Way back in August of 2019, I wrote a post called Getting Rich With A Mortgage. It was about how I could have paid cash for a house I bought in 2013, but decided to get a mortgage instead and invest the rest. I’m a big fan of debt when it’s cheap and a low-rate mortgage seemed like a no brainer. I even wrote this:
Rare opportunity: Today’s rates are a historical anomaly. I’d be very surprised if they stay this way long-term.
I didn’t quite call the bottom, but I got pretty close:
When COVID came on the scene, rates were too good to pass up. Mindy and I pulled the trigger on a cash-out refinance. We did OK (2.875% loan for 30 years):
Of course, I had no way of knowing rates would go where they’ve gone:
- Anyone who tells you that they can time a market is full of sh*t
- Anyone who successfully calls a top or bottom got lucky. I was very lucky.
But, I did think that low rates were an anomaly that wouldn’t last. And I don’t think they’re coming back any time soon either. It could be a very long time before we see 4% mortgage rates again.
I’m glad I didn’t pay off my mortgage, but I’ve found that most don’t share my views.
Free Mortgage? No Thanks!
I had an interesting conversation with someone back in July. It went like this:
- Other person (OP): I’m buying a house soon!
- Me: I’m sorry about your timing. Mortgage rates are kind of rough now.
I saw a slightly distressed look in OP’s eyes:
- OP: Oh, I would NEVER get a mortgage. I’m paying cash.
- Me: Is it because of rates? Would you consider a mortgage at 3%?
- OP: Nope. I hate any and all forms of debt.
Now I thought of my situation. I have a mortgage at 2.875%. Meanwhile, I can get almost 5% in a savings account. A little time arbitrage has resulted in the weird situation that I’m being paid to carry debt. Note: I didn’t actually keep the money in cash, but I’ll show you what I did do in a moment.
- Me: Let’s take this another step further. If you could have a 0% mortgage, would you do it? What about a negative mortgage where you’d be paid to hold it?
- OP: Nope. I don’t like any debt at all under any circumstance.
I don’t agree. My goal with money is to maximize my returns. More money, less problems.
Results
When we executed our last cash out refi in March of 2020, our goal was to lower our rate (3.35% -> 2.875%) and get some money out to invest. Here’s how our investments have done:
Random Thoughts
- A beat! In that time, we’ve paid about $31,000 in interest. We’re ahead by about $74,000. My returns are higher too since these numbers don’t take into account dividend reinvestment.
- Time capsule: Apparently I couldn’t make up my mind back in 2020. VGT! FTEC!! Tesla!!! Oh my! But all of those are ahead of VTSAX.
- Lucky: I got pretty lucky with the timing. I didn’t quite catch the COVID bottom, but wasn’t far off. Even if I had not been so lucky with the timing, I’d still expect decades of returns to far exceed 2.875%.
One last bit about mortgages.
The main thing I don’t understand about the I’ll-pay-off-my-2.5%-mortgage-because-I-hate-debt crowd is that many of these same folks also count on the 4% Rule. So, they hold these beliefs in their head simultaneously:
- Paying off 2.5% debt is a good idea.
- I expect my investments to return at least 4% for the rest of my life.
But I understand how not having a mortgage clears one’s mind a bit; one less thing to worry about. The fact that I’m here typing out this post means I continue to use valuable brainspace on this topic.
Leveraging debt is also a bad idea if you can’t control your emotions. If you can’t handle a market correction, then do the sure thing and pay off your house. Or maybe don’t even buy a house in the first place and rent.
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Hi Carl,
I may or may not buy a house but under 3% mortgage is a great tool for wealth building. Once should never think of paying it off early. With right insurance and emergency fund any risk could be mitigated.
I also spoke to someone (initial SH) at camp fi. He absolutely hated paperwork. So his last house, he bought with cash. He is retired and in his 60s so I believe it is the best suited for him.
I don’t fully blame the crowd who wants to pay off their under 3% mortgage.
But I have a question for them. If they were buying in this market at 7% mortgage, will the stop their 401k, Roth and HSA contribution to prioritize to pay off mortgage first, then look at retirement savings.
Always fun and thought provoking post. Keep writing and it’s a pleasure to read.
Someone actually said they wouldn’t take a 0% mortgage, or a negative rate mortgage where they are paid?? It must be very psychological to them. Logically, it certainly does make sense to take one out in that instance.
Yep. It amazes me. They always say it comes down to “peace of mind.” To which I say: The bigger chunk of money that I’ll have gives me peace of mind.
I refinanced out of a 3.5% FHA mortgage with the required monthly mortgage insurance specifically in order to drop said mortgage insurance just as I achieved enough equity to allow it in 2020 (I believe). My new rate was 2.625% with a local credit union. Total luck but I’ll take it.
