Showdown! Keep Your Mortgage vs. Crush Your Mortgage -– Who Wins The Championship?

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Ready to rumble?

There’s a fight brewing. Two contenders have climbed into the ring.

Both are clawing for victory. Only one will survive.

It’s a showdown.

In one corner: Crush Your Mortgage, and his team of anti-debt advocates.

In the other corner: Keep Your Mortgage, and his cheering crowd of leveraged investors.

Who will take home the title?

Pay Off Your Mortgage vs. Invest

In all seriousness: “Should I pay down the mortgage? Or should I invest?” is a hot question.

And it’s been consuming my thoughts recently.

At the risk of sounding obsessive, I’ll admit: I think about this everyday. I ponder this while I’m cooking. While I’m gardening. While I’m running gnawing chocolate-chip ice cream straight from the pint.

Why deliberate so much?

  1. It’s complex.
  2. It’s not theoretical. It demands a decision (and it needs one now).
  3. It influences the path of hundreds of thousands of dollars. Yikes! (And I thought being an adult would be easy.)

And since I have three mortgages, that’s three times the fun. ☺

So let’s take a look at some of the factors at play.

The Reigning Champ: The “Keep the Mortgage” Fighter

The reigning champion in the ring, returning to keep his heavyweight title, is the “Keep the Mortgage” fighter.

He’s the champ because most of America supports him. Most people spend 30 years paying off a 30-year mortgage. (Not that most people are investing that money, but …) Keeping the mortgage is the norm.

But Afford Anything Rebels don’t blindly side with the majority. We’re radical free-thinkers. So let’s think.

Here are the benefits to Keeping the Mortgage:

1) Investment Gains > APR on Loan

The top reason why Rebels keep the mortgage? They believe their investment gains could outpace their loan APR.

This is a simple concept: You borrow money at a low interest rate. You invest it for a higher return. You pocket the spread.

• Banks borrow from the Fed at a low rate; lend to the general public at a higher rate.
• Travelers earn in dollars or euros; spend in Thai bhat or Colombian pesos.

And whether or not you’re consciously aware of it, every person who holds a mortgage and invests also plays this game.

So – Could your investments really outpace your mortgage APR? Probably. From 1990 to 2010, the S&P 500 returned 9.14 percent as a long-term annualized average.

“WTF does that mean?”

If you dumped a bunch of cash into an S&P 500 index fund in 1990 and didn’t touch it for 20 years, you would have earned 9 percent annual returns over the long-haul.

“But those were unusually great years. Right?”

Nope. Those two decades include the dot-com burst of 2001, plus the Great Recession of 2008. (Notice that the timespan ends mid-recession, before the recovery.)

“Oh, so I could earn 9 percent. Then why are we having this conversation? Isn’t keeping your mortgage a no-brainer?”

Nope. In finance, there’s a concept called “risk-adjusted return.” It’s a fancy way of saying that you can’t just stare at your returns in a vacuum – you have to look at returns within the context of risk.

• Earning 10 percent on Facebook stock isn’t the same as earning 10 percent in a savings account.

• Earning 12 percent on a dingy rental property in a high-crime area isn’t the same as earning 12 percent on a sparkling rental property in a high-end, luxury resort.

• Borrowing money to invest in the stock market isn’t the same as paying off a loan.

“But I’m not borrowing to invest!”

Yes, you are – in the form of opportunity cost.

But we’re getting off-track. In this section, we focus on arguments in favor of Keeping the Mortgage. So let’s look at the second reason:

2) Compound Interest > Simple Interest

Alright, this one gets a little more complex. Hang with me:

When you invest, you earn compounding interest.

• Year 1: $100 * 10 percent = $110
• Year 2: $110 * 10 percent = $121
• Year 3: $121 * 10 percent = $133

By the end of Year 3, your original $100 has grown by 33% of its value. Wowza.

Mortgage interest … well, if Facebook had a relationship category for mortgage interest, it would be “It’s Complicated.”

