum) into the stock market (we have most of our money invested in low-cost index funds). With the valuation of the current stock market being at some of the highest levels historically, it gave me pause to take a lump sum and put it into the market vs. my home.
- We see a home as a place to live, not an investment. A house where you live is shelter in its simplest form. To pay a bank monthly interest for shelter didn’t align with how we felt about our home. Our feeling was that paying it off more quickly meant that we could comfortably live in our “shelter” knowing that it is ours, and not the bank’s.
- We had no tax advantages of holding a mortgage. Our expenses over the years have dwindled because of our focus on savings, leaving very little to write off at tax time. What used to be several thousands of dollars in annual interest write-offs became $0 when the new tax code was written and put into place. We, like most others, now take a standard deduction annually. This leaves no room for itemized deductions, like mortgage interest.
- We did not want the monthly expense of a mortgage in [early] retirement. By getting our mortgage out of the way, we have effectively reduced our monthly expenses needed to retire. Retirement becomes closer when one of our highest monthly expenses, a mortgage, is out of the way.
Here’s how we were able to pay our mortgage off early:
- We live in a modest home compared to our net worth and income. By living in a smaller home, we experience lower utility bills, taxes, maintenance and so forth, which allowed us to put more of those savings toward investments and paying off our home early.
- We remortgaged to an ultra-low mortgage rate. By shopping the market, we found an extremely low 1.7% fixed interest rate mortgage with a 7 year term at a local credit union. By bringing both our term and our interest rate down, the balance melted away much faster.
- We have had a 50+% savings rate over the past several years. By controlling “lifestyle creep,” we have successfully achieved a high rate of savings. This allowed us to use both money we had already saved up coupled with extra cash flow monthly to put toward the mortgage.
- We poured in extra money monthly. Whenever we had extra cash flow in the month (after contributions to retirement accounts, HSA and college funds), we put it into the mortgage.
- We DIY. YouTube is my best friend. Whenever we’ve needed home repairs, most of the time, I can tackle it myself. Recently, I fixed my HVAC unit which would have set us back several hundred dollars. My cost, a $12 part purchased online. DIY has helped us achieve a significant savings rate.
Some things you should consider if you’re thinking of paying your mortgage off early:
- Remember that it is a personal decision. Some experts say you’re forgoing investment earning potential by not investing in the market vs. your mortgage. You should understand and feel good about your “why” for making this decision.
- Weigh the pros and cons. Evaluate your interest rate, amount of dollars you’re spending annually on interest and compare that against what you think you could get in returns in the market. But remember, past performance doesn’t equal future performance.
- Ask yourself, “would I mortgage my paid off house to invest in the stock market?” If your answer is no, ask yourself why that is. This helps you understand your tolerance for risk.
In the end, whatever path you choose, if you do so with informed decision making, you’ll be just fine. When it comes down to it, your rate of savings is the most powerful tool you have to build wealth. If you can accomplish driving your savings rate up, you are on the right path either way.
Until next time…