I’ll be the first one to tell you that debt is evil and bad. It will:
- keep you awake at night with worry
- possibly hurt your credit score
- encourage you to call your ex-girlfriend/boyfriend after drinking one too many
- hit on your husband or wife when you have your back turned
All of that is true, but there is one form of debt that I tolerate, mortgage debt.
I Love you Mortgage
I bought my house in 2013 for about $175,000. Because I was a saver and my family was downsizing, we could have paid cash for the home. I ran the numbers and determined that I’d probably be much better off if I put 20% down and kept the rest invested.
The experiment has worked out well. I’m not even 3 years into the mortgage and the money I’ve made off my investments is almost equal to what I’ll pay in interest over the 15 year life of the loan. Soon, even before the year is out, I may be in the black.
Despite this fact, the decision to pay off a mortgage is a contentious one. Just look at these comments I “borrowed” from another article on the matter:
The Goal
My goal is to have the biggest pile of money decades from now. I will not deny that having a paid off home provides for peace of mind, but you know what provides even more peace of mind?
A HUGE PILE OF MONEY!!!
Under most circumstances, I’m not a fan of using leveraging debt for investing. However, in the current low rate environment, this decision is a no-brainer for the smart, long term investor.
So anyway, I wrote all about it over at Investment Zen. Click over to see all of the juicy numbers. Even my very conservative calculations show that I’ll mostly likely end up far, far ahead by taking on mortgage debt.
And you Debt, knock it off! Don’t think that I didn’t see you looking at my wife’s ass!
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My wife and I are in a similar situation and I agree with you 1500%! =)
With rates this low, no reason not to keep pumping money into investments. I also find that having liquidity is a major benefit as well. It’s sure a lot easier to click a few buttons on the keyboard and sell investments than sell a house. Keep growing that pile of money!
YE$$$! I didn’t even go into the liquidity part, but that is a major reason too. I love having the money not sunk, able to be deployed to purchase a rental property or home to flip! Options baby, options…
1500%, ha!
This (liquidity) is one of the reasons why I didn’t include our house in my calculations on how much I needed to retire last year. We have to live somewhere, house was paid off, spouse not retiring yet so no plans to move…..
Always many arguments on Mr. money Mustache about whether to include your house in your networth. I never bother, but I understand why others do so. But personally, I would not be comfortable FIREing on $1MM networth when $750K is the house value.
And I understand why this mortgage is a smart move and a no-brainer financially.
This is something I think about every day, but seeing the actual numbers helps. I currently have about 250k in mortgages across my home and 2 rental properties. The rates are 3.75%, 3.625% and 4%. As someone who wants to be financially independent early, there is an allure to paying early for the consistent cash flow that would cover a majority of my spending when I become FI. The math long term obviously says otherwise. At the end of the day, asking yourself whether to invest or pay off a mortgage early is a good problem to have 🙂
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That was a great post and I’m glad you’re bringing to light this issue. I liked the ‘it gets better’ then ‘it gets EVEN better’ haha.
You frame the issue perfectly. Its about either wanting less debt or a wanting higher net worth. It is not a black and white decision as it involves emotions, but I’m on the same page. Peace of mind and a hyper conservative approach can hinder someones chances for financial independence.
I copy the same approach, with some controversy, to student loans. The 5% savings on interest is massively outweighed by the 25% income tax savings I get on each dollar going into my 401k/IRA instead of student loan debt.
Even if my money wasn’t going into tax deferred accounts, the after tax rate is closer to 4%. With dividends ~2% I only need to expect a 2% return in the market to break even.
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Hi Mr. 1500. I will never understand why the ER community is so focused on paying off mortgage debt. I wrote a similar post to this one back in December: http://www.mrtakoescapes.com/2015/12/30/debt-can-help-you-achieve-financial-independence/
The simple math of the situation says most of us will be better off NOT paying off our mortgage.
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it’s not simple math. Some people like the feeling of owing the house outright, knowing it can’t be taken away. it is yours free and clear. It’s a psychological thing, not a financial one.
Ahhh, but I’d say that it is simple math. One number comes out bigger than the other and there isn’t much more to it. Regarding the psychology, I think this is an extreme example of short-term versus long-term thinking. We all know that it’s better to think in decades and this is no exception.
I do understand the psychological feeling of a paid of house, it does help some people SWAN, but you also have to realize that your home can still be taken away after it is paid off. First by non payment of property taxes and second by imminent domain. The second one happened to my in-laws when the road their house was on, was improved (widened).
Yikes, I hope they got a fair price for their property.
Sometimes I am so jealous of you people in Us. 3.25% would mean I would be paying next to nothing in interest. Here we have one of the lowest rates for our loan and its 9.55% which means in most cases people pay twice the principal by the time they are done with the loan.