Mortgage interest is calculated as simple interest, meaning that it’s a straight-line rather than a compounding figure.

• Year 1: $100,000 * 5 percent = $5,000
• Year 2: $100,000 * 5 percent = $5,000
• Year 3: $100,000 * 5 percent = $5,000

Seems “simple” by definition, right?

But there’s a curveball: Mortgage interest is “amortized,” which means that during Year 1 of a 30-year mortgage, the vast majority of your payments are applied to the interest, rather than the principal. In other words, you barely make any equity gains as a result of mortgage pay-down.

In Year 29, the tables are turned: You’ve repaid almost all the interest, and the bulk of your payments are now used for equity paydown.

This gets complicated quickly, so let’s use charts and a calculator to illustrate it:

pay off the mortgage or invest

Here’s the situation illustrated in the chart:

  • Loan: $200,000
  • Term: 30 Years
  • Interest: 5.375%
  • Tax and Insurance: $250/mo

This tracks the first 8 months of the mortgage. Notice how the bulk of the payments are applied to interest, with only a tiny sliver going to the principal?

Okay, now climb into our Time Machine, speed ahead to the year 2044, and look at our payments.

should i pay off my mortgage early

Notice how the majority of payments are applied towards principal, with only $5 on interest at the end?

(Yeah, this is how I spend my Saturdays. #NerdAlert)

Let’s recap:

  • If you invest, you earn compound interest, which is sexy.
  • If you pay mortgage interest, you’ll only pay simple interest (yay!!), but you’ll pay on an amortized schedule (boo!!).

If your head hasn’t exploded yet, check out the next “Keep the Mortgage” argument:

“‘Cuz We Are Living in an Inflationary World”

(Sung to the tune of Madonna’s Material Girl)

If you have a fixed-rate loan, inflation is your best friend.

Thanks to inflation, you’ll repay your loan in cheaper-and-cheaper dollars over time. Today, your monthly mortgage payment is $1,400. That same $1,400 could buy you roundtrip airfare from New York City to Christchurch, New Zealand.

In 2044, your mortgage payment will still be $1,400, but thanks to inflation, that money will only cover a quick hop from New York to Chicago.

Major point in favor of keeping the mortgage intact, and investing instead.

(P.S. Actually, your future mortgage payment will be a little higher due to taxes and insurance. But since those expenses will burden you regardless of whether you carry a mortgage or not, we’ll leave them out of the equation. Death and taxes, right?)

Speaking of taxes …

Mortgage Interest Deduction on Taxes

First, an important Public Service Announcement: Never spend money for the sole purpose of a tax deduction. You’d literally spend $1 for the sake of saving 33 cents.

That said, I’d be remiss if I didn’t at least mention that your mortgage interest is tax-deductible, which lowers the “effective” interest rate on your loan.

For the sake of a simple example, let’s say you paid $10,000 in mortgage interest this year, and your overall tax rate is 25 percent. (Not your top marginal bracket, but your overall rate.) You’d save $2,500 in taxes.

(This is a rough number — there are more complex factors that come into play.)

You’ll get the biggest tax-deduction impact when your mortgage is fresh and new. Your tax deduction will shrink as you progress along the amortization clock.

The Contender in the Ring: Crush Your Mortgage ASAP

The dark-horse contender fighting in the ring, eager to claim championship victory for himself, is the “Crush Your Mortgage” contender.

This fighter has fervent supporters among a minority niche. If you fight for the Anti-Debt Army, mortgage freedom is the penultimate victory.

Mortgage freedom is rare. When most people say “I’m debt-free,” they mean: “I’m debt-free except for my mortgage.” In America, it’s assumed that every homeowner carries a mortgage until age 55-65+. Breaking free is a defiant act of rebellion.

But should you crush your mortgage? Let’s look at the arguments in favor:

#1: Lower Debt-to-Income Ratio

Let’s assume you’re a rental property investor. You have a mortgage at 5 percent. New 15-year mortgages are being offered at 3 percent, and you’re hungry for a slice.

