By now, most readers know that we paid off our mortgage early. In my opinion, it's one of the cornerstones for true financial independence.
I believe that having no mortgage (this excludes real estate investments) is one of the critical aspects of maximizing your freedom. It's a prerequisite for transitioning into the Freedom Phase.
This is a hot topic in personal finance circles, with many individuals arguing against it, and plenty of expert articles doing the same. There are two primary reasons why paying off your mortgage early is cited as a bad idea.
These were the same considerations that were bouncing around in my head before I became determined to pulverize this particular debt.
Investment Opportunity Costs
This is, by far, the most utilized logic. Any extra cash you use to pay off your mortgage is cash you could have used to invest in something that may earn more than the cost of the mortgage. For example, that extra $100K you just used to pay down your mortgage, could have been used to buy stocks earning X% more than your current mortgage rate.
Investing that money properly could net you gains you would otherwise miss out on if you choose to hand over the money to the bank instead. The underlying message is that you're a financial dunce if you're even considering this move.
What About all the Tax Benefits
Once you pay off your mortgage, you can kiss your mortgage interest rate deductions goodbye on your tax filings. Because of this tax break, your actual mortgage interest rate is effectively lower than advertised. Many people depend on this deduction to be able to itemize as part of their tax profile. Why would you want to give the government even more of your hard-earned money?!
I get the math. It makes perfect financial sense to delay paying off your mortgage so you can use the extra money to invest and minimize your tax exposure along the way. But it's not always about the math, and there's a deep psychological element to it, take my personal experience as an example.
I took out a mortgage in 2009 for our first single-family home. At the time, the home value was pushing my comfort zone given our income, but I felt confident in our ability to earn more over the coming years. I put 20% down and took out a 30-year mortgage as a hedge against any potential income shortfalls. The initial interest rate on the mortgage was 4.25%, but I was able to renegotiate a lower rate four years later to 3.65%.
As our income grew over those subsequent years, and our expenses remained flat. I found myself with extra cash that needed a place to be stashed. I was still maxing out my 401K and had opened some non-tax advantaged brokerage accounts.
Five years after the 2008/09 financial crisis, the investments were doing well, but I was feeling very uncomfortable with the stock market in general, which felt overextended to me (can you imagine how I feel now?).
The only debt I had left by then was the mortgage, given I had destroyed my student loans a few years prior. Since I have a tremendous aversion to debt, I began to contemplate what it might feel like to be completely debt-free.
The idea appealed to me so much that I put a plan in place to have the mortgage paid off before I turned 40.
But before I could make this a reality, I had to overcome some of my fears:
- The fear of losing out on other opportunities
- The fear of making one, or multiple significant payments
- The fear of having regrets afterward
- The fear of needing the money for an emergency
- The fear of a real estate crash
- The fear of being tied down to one location
Those were all valid concerns, and it took quite a bit of mental gymnastics to overcome them. In the end, I split the final mortgage pay off into three large chunks over three years, to minimize some of my fears, and plowed ahead.
You can see the gradual decline in the snapshot above from my account using Personal Capital's Free Net Worth Tracker.
Closer to True Freedom
Fast forward to today, and I am now proudly debt-free! I have had no regrets. Instead, I have this wonderful feeling of freedom that is hard to describe. All my fears were replaced with a sense of financial peace like a heavy burden had been lifted.
I also now have advantages that I hadn't fully appreciated:
- I worry less about income
- I feel better about taking on more risk with investments
- My expense threshold has been lowered considerably
- My extra cash flow can now be converted to other activities guilt-free
- I saved myself >$150k in additional interest over the next 20 years
- I have more flexibility and options with the house
- I am no longer a financial slave to anyone
If your goal is freedom, and the ability to live on your terms, you need to ditch your mortgage. Put in place a plan to pay it off early, and the time you are pay off date with your entry into the Freedom Phase.
Everyone's situation is, of course, different, there are many exceptions to this philosophy. You would need to consider yours carefully and keep the following things in mind:
- Don't pay off your mortgage if you have any other kind of debt, take care of those first
- Watch out for any prepayment penalties from banks
- Make sure you have a sufficient emergency fund set aside
- Make sure you have at least 2/3 of your net worth invested for the long term
- You can make extra mortgage payments instead of lump sums
Paying off the mortgage early was the right decision for the MYF Household. Since my goal is to keep our expenses flat, I can now use the extra cash flow generated from the absence of mortgage payment and convert that money into a travel fund. This is one of the main reasons I'm able to pull off two months of slow travel in Barcelona, Spain.