Nice work! 2.625% is outstanding!
“…I don’t agree. My goal with money is to maximize my returns. More money, less problems….”
If you are already FIRE or have reached a level of self sufficiency based on savings and passive income then the statement above is just fine (maybe).
In your case, you were at your self sufficiency level when you took out your mortgage. If life got tough, it wouldn’t matter if you had a mortgage, you would have the resources to handle whatever the crisis was.
But most people who take out a mortgage are also taking on risk. Often the only way to get a home that is affordable is to take out a mortgage. An affordable house price, a reasonable interest rate, and a ‘steady’ income to pay all the bills including the mortgage. But the risk is real and bad things do happen to people who aren’t financially bullet proof. Life is easier when risk is limited and the less financially secure should de-risk life when possible.
Bad things are not necessarily single events. Many times in my life I’ve seen multiple events hit broad swaths of US families. One example of many: in the 1970s the biggest employer in my suburban community was a huge US Steel mill employing many thousands for decades. And suddenly the plant closed and thousands were out of work. And in the area, many companies were closing facilities and off shoring work. The outcome was tragic for many. Union workers aged 35 to 55 were never going to get a union job within 50 miles for the rest of their work lives. And with so many distressed families, house prices dropped dramatically. The families with recent new mortgages, two car payments and a kid going to college in a year were ‘toast’. And a lot of others literally had to move far away losing everything and start over like they were 22 again. No job, the home value less than mortgage value and a ton of expenses just to live day to day.
I say, for anyone not fired, de-risk your life as much as you can even if it delays your retirement. Buy a home you can afford on one income (the safest one). Save money. Pay off the car, credit cards and mortgage ASAP. Live in an affordable area that has employment diversity and an apparent future.
These folks will sleep well every night and will survive the ‘black swan’ event that crushes others.
A person in your situation, nothing matters. If you payoff the mortgage tomorrow, it will have ZERO impact on your future. If you don’t pay it of, it will have ZERO impact on your future. For someone with over $4MM, a hundred thousand dollars just doesn’t matter.
So, I think the answer really depends. Personally the teacher who lives in a $350,000 home with a 7% mortgage in north metro Atlanta probably has made a better life decision than the teacher in Palo Alto with a huge commute and a 3% mortgage on their smaller $700,000 home. Especially if the spouse is a construction worker.
Nothing necessarily wrong with some extra money. Nothing necessarily wrong with leverage. But the amount of risk you should take depends on how able you are able to handle risk opportunities that go wrong. In your case, the risk penalty in the worse case is very modest. But we should not assume everyone else can take the risks that are no big deal for you.
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I wrote about this some years ago here: https://www.quora.com/Does-paying-off-a-mortgage-early-make-sense/answer/Bob-Reisner
Buying a house also takes on the risk of the black swan event. I fail to see how owning 100% of your house that lost 50% value overnight while you still have to move to find a job is better than owning 20%. I would never advocate foreclosure as a financial strategy, but you lose a lot less money walking away from a house you don’t own outright.
Responding to ‘AnotherEngineer’:
Absolutely true on owning without a mortgage. It has risks. But I’d suggest less urgent risks and more time to deal with them.
No mortgage can mean meaningful less monthly expense. It is not unusual for a mortgage payment to be 25% t0 30% of a take home paycheck. Not having this payment means that in a job loss situation, your cash on hand, all other things being equal, will support you longer. More time to find a better job. More time to look at alternatives. More time to wait out some of the transient effects like a rapid drop in home values.
If you have a 60% mortgage to value before the crash and then a 120% mortgage to value, you have a host of problems and limitations if your job or income were also impacted by a crisis. If you own the home free and clear, even with a 50% drop a HELOC or mortgage is possible if you need more funds for a year or two. Like paying taxes and insurance and utilities. If you need to move for employment, at least you can salvage some value and have some cash for a down payment in your new area.
If your the person with the mortgage and no job, holding on to the home might be impossible. No chance on getting cash out via HELOC. No chance on selling the home because a sale at market might mean you have to pay significant funds from personal sources for mortgage payoff.
Personal bankruptcy is really tough. It might be necessary but the ramifications are huge and long lasting. Kiss credit cards and credit goodbye for quite a while. Bankruptcy can affect your ability to get an apartment and certainly a new mortgage. It might even prevent you from getting that new job. We all do what we have to do but I’d rather take the loss on a home but still have lots of cash and great credit. But yes, I’m talking about making the least bad choice in a tough situation.
