When it comes to debt, especially paying off a home mortgage, there are several schools of thought. Interestingly, because there is controversy which often happens when talking about money, people can sometimes become defensive.
This has been, to date, the most controversial topic I have discussed.
Quite simply, debt – not getting into it – but getting out of it, can be reduced to simple math.
It is hard to argue with logic and facts. Numbers don’t lie. However, it is not that simple when it comes to paying off a mortgage IF you are weighing that against delaying investing. If it was as simple as whether to pay off a mortgage early, to throw everything at the debt, it would be a simple answer.
The decision to pay off our mortgage as vigorously as we did, actually “cost” us $42,00.00, but it is a decision we do not regret. It is by far the best financial decision my wife and I have made. It was right for us, and it may be right for you. Let me explain why.
The basic schools of thoughts on debt are as follows:
Everyone has a mortgage, Right?! – Some contend that everyone has a home mortgage, so they are fine making the minimum payment required until the end of the mortgage. For me, paying on something for 25 or 30 years AND paying tons more than I borrowed was unfathomable. This does not make any financial sense and one I never entertained.
I make more in the Stock Market! -Still others argue not to pay off a home mortgage because they think investing their money gives them a higher rate of return compared to what they would make paying off the mortgage.
I get this concept and understand the math. I am a CPA and crunch numbers, so it does make sense – mathematically.
Many people in this category ensure they have the lowest interest rate for their mortgage and will refinance accordingly to keep their rate low which is a good thing. Having an interest rate below three percent and getting a rate of return on your investments of six percent or higher is logical.
BUT, this is NOT guaranteed and does not take into account your appetite for risk.
There are many variables; it is contingent on the interest rate, the term of the loan, and the market/economy. It is a feasible concept in terms of numbers, but there is more than numbers involved.
I value the piece of mind that comes for knowing I OWN my home! – The last thought process is where I fall. People in this camp still want to ensure they have the lowest possible interest rate since paying off the home mortgage takes center stage.
People throw large sums at the principal to get their houses paid off as quickly as possible in order to save money in the long run on their mortgages in the form of interest and eliminate a large month expense.
Many in this camp will then turn their focus to invest money in the market or will invest more vigorously after accomplishing their mortgage payoff.
Investing, putting money into investments, is always advisable due to the wonder of compound interest. However, it may not be possible or you might not be able to be as aggressive as you may like when you are in the throes of paying off your home mortgage.
Mathematically, as noted above, some will contend this route does not make sense.
But for my wife and me, the luxury and sense of security of having our house paid off, of money not going out but staying in our account, and having peace of mind, was totally logical, so it was the path we took.
So, looking at the math and the above reasons, again numbers don’t lie, you may wonder why we were fixated on paying off our mortgage, especially with me being a CPA who is trained to look at the logic of numbers. There were three basic reasons why we decided to pay off the mortgage early, in just five years, despite the fact that the math didn’t outweigh the personal reasons of security and opportunities.
As I mentioned earlier, paying off our mortgage early on paper cost us about $42,000.00, but we were also looking at reasons that were more intangible.
Our reasons may not make any sense for you and where you are financially. I will explain our reasons, so you can decide if they make any sense for you and your family.
- By paying off our mortgage early, we were able to lower our monthly expenses by 40 percent. Since we lowered our monthly expenses and had a lower financial risk, we freed up cash and were, therefore, able to invest more heavily. This was always our plan.
Based on our age, we knew that forestalling for the short term in order to pay off our mortgage would not hurt our investing compared to our financial peace of mind.
- In addition, since we had reduced our financial risk, we had the confidence that enabled me to leave my “regular job” working long hours away from home as a CPA to pursue Budgetdog, my dream and my passion, full-time. Here is where the numbers get dicey. Since I was able to devote all of my time to Budgetdog, I have been able to grow my business considerably. My prospects are indicating that this growth should continue.
Therefore, I contend that the $42,000.00 that we “lost” by paying off our mortgage early will be recouped, and, ultimately, I will be able to make even more money since we had the flexibility and security to make that leap.
- My final and most important reason for paying off the mortgage early is time. While this goes hand-in-hand with the above reasons, time is something that does not have a price. Having a mortgage hanging over our heads created the feeling that we were so tied to our jobs in order to make that payment. The payment was always looming, and the house was not ours. There was something unnerving to us about that feeling.
There were too many “what ifs.”
Now the house is ours.
So the financial freedom, the knowledge that we own our home, allows us the luxury of time. This afforded us the opportunity for me to grow Budgetdog. Along with that, I also now have more time to spend with my wife and my infant daughter. I can never get time back. There is no price tag that can be attached to that.
Overall, some voice the desire to be rich right now, almost instantaneously. I understand the desire to want the financial security that money can bring. Keep in mind that being strategic can help bring you to this end, but you don’t really just need stockpiles of money to be financially free.
For us, making a plan and staying with that plan, enabled us to pay off our mortgage early, change careers to better suit our aspirations, and have a sense of security and independence that was desirable to us rather than following a more traditional mindset or numbers on paper kind of logic. But just because it worked for us, does not mean it is the best route for everyone. You will need to make that decision.
But here is one thing I know for certain that you may really want to consider. Projecting out the math equation twenty years from now instead of the pace at which we paid off our mortgage, the amount our decision cost us is actually more around $400,00.00 if all things remained the same. That is staggering, but it does not change our decision because, as previously mentioned, to us, there is no trade-off, no amount of money, for our sense of security, time, and true happiness.
Truly, once you are able to own your time, to have a real sense of well-being, you will understand wealth. For us, freedom was our goal.
If you decide to pay your mortgage off early to gain time and security as well as the luxuries that go with that, remember to make a plan and stay with it. I am happy to help you on your path to reaching your goals – whatever path you choose.