You have two choices:

a) Refinance your current mortgage.
b) Decimate your mortgage so that you can qualify for a new mortgage (on a new house) at 3 percent.

Both are solid options. If you can wipe out your current mortgage in a short timespan (before rates will rise), you might be better off clearing the slate so that you can qualify for another mortgage.

“Um, Paula, WTF?”

I know, I know. It sounds ridiculous to crush debt in order to take out more debt. So let’s move to Reason #2 —

#2: Better Cash Flow

Crush your mortgage, and your cash flow will skyrocket. (Wheeee!)

If you’re an owner-occupant, you’ll keep a huge chunk of your paycheck. If you’re an investor, you’ll keep a massive chunk of your rental income. You win, either way.

You can then invest every dime of the money that would have gone to mortgage payments. In an S&P 500 Index Fund, you may make long-term 9 percent returns without the added risk. (Or you can buy your next rental property in cash.)

This is one of the most compelling arguments I’ve ever heard for crushing your mortgage. And so is the next one –

#3: Humans are Imperfect.

It’s grand to ask, in theory, “Should you pay off your mortgage or invest?”

In reality, though, how many people will actually invest that money? How many will spend the cash on steak dinners, pedicures, brand-new cars, handbags, and trips to Aruba?

Furthermore — (and this is the argument that really gets me) — will you then feel guilty while you’re enjoying those activities? Will you surf the waves in Costa Rica while thinking, “I’m borrowing for this trip, via opportunity cost?”

(BTW: You can’t think this way. You’ll drive yourself nuts. #AskMeHowIKnow. Ironically, the only way to stay sane is by embracing a little economic irrationality.)

Speaking of economic irrationality …

#4: Would You Invest a HELOC?

Ready for some cognitive dissonance? (Am I ever!!)

Would you borrow a home-equity line of credit and put that money in the stock market?

“Heck no!”

Really? Why not? What’s the difference between borrowing a HELOC and putting your money in the market, rather than using that cash to build home equity?

“Um … a HELOC has closing costs.”

Fine. I’ll give you the $2,000 to cover closing costs, if you take a massive loan against your house and shove all that money into the stock market.

“Uh, I still don’t want to.”

Why not?

“It’s uncomfortable.”

Again, what’s the difference? Aren’t you borrowing against your house, either way?

“Uh …”

Boo-yah!

This is another one of the most compelling “Crush Your Mortgage” arguments I’ve ever heard.

Actually, it’s a great litmus test. Would I be willing to borrow a HELOC and use that money to buy more rental properties? You betcha. Absolutely. In fact, that’s how we bought House #4.

But would I be willing to borrow a HELOC and give it to Wall Street? Hahahaha … No.

No-no-no-no-no.

****

Championship Victor

Which fighter wins the round? “Crush Your Mortgage” vs. “Keep Your Mortgage”?

There’s no clear victor. As you can see, there are rock-solid arguments for both.

But in my next blog post, I’ll explain which choice I’ve made — and why. Stay tuned!

(UPDATE, 4/22/2014: Here’s my decision.)

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P.S. If you want to read even more about this topic — (Man, you just can’t get enough, can you?) — here are two of the best blog posts I’ve read on this subject:

  • Former hedge fund manager and self-made millionaire Todd Tresidder wrote the article-to-end-all-articles on the “mortgage paydown vs. invest” controversy. I contemplated his article for days. #Obsessed.
  • Financial independence striver Johnny Moneyseed took a stand on the issue, writing a compelling argument for the “invest” side. His stance is well-researched, and the debate that erupted in his comments section (almost) restores my faith in Internet debates.

Enjoy!

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33 Responses to “Showdown! Keep Your Mortgage vs. Crush Your Mortgage -– Who Wins The Championship?”

  1. Romeo
    10. Apr, 2014 at 1:08 pm #

    Hmm…

    A huge solid argument that I believe you neglected to mention is…”crushing your mortgage IS investing.”