We managed to equate the loan in ~3 years by using the OD feature of our loan account. Investing that amount in fixed instruments would yield me a max of 8.7% which is way lower. Equity might have helped us fare better but with all the calculations we did we believe equating the loan but not paying it off is the best option. It ensures we keep on getting tax benefits(even on principle) without paying interest and we have a huge cash reserve we can tap into whenever required.
I was just writing about it and every single time I couldn’t help but be jealous. If I could secure loan at those rates it would be a no brainer since market returns here average >10% over a long period. Maybe I should buy a house up in the US!
We are in the process of buying a new property and did the math as well to find out what the optimum down payment will be (or how many extra payments are worth putting into the property). Thing is that the lower the mortgage to property value ratio, the lower the interest rate (e.g. 100% ratio = 2.44%, 85% ratio = 2.09%, both for a 5 year fixed term).
In our case, it appears that a down payment of 10-20% is the optimum (or extra deposits to a mortgage to property value ratio of around 80-90%). After this, there is no benefit to paying off extra on the mortgage, financially it is wiser to invest.
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It’s definitely true that you can make more investing extra money than by using the same $$ to pay off your mortgage.
At this point, I still have a mortgage, but I pay extra toward the principal and my next big financial goal will probably be to whittle it down. I like the idea of freedom of having no debt at all, not even a mortgage.
Maybe some of this impetus is psychological, but it’s still a very real motivator for me,
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I battle with this. I have plenty of savings/investments so it is not an either save for retirement or pay off the mortgage option. I like the idea of owning the home outright. It is comforting. But I can not argue with the simple math. The compromise I made is that my wife and I contribute to a separate “sinking fund” (VG Total Stk) instead of making early payments. In a few years, we will have enough to pay off the mortgage (plus hopefully gains), if we choose to. Or we could keep going and have the comfort of being able to pay the ever decreasing mortgage (and ever increasing “sinking fund”) off at any time if circumstances change. Otherwise, we have a big chunk of hopefully growing money to use for the kid’s college, retirement, the mortgage, a rental property or whatever.
I like it! I’m curious to know how your thinking evolves, especially once you have enough to pay it off.
I’m on the other side in that I do have enough to pay it off and just choose not to. I feel more strongly about my decision than ever.
That’s a great idea. My circumstance is different, because we are buying our home directly from my wife’s grandparents (therefore the absolute lowest interest rate allowed), so no hurry to pay it off. I might crunch some numbers to see how well this would work with our student loans though.
We currently pay about double the required payment amount. If we instead took that extra and invested it into something like VTI and treated it like “extra” payment, it could earn for a while and then we payoff the loans with one lump sum. The two caveats though:
1) Our loans are gonna be paid off about 5 years. Not very much time for compounding and imo too short of a window to be invested in the market due to volatility
2) We refinance our loans with SOFI. Currently they are at about 3.5% but it is a variable interest rate tied to the LIBOR rate. If the Fed increases rates twice this year like they are projected to, I’m not sure how that will affect my rate (but I’m assuming it will go up). It might be better to try and pay off the loans sooner at current rate than later at higher rate.
Lots to think over…. But still a great idea nonetheless.
This is how I am with my last stupid student loan. I could have paid it off a long time ago, but at 3%, what’s the hurry. I’d rather pad my investments and drag this puppy out a little while.
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I think it matters if you know what the hell you are doing in investments… and apparently, we don’t!
We bought our condo in 2012 with about $230k-ish mortgage. For each year after 2012 we’ve been able to approach our financial advisor with about $50k to invest (in addition to autotransfers). At the beginning of 2014 I had noticed that one of the work horses she picked for us pretty much started tanking the month after we purchased… and for 1.5 it did not recover. I was kinda pissed about it, but I was the one who told her to “take some risk” over our automatic transferring accounts. In January 2015 I discovered MMM and Boglehead.. I read my first books on investing (you can roll your eyes) and I made the sad realization that I didn’t like a single thing we had done! I didn’t like our advisor.. I didn’t like our equities or the brokerage company… and last last fall, I realized, “crap, we’ve lost money… plenty of it!”. What’s the point of investing if you aren’t coming out ahead? So we decided to liquidate everything we bought since 2012 and to pay off the freaking mortgage, enjoy a little tax harvesting and use the next several months to come up with a more educated plan moving forward. So yeah… we’ll be mortgage free in about 2 months and then, after licking our self-inflicted financial blundering wounds, we’ll get back on the horse, with more knowledge, confidence and self-direction.
Our goal is not to have the biggest pot of money, but to feel secure during each stage of a productive life. Although I do wish it had turned out differently, I do think there is something satisfying about saying I am mortgage-free before age 40. There is something very liberating about not having any sort of debt. I am also optimistic about our future income: even if we don’t invest a single dime our savings rate alone is enough to surpass our targeted retirement fund at 65 and like our well-off, business-owning fathers, we aren’t very interested in actually retiring, maybe just slowing down.
