Mindy and I just sold our old home. It had been a rental, but the numbers didn’t work well. We earned less than $3,000/month on a $600,000 home. We weren’t close to the 1% Rule. Hell, we weren’t even at the .5% rule. If we had pursued our original plan to put the home on Airbnb, the numbers would have worked much better. But then, we’re trading time for money. I need time much more than I need money at this point in my life. We bailed on our Airbnb plans and closed on the sale about two weeks ago.
Here are the dirty details from way back in June of 2013 when we moved in:
- Purchase price: $176,000
- Amount financed: $140,800
- Loan term: 3.25% for 15 years
Mindy and I could have paid cash for the home, but we took out a loan instead. More on that decision in a moment. First, I have more juicy numbers to share.
Mortgage For The Win
Over the course of the mortgage, we paid about $27,282 in mortgage interest.
We took out a mortgage because we thought we could do better in the markets. And did we ever. Here is how the S&P 500 performed:
$140,800 invested in the S&P 500 would have grown to $378,081.
Another way to think about it is that we made $237,281 in exchange for paying $27,382 in interest. Not bad. Not bad at all.
But, index funds aren’t what we put the money into. Back then, I didn’t know what an index fund was, so we bought tech stocks including Facebook, Google (now Alphabet), and Tesla. Because tech boomed, we faired much better than we would have if we just went with the index. However, this is dangerous territory and not reproducible. Also, I’m mostly an indexer now, so I prefer to keep it simple and compare to the S&P 500.
Some Caveats (The Fine Print)
There are some definite disadvantages to having a mortgage:
Mortgage companies require that you keep your home insured at certain levels. Even if we didn’t have a mortgage, we’d still have insurance, but maybe we’d be able to get a cheaper policy. Is there such a thing as a catastrophic policy for a home? By this, I mean a policy that has a crazy high deductible (>$50,000) that you’d only really exercise if the home was totally destroyed. If so, this is what we’d get if we had a paid-off home.
Our mortgage company made us have an escrow account for insurance and taxes. I HATE escrows! Our cash sits around wasting away in the mortgage company’s account, not earning a cent. For us anyway.
No Payment Equals More to Invest
If we had paid cash for the home, we would have had an extra $1,300 to invest every month. Note: Front-loading usually beats dollar-cost averaging, so this argument is mostly moot.
Sequence of Returns Risk
Some early retirees don’t want a mortgage for fear of sequence of returns risk. This doesn’t apply to us because we oversaved and Mindy still works, but I can understand the peace of mind that sailing into retirement with no debt would bring.
Really ****ing Good Timing
With dividend reinvestment, the markets returned almost 14% annually over the course of our mortgage! This is above the historical average of around 10%.
I find that most in the FIRE community are eager to pay off mortgages and I never really understood why. We’re counting on index investing to give us a return of 4% in a worst-case scenario. Why would you rush to pay off debt at 3% then? Would you rather have more money or less money?!??
Mindy and I will always take advantage of cheap money. We did this back in April of 2020. We had paid cash to get a good deal on a home, but then took out a mortgage when the world seemed like it was collapsing. It all comes down to this:
I feel that over a long time period (>10 years), the stock market has a good chance of appreciating at least 4%/year.
And history backs me up. From 1926 to 2018, the stock market has lost money over a 10 year period 5% of the time. And, if you happen to get caught in one of these rare down periods, it’s usually followed by above-average returns.
I also find value in having a powder keg of money ready to pounce on a great investment. This is slightly less important now that I discovered that I can take out a loan against my portfolio.
Debt And Finance Are Personal
But, I know plenty of humans with better brains than mine that have aggressively paid off their mortgages. Debt, money, and investments are personal. What helps me sleep at night is having the most amount of money over the long-term. For others, eliminating debt is more important.
And truth be told, I HATE debt. But, I like more money just a little more.
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