    In your example, you are investing at the same rate of your existing mortgage, 5.375% FIXED, if you use your money to pay it down. There is no need to guess..I mean predict…I mean assume..I mean…you get the point…that your money will return 9% annualized in the stock markets.

    The problem, though, is if you pour all of your extra money in your home to crush your debt you can be setting yourself up for future disappointment. Image, $100,000 into your debt demolition and a nicely new 5 unit apartment complex comes on the market. Your savings are crushed and you’d be forced to get a HELOC. Now your effective return on investment is affected by the additional interest rate charged on the HELOC.

    You’re right. It’s complicated.

    A hybrid choice would be to put your cash flows into a “wealth number” account. This is what I suggest in my book, The Wealth Number: The Financial Solution to Pursuing the Job You’d Love.
    The same concept applies.

    Agressively save your cash flows until you have enough to pay off your mortgage balances in full…if you want. In the meantime, if another property comes on the market you’ll have the ability to pay it instead. Who knows, you may be able to pay cash for the next investment property if you save aggressively enough.

    If you use this method you wouldn’t have to worry about the S&P dipping again or crappy tenants that destroy your properties because you’ll always have a shit ton of reserve funds…waiting for you to make a solid choice as you need it.

    Bottom line. Don’t lock up your cash flow in a house until you’re ready to pay the entire balance at once and take advantage of the tax advantages as long as you can.

    • Afford Anything
      10. Apr, 2014 at 2:47 pm #

      @Romeo — I’m not joking: Your remark about a “nicely new 5 unit apartment complex” totally got me to open a new browser tab, and start crawling listings of multifamily units in Atlanta. And that sent me on a 20-minute Internet Distraction spiral. Hehehe. (It’s after 2 pm and my brain has turned to applesauce.)

      In all seriousness, though, another advantage of the “save your cash and make a HUGE payoff” model is that it’s psychologically motivating. It’s fun to watch your savings account grow … and grow … and grow … and then make a massive payoff. I do a modified version of this: I’ll accumulate $5,500 or $17,500 in my savings account, and then make a big, one-time chunk payment into my Roth IRA and my Solo 401k (respectively). Yes, I’m losing a teeny-tiny extra amount in theoretical gains (probably $200 or less) during that hold time, but that’s the price of maintaining the mental motivation.

  2. M
    10. Apr, 2014 at 1:48 pm #

    One other factor that weighs on the side of prepaying a mortgage rather than investing in taxable accounts that often is not mentioned in analyses of the issue is financial aid for college. This would only matter for a subset of the population, but the federal need analysis methodology does not consider the equity in a family’s primary residence. So, if someone will be filling out a FAFSA in a couple years and has a mortgage balance and money sitting in a taxable investment account, he or she might be better off throwing the money at the mortgage and thereby maximizing aid. Of course, many private schools do their own analyses (using the CSS Profile, etc.) and do factor in equity in a primary residence.

    • Afford Anything
      10. Apr, 2014 at 2:40 pm #

      @M — That’s an excellent point. Yes, federal college aid models look at the balances in your taxable investment accounts, but don’t look at your home equity. (They interpret the former as reflective of your ability to pay, but not the latter). If you have a child that’s applying for college soon, you have a stronger reason to put your money towards mortgage pay-off.

  3. bethh
    10. Apr, 2014 at 2:22 pm #

    Nice job on this! You made a fairly dry topic pretty easy to follow.

    I bought my house just over a year ago, and with the first (awesome!) tax return this year I started my investment plan. My PITI runs just over 1200/month, 1012 of which is PI, the other 200 is TI.

    I’ve decided to invest 4k/year into the stock market (Vanguard VSTAX), which is pretty close to a mortgage payment per quarter. I calculated that if I prepaid my 3.55% APY mortgage by 250/month, I’d shave 9 years off, but if I invest and get only a 6% return, I’ll shave more like 12 or 13 years off the total repayment (my numbers may be slightly off, but investing at a conservative rate will save me about 3-4 years).