I’m old. In the early 1970s I was a new college grad with a great and very secure job. Not so much about half the economy. I knew many who got unemployed in this stagflation era. Read many stories in the press about engineers being laid off, wall street guys working in gas stations and union guys with zero prospects. I knew quite a few people who had bught their first home and stretched to buy more home than they needed in better than average neighborhoods. It was a logical and good decision if things went well for a few years. I saw many who lost their homes, took huge loans from their parents and a few who just went bankrupt. It took many of these folks a full decade to recover. And some never did.
For most people most of the time, in the USA, it all works out. Most people come to regret not spending more on their first home and regret not taking an even bigger mortgage. But most people aren’t all people. And no one knows if they are going to be ‘good’ results category or the ‘horrible’ results category. Any might have ‘bad luck’. I just advocate do what you can, when you can to de-risk your life so that setbacks don’t crush your life.
“Not having this payment means that in a job loss situation, your cash on hand, all other things being equal, will support you longer.”
But you’ve sunk a load of money into an illiquid asset. In the event of an emergency, I’d rather have a pile of money or stocks that I can easily liquidate.
You can take out a HELOC, but that’s a risk too. Back in 2009, we had a HELOC and the bank took it away without warning. We received a letter that stated that due to house price volatility, our HELOC was being revoked immediately.
The chance of a HELOC being canceled is probably rare, but it’s also most likely to happen in a time of economic distress when you need the money the most.
> But you’ve sunk a load of money into an illiquid asset. In the event of an emergency, I’d rather have a pile of money or stocks that I can easily liquidate.
I think that his point has to do with considering why this may or may not be a good thing.
For instance, in your specific case you live in an area where you don’t have a reason to in that location apart from “I like the area”. If things went badly, you would have the flexibility to consider relocating to a place with better prospects. If you were still working this would be very valuable. However, if four generations of your family all live close by to where you are (i.e., relocating out of the area is not an option), then sinking the money into the illiquid asset (and thus reducing your monthly cash-flow requirement) might be more sensible.
I can certainly see how there are reasons why both approaches would be considered good, depending on the evaluation criteria. Your circumstances and goals lead you see putting all that money into a house as not the best course of action. Someone else could easily look at the same situation and because of their individual circumstances and goals decide that the opposite is the best for them.
It is the same sort of thing we do when securing computer networks and developing software to run in a secure way: start by asking, “what is the threat model?” Without first answering that question, we have no hope of developing a sensible, robust cost-effective approach to security. Likewise, really big financial decisions, like “take a mortgage, or pay cash (or pay off the mortgage)” have to begin with asking, “what am I trying to accomplish?” Plus, just like with developing secure networks and software, there are multiple viable approaches to reach your goal.
Carl, I enjoy the blog, thanks for sharing everything with us. Agree with you on the mortgage, I’d much rather have a liquid pile of stocks or cash (especially now with savings accounts paying 5%) and a fixed low interest payment rather than equity tied up in a house.
I’ve been meaning to send this question to Mile High Fi but I’ll just ask here. What does your investing life/strategy look like nowadays? Dollar cost averaging monthly or just throwing in when you see an opportunity? VTSAX or something else? Recommend owning a handful of single stocks or na?
I subscribe to the JL Collins way of investing, essentially 100% VTSAX or S&P 500 Index. Have considered a small allocation to an international index after listening to one of Mindy’s recent podcasts with a guest whose name I can’t recall.
Feel free to answer some or none of these questions! Thanks again for the blog!
Hey Mark!
Thank you for the kind comments MfO!
We’ll answer your question on the podcast too, but now I’m mostly just about VTSAX. I still do hard money loans (12%!) and very rarely, I think that I see very unique opportunities that I throw money at. The most recent example was buying SpaceX stock a couple of years ago. I think Starlink (part of SpaceX) is an amazing business and look forward to an IPO in the next couple of years.
With that said, VTSAX is mostly drama and pain free, so that’s the way to go.
Also, we don’t have much income anymore, so we’re not putting much into the markets now.
I haven’t considered international; but not for any specific reason. I’m probably just too lazy!
If you have a $2,000 mortgage you need to have $48k+ more in income each year than without. That money has to come from somewhere. Work or savings. You can’t both have the munny and keep the munny. The $2,000 per month has to come from somewhere.
Some people like to live small and if your total income is $40k, needing $48k more might not be the way. 0% or 1% or 3% or 7.5%.
We paid off our mortgage in summer 2007. That time had a strange vibe. I get the same vibe right now. My vibe crystal ball may be busted, but I don’t expect to need or want another mortgage.
Many paths. You put the personal in personal finance….
$24k not $48k. Bad at maff.