I won’t argue with the math: you’re right.. but I hope you see that context also matters.
Bleh, I’m sorry about your advisor. I’ve never used one and am VERY fortunate that I haven’t screwed things up myself or let a toxic advisor do it for me. I didn’t even know what an index fund was until 3 years ago.
I’ll bet you’ve already heard of this, but in case you haven’t, this is a must read: http://jlcollinsnh.com/stock-series/
In any case, it sounds like you’re on the right track now. In case you’re not and haven’t read Jim Collins piece, ditch your advisor and just stick to low-fee index funds. It’s really that simple.
Even if you’re not interested in retiring, I always advise people to pursue FI/early retirement anyway. You never know what curveballs the world will bean you in the ass with. You also never know where you’ll be in 10 or 20 years. Besides, living frugally and below your means is just a good, safe way to live.
1. I am a believer in looking but no touching 🙂
2. The conversation of pay off mortgage or don’t pay off mortgage is over done and over simplified. The conversation should be…how much of the mortgage should we pay off, what is the value of the interest rate deduction one receives, what are the other costs associated with having a mortgage?.
If you are not at 20% equity, you should find a way to get there so you don’t have to pay PMI anymore.
Do you itemize or take standard deductions? If you itemize, you get a benefit from interest expense. If you don’t then there is no reduced benefit, therefore paying off your mortgage would be like getting a risk free rate of return equal to your interest rate. Keep in mind, not everyone has sub 4% interest rates.
Do you get better insurance rates when the house is paid off? In many cases, you can then decide to insure the property in the way that meets your goals, not protects the bank. Ways to save are; higher deductibles, insure just the value of the building, not the value of the land and building (your mortgage is a function of both and your insurance needs to typically cover the mortgage you carry).
Lastly, if you have more than one property, it may make sense to shift where the debt “lives” as to optimize taxes (see above about itemize deductions vs standard deduction) or to shift liability exposure .
One thought I’ve had is that the mortgage deduction is overrated. If you have a modest home, are married and don’t have a lot of other deductions, you probably can’t use it. Even if you can, how much are your deductions over the standard deduction of $12,600? Folks buying homes in San Francisco, New York and West Palm Beach make great use of the deduction. I wonder what the overall benefit of it is for Average Joe though? That’s why I didn’t make a big deal of it.
“paying off your mortgage would be like getting a risk free rate of return equal to your interest rate”
True, but another benefit of not paying it off is that once you do, that money is sunk. A 3.25% rate of return is pretty good in today’s environment, but I want my money available for other investments like a rental or flippable property.
I recommend people think 5 years out too regarding rates. I remember when my Internet bank account paid 5% interest not more than 10 years ago. Will we see that again any time soon? No. However in the 12 years I have left to pay on my loan, I wouldn’t be at all surprised if my bank account paid a rate equal to or greater than my mortgage rate. I’d be feeling silly if 2021 rolled around and I had paid off my mortgage, only to be able to make 3.5% on my cash.
My main point, which maybe I should have stressed more and that I don’t think is overdone, is that the low rates available now for borrowing money are amazing and may be a once in a lifetime opportunity. Deep down, I hate debt, but this offer is too good to pass up. To each, his own. But for me, the strategy fits my situation.
The mortgage interest rate deduction is completely overrated, unless you don’t know how the deduction works then it is great. Don’t get me wrong, I am more than happy to take it while I can (and have to), but in all honesty it is pretty dumb. I can only assume that most people are in the 15-20% tax bracket and the deduction only brings down your taxable income, it’s not a direct credit.
Wouldn’t it be better to keep your $100 in interest instead of paying it and getting back $15-25 back at the end of the tax year?
I’ll even offer one better: anyone who is interested, send me as much money as they want and I will gladly ‘refund’ 40% back to you. I won’t even charge you for shipping, direct deposit, processing fees, nothing.
Yeah, you’re completely right! In my experience, most people think that because you get to right off 5K in interest, they are getting 5K back. Nope. Like you said, it’s a deduction, not a credit. And even if you understand that, it only matters if you have a lot of other deductions. If you’re beating the standard deduction by a couple $1,000, it amounts to just about nothing.
Hurray leverage!
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I agree about 90 pct with the statement. The point that makes me doubt is the peace of mind that comes with a paid off house.
The initial goal was to pat it off as soon as possible. Since then, a lot has changed: our interest is now so low that it is almost fully covered by the fiscal advantage of the loan. Hence, we now stop throwing extra money to the house. The rest goes into investing for the long term.
I like the idea that a hughe pile off money even brings more peace of mind!
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Mortgage debt is OK, as you either have to rent or buy. As I get older and ready to quit the rat race, I did-like even mortgage debt in a rental.
Once you have a mortgage, you have a tendency to want to get rid of it. Saving $1,000+ a month in interest is a good thing…
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