    That also lets me have the cash available in case of disaster (though obviously it’s vulnerable to market fluctuation), and since I’m a single-income household that feels good. A main risk, of course, is when stuff happens – will I hit that account to replace my car, do home maintenance, etc.? That is not my intent but I can’t swear I won’t.

    We’ll see if I change my mind after your next post!

    • Afford Anything
      10. Apr, 2014 at 2:52 pm #

      @Bethh — Thanks! I’m happy to hear that I can talk about a dry topic in an entertaining manner.

      If I ever taught a writing class, I’d probably have a lesson in there about “The Benefits of MisQuoting Madonna’s Material Girl.” :-)

  4. Steven
    10. Apr, 2014 at 2:50 pm #

    Coming from the pay off the mortgage early camp, it’s nice to hear an unbiased review. Dave Ramsey always pulls the would you borrow on your house to invest in the stock market and 99% of people would say of course not, the other 1% prefer sky diving to work as a form of transportation.

    My wife and I chose pay off the mortgage(rental) early for a couple of reasons, that’s what my wife wants! Paying off the rental will increase our cash flow and give us more of a peace of mind, paying off a house early with someone elses money really isn’t that bad.

    • Afford Anything
      10. Apr, 2014 at 2:53 pm #

      @Steven -
      On a totally unrelated note, you have the most entertaining profile picture … :-)

      • Steven
        16. Apr, 2014 at 12:53 pm #

        I’m guessing more David Beckham than Warren Buffett or are all things equal?

  5. Jen of Hens
    10. Apr, 2014 at 2:58 pm #

    In the category of “if I knew then what I knew now…” I’d CRUSH. THAT. MORTGAGE!

    Why? Back in 2004, things were going swimmingly. I’d just used a good chunk savings to invest in a small business with a friend. Things were going along great. Until…mystery illness.

    Starting in May, 2005, my life was turned upside down by a terrible illness. I had to take disability – it took me three years to get. I live alone – no second income. Needless to say, I racked up some HUGE medical bills during that time. I used all my savings and retirement paying those and my daily living expenses. I was financially bled dry by this. I damn near lost my home – I fought to save it from my hospital bed between episodes of unconsciousness. I just barely managed to save my home.

    Even though I managed to save my home, I still had to figure out how to pay the mortgage. If I had been smarter and chosen to pay the mortgage off first, that one ENORMOUS worry would have been off my mind and I would have more money now.

    You just never know. And I’d been super healthy all my life up to that point….

    • Romeo
      10. Apr, 2014 at 8:40 pm #

      With all due respect, it was the business decision that almost caused you to lose your home, not the fact that you didn’t pay off the mortgage. Had you had the cash available when you had your unfortunate episode (instead of putting it in a business or a home) you probably would have been in a better financial position. In any case, I’m glad to know that you are doing well.

      • Jen of Hens
        12. Apr, 2014 at 1:29 pm #

        Agreed. But the business was a plan I’d had for a long time and I’d saved carefully for it, had money in the bank to survive for 18 months without income, and was still working my “cubicle job” for the first 6 months of the business. The illness hit fast and hard. I was lucky to have the funding I needed to keep me going until SSDI kicked in.

        It’s worth noting that this is not an uncommon story. I’ve heard variations on the theme from many who are now disabled. I envy and applaud those who can say – “thank goodness I paid off my mortgage, otherwise I would have lost my home.” No one is immune to the vagaries of life, even when we plan, save, invest, etc. I was very smug about my various financial safety nets. The situation above wiped that smug smile of my face.

        But hey, I still have no regrets because I am both a risk taker and an adventurer. I’m learning a different kind of freedom now.

