I bought my last home in 2013. I could have paid cash for it, but instead, took out a mortgage and invested the rest. Today, I tell you how it’s worked out.
Getting Rich With A Mortgage
One of the great debates in the FIRE space is whether you should pay off your mortgage. By not paying off mine, I’m in the minority:
Most would say that they like the peace of mind that having no debt gives them and I can relate; just a little. I hate debt. Hate! Hate!! HATE it!!! I hate debt almost as much as I hate:
- Having to pee on a plane when you’re in the window seat and the guy in the middle is asleep
- Letters from the IRS
- When it’s 10 degrees outside and the kids fart in the car
- When you get done “taking care of business” and there is no toilet paper
- Humans who click pens incessantly
- Open mouth chewers
You get the picture. I DO NOT like debt. Except for the mortgage. Well, I don’t like it much either (I’d happily let you pay mine off), but I tolerate it.
Mo’ Mortgage, Mo’ Money
I bought my home in June of 2013 for $176,000. After putting 20% down, My mortgage debt came out to $140,800. It’s financed at 3.25% over 15 years. So far, we’ve paid $23,467 in interest:
Over the course of the loan, I’ll pay $37,284 in interest:
Discussing mortgage interest is boring. I know. Stick with me.
Let’s talk about the cool part; making money! Remember that I kept $140,800 by not paying cash for the home. Here’s how that money has performed in the S&P 500 with dividend reinvestment:
It’s time for some simple math:
$140,800 * .75479 = $106,274
Remember that I’ve paid $23,467 in interest to date? I’m ahead by $82,807.
If my portfolio returned $0 for the remainder of the loan, I’d still be ahead by $68,990:
$106,274 – $37,284 = $68,990
Paying cash for my home would have been a huge financial mistake!
But, that’s not the whole story. If I would have paid cash for my home, I would have been able to invest the money I’m not paying into a mortgage ($989/month) into the stock market. Let’s see how that scenario would have worked out:
Instead of having $106,274, I’d have $95,781. I’m ahead by $10,493 or about 10%. This option doesn’t beat front-loading but isn’t so bad as long as you have the discipline to invest the money instead of doing something stupid with it. Like me:
Other Things People Say
I hear excuses of why people pay their mortgage off all the time:
If I have a mortgage at 3.25%, paying it off is an automatic 3.25% return!
Even if you’re afraid of the stock market, I hope you’d keep your money in an FDIC savings account. Currently, you can get a rate of 2.25% on these accounts, so it’s a 1% return.
I just love the peace of mind that having no debt provides.
Silly human. This is an example of short-term thinking.
If you believe in VTSAX and believe in paying off your mortgage, you have a case of cognitive dissonance. Holding these two thoughts is inconsistent:
- I invest in VTSAX because it will return between 6% and 9% over the long term.
- Paying off a mortgage at 3.25% is a good idea.
Paying off a mortgage is short-term peace of mind.
A huge stack of money is long-term peace of mind.
The bull has run: The stock market has been on an incredible run. I’d be surprised if the returns on the next 10 years outperform the last 10 years. However, if you have a mortgage under 4%, I’d still consider holding on to it.
Cheaper bills: If your mortgage is paid off, you can negotiate cheaper insurance because the loan holder isn’t dictating terms. Heck, if you’re OK with risk, you don’t have to have insurance at all.
Rare opportunity: Today’s rates are a historical anomaly. I’d be very surprised if they stay this way long-term.
30 Year FTW
If I could do it over again, I would have secured a 30-year loan instead. Despite my assets, I don’t have the income to refi my house to a level that would make it worthwhile (lenders are stupid and don’t care about assets).
So, I’ll just keep plugging along at 3.25%. Check back in nine years and I’ll let you know how this experiment worked out.
For another viewpoint, check out ERN’s excellent post: https://earlyretirementnow.com/2016/12/28/seven-reasons-in-defense-of-debt-and-leverage/
For an opposing viewpoint, see this guest post on Physician on FIRE: https://www.physicianonfire.com/paying-off-mortgage-mistake/
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