  6. Ulf
    10. Apr, 2014 at 4:27 pm #

    You should choose a risklevel. Not using your house as collateral would send mortgagerates skyrocketing. Repaying is a sure way to get a good cash-flow-impact. But ! Rather than repaying in full, repay it to a level where it would be possible to live with, for a long time during rainy periods. You will get sick, as people do, would you cope then?
    Not using some of the money for risky, but profitable, investments also carries a risk – the risk of not receiving dividends and value increase. Every thing in life is a risk. Repaying is a risk – not doing it is too.
    In a perfect and predictable world, you should get the largest possible loan and then invest the money somewhere where the interest received is greater than payed. No such world exist.

  7. Lee @ BaldFinance.com
    10. Apr, 2014 at 4:40 pm #

    One advantage of paying off properties sooner is that traditional lenders will only let you have 4 mortgages at a time, so having too many mortgages (aka too much debt) will limit your investing potential. What I’ve done is put the 4 mortgages I have in my name only, then I will put the next 4 in my wife’s name to mildly circumvent the rules. By the time we get to that point, it will be relatively easy (due to amortization of existing 15 year mortgages) to pay off a small balance loan to add on the next one. At some point, I will have to turn to non-traditional lenders, but that’s ok. With today’s low interest rates, I want to take as long as possible to pay off that debt.

    With 3 of the mortgages in the 3% range, by the time I tax deduct the interest and factor in inflation (both today’s rate of inflation and the expected rise in inflation… not if, but when rates rise), my mortgages are close to 0%. My cash is then focused on saving for the next down payment (investor properties require 25-%-30% down), funding retirement accounts, and making a contribution to my son’s 529 account.

    Great article contrasting the two sides of the argument.

  8. mistersquirrel
    10. Apr, 2014 at 6:36 pm #

    both succeed.
    but you have to go on this journey together, I haven’t had all the conversations that I need to with my partner who (no shame on their part) started the journey later.
    > we know the principles of FIRE
    > but the voices from the past, and maybe the now, screech in our ears

  9. Romeo
    10. Apr, 2014 at 8:44 pm #

    Wells Fargo only requires 20% down for investment properties. ;-)

  10. Capt Jill
    10. Apr, 2014 at 8:47 pm #

    I think a lot of it depends on the individual involved. I’ve done it both ways. I paid down my first mortgage in only 7.5 years and used the extra money to invest. Then I took out a mortgage on this house when I had it paid off to buy a package deal of 4 houses which I’m slowly paying down. I was able to buy another place for cash which has been paying off the other 2 properties I have seller financed mortgages with. It’s all working out so far, but I do feel better being totally debt free (no mortgages) and I’m working towards that goal again now. I would NOT take a mortgage to invest in the stock market (even tho I have done fairly well on choosing stocks), it is just too risky, nothing in the market is a sure thing, no matter what anyone says. There are just too many risk factors we don’t have any control over.

  11. Angela
    11. Apr, 2014 at 10:27 am #

    Paula, I just love your blog. Your posts are always well researched and thought provoking, AND they have personality! Love it!

    Anyway, the “keep your mortgage vs. crush your mortgage” issue is one I’ve been struggling with myself… I’m leaning toward paying down the mortgage early. Why? Mainly because it will feel good. I didn’t come to frugality and investing naturally. It’s been a process over several years to develop the focus and discipline I need to keep making smart financial decisions. Finding a new goal to throw myself into keeps me from backsliding into over-spending. I think crushing my mortgage is a new goal that will keep me on track.

    • Afford Anything
      12. Apr, 2014 at 1:03 pm #

      @Angela — Thank you! That’s exactly what I’m striving for (well-researched, informative and motivating posts that are also funny and entertaining), so I’m thrilled to hear you say that. :-)

  12. Done by Forty
    11. Apr, 2014 at 1:37 pm #

    Paula, we struggle with this debate even well after we paid off our mortgage. There are huge opportunity costs associated with our mortgage pay-down period (2010-2013). But they’re done and gone. Now all that matters is what we’d do going forward. We may, like you, tap our equity to buy more rental properties, once our cash reserves are gone. But, for whatever reason, I’m also more comfortable doing that than borrowing money to put in the market. Who knows why.

    I’ll say that I’m more relaxed and happier now that we have no mortgage debt (though we’re in the process of getting some more, with our first rental). Who ever said we’d be rational with our financial decisions. ;)

    • Afford Anything
      12. Apr, 2014 at 1:01 pm #

      @Done by Forty — There are two reasons I’m more comfortable tapping home-equity to buy a rental property (as opposed to invest in the market):

      1) Knowledge. The best investments are the ones you understand. And rental properties are much easier to understand than complicated corporate earnings statements.

      2) Control. In rental-property investing, I have the ability to manage the costs more tightly and make the operation more efficient. I can test different pricing models. I can call a dozen contractors for the cheapest quotes. By contrast, I have zero personal control over the stock market.

      It’s interesting to hear that you continue to struggle with this question even after you’ve paid off your mortgage. I suspect that I’ll have the same experience. No matter which option I choose, I’ll always wonder how my life might have changed if I had picked the other one. That’s just the nature of making big decisions, I guess. :-)

  13. spiffi
    12. Apr, 2014 at 1:50 am #

    I enjoy reading PF blogger’s viewpoints on this.

    My mortgage is still new – so as you pointed out, each month’s worth of payment is heavily weighted toward interest.

    The *benefit* of this is that right now, every additional principal dollar I can come up with, has a bigger effect on reducing the length of my loan period, than it will in the future, *because* my principal payment each month is so low.

    Someone on a PF blog pointed this out a few months ago – if my payment each month is $1000 and $300 of that is principal, then every additional $300 I can come up with each month, takes a month off of my loan period. In 5 years, when my $1000 payment has $500 going toward principal, it will take an extra $500 each month to reduce my loan period by that same month.

    And, I like updating my spreadsheet every month, and watching that payoff date move further up the page each time :)

  14. Blair
    12. Apr, 2014 at 6:45 pm #

    I prefer a hybrid method. Rather than adding to my monthly payment, I prefer to invest with the intention of being able to write a check in a couple years to payoff the mortgage. I have always appreciated the options that come with liquidity.

  15. Mortgage Free Mike
    13. Apr, 2014 at 11:09 am #

    You write so well and so often about freedom on your blog. After paying off my mortgage in 2 years, I have freedom that those with a mortgage do not have. I have the freedom to invest a large sum of money ever month however I want — or some months — travel and make lifelong memories. I saw my mortgage standing in the way of my freedom, so I got rid of it!

  16. Bilgefisher
    13. Apr, 2014 at 6:14 pm #

    We are in a very similar situation. We decided on the following method. We will take our income from our property in excess of our reserve and put that towards principle.

    Our W-2 saving will be put towards new properties.
    We will decrease our debt coverage but not limit our investment. High risk vs guaranteed yield. We will have a heloc on those free and clear properties to invest should the right deal come along. We can also use those helocs for quicker principle reduction by shifting the amortization table in large chunks rather than small monthly increments.

    Also I don’t consider the interest rate on a mortgage when I look at payments. I calculate the mortgage constant.

    Take a $20,000 car loan at 3% interest over 60 months. Payments are 359.57. While the interest may only be 3% the loan costs 21.5% each year. 359.57*12/20000. I think this is useful for folks looking for cash return on cash and net spending/income. $20,000 paid down buys $359.57 per month.

  17. Kathy
    14. Apr, 2014 at 9:32 am #

    We paid off our mortgage and there is no feeling like not having a house payment. Unless the government takes it through eminent domain, or you neglect to pay your RE taxes, this piece of property is yours forever. The psychological impact is priceless. However, we both look at the numbers and totally recognize that there may be a benefit to having the cash available to invest. Obviously you have to run the numbers comparing mortgage rate vs. investment rate, plus figuring in your interest deduction you can take on your tax return. While the house is definitely an asset on your balance sheet, it is harder for the equity to help in an emergency situation unless you have a HELOC in place, which then costs you interest. With stocks or bonds they can easily be sold and the cash available in just a few days. Of course then if you sold at a profit, the government wants their share of that which has to be factored in as well. It is quite the conundrum, but we think if we ever buy/build another house, we will go the mortgage route assuming the numbers make sense. You put forth a great discussion covering all the bases.

  18. Even Steven
    16. Apr, 2014 at 12:58 pm #

    Where is the hybrid method? Why can’t you pay off your home early and invest some of that money along the way. Sounds like diversification to me vs Putting your eggs in one basket approach.

  19. Neil
    19. Apr, 2014 at 5:13 pm #

    One of my coworkers just paid off her mortgage and is very happy about it. I’m doing the opposite, as I leverage more to be able to purchase more rental property

    Is she wrong? It depends. She wants to focus on more piece of mind and flexibility as she not longer has that mortgage payment over her head and can invest other ways (stock market in her case). I believe that leveraged real estate is generally a far better deal that the markets and that taking on mortgage debt to do so is a much better approach.

    Both of us believe in investing, and both of us commit to putting money towards financial independence. I believe that my approach is superior, but it does involve more work (in the short term) and ties me into the investments – my properties – longer.

    Either way, at least we are both actively investing, and that makes us better off that 80%+ of the population.

  20. Carrie
    22. Apr, 2014 at 6:26 pm #

    Interested to know the source for the information for “From 1990 to 2010, the S&P 500 returned 9.14 percent as a long-term annualized average.”

    The NYTimes has a nice chart based on the performance of the S&P 500 which shows that the data might be right. But go back one year to 1989 and you’d barely be matching inflation over that period.

    http://www.nytimes.com/interactive/2011/01/02/business/20110102-metrics-graphic.html

    • Afford Anything
      23. Apr, 2014 at 1:25 pm #

      @Carrie – The source is Dalbar’s original source, here’s their press release, and here’s a Motley Fool article following up with analysis.

      The stock market collapse from 1989 to 1989 was one of the biggest crashes in our lifetime — that’s why October 19, 1987 is called “Black Monday.” Anytime you face such a tremendous crash, you need to wait for a few years for the recovery. (The timespan 1990-2010 includes the recession in 2008, but doesn’t include the recovery that’s stretching well into 2014).

      As the NYTimes piece says, “From the end of 1979 to 1999, $10,000 would have grown to $48,000.” That being said, “$10,000 invested at the end of 1961 would have shrunk to $6,600 by 1981,” indicating that investing always carries an element of risk.

  21. Melissa
    01. May, 2014 at 7:56 am #

    We paid off our mortgage a year ago yesterday. We chose to do it solely based on how it would make us feel. We hated being in debt, even for a house. Not owing anyone money is a great feeling! Very freeing. Now we can focus on investing even more with the extra money.

  22. Darrell
    27. May, 2014 at 2:05 pm #

    I have an argument for the “Keep your Mortgage” camp…I bought some furniture a while back on a 0% interest loan. It’s one of those even payment loans where you just pay 1/60th of the loan every month and it closes without paying any interest (I didn’t buy too much furniture because of the financing deal, promise). I’m probably half way through that loan. Is there any logical reason that I should pay that loan off early? I’d say “no.” I don’t necessarily know what the marching orders are of those specific dollars that I kept within my cashflow, but I know that I am generally making good decisions with them. I struggle to max my Roth’s and 401k, blah blah blah.

    Applying the same logic to your Mortgage, I think that the answer to crushing it depends on the interest rate and your risk tolerance. If the mortgage was 0%, you’d definitely keep the mortgage, right? …right? If it were 10%, you’d definitely crush it. Somewhere between those numbers is where you change your mind. I’m not sure where that number is, but for me, it’s not at 3.625%.

  23. Alexander
    18. Jul, 2014 at 9:56 pm #

    Thank you!

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