To pay off the mortgage or not, that is the question. And a highly debated one, indeed.
But the answer depends upon a person’s unique financial situation and mindset.
Investing is typically the winner when we rely strictly on the math for an answer. Average market returns are generally higher than the amount of saved interest from making additional mortgage payments. But even then, many factors can influence the outcomes, such as risk tolerance, market volatility, tax rate, and interest rate on the mortgage.
On the flip side, paying off the mortgage gives peace of mind and a sense of freedom. A mortgage is likely the most debt a person will ever have and paying it off gives a guaranteed rate of return (good for those who are risk averse).
We will start paying down our mortgage
If you have read our personal story, you know that we have paid off several thousands of dollars in student loans, as well as numerous consumer loans procured to purchase new cars. But you will soon see we have some serious mortgage debt.
The fact is, even with the good intention to do so, we have never made a concerted effort to reduce this debt. We chose, instead, to invest any extra money in retirement savings.
Whenever the discussion of paying down the mortgage comes up, I say we should try to throw extra money at the mortgage and my husband says we should invest the extra cash. So, you can guess what we have done. That’s right. Nothing. At. All.
Which is why I’m so excited about this post!
While it is true that we don’t have much extra cash flow at the end of the month, I figure given a little motivation, we will find a way! And publicly sharing our progress on the blog will definitely provide a needed incentive.
Since we debate about the best place to put extra cash, the compromise has morphed into a little experiment. Whatever extra money we can scrounge up each month will be divided in half – half will go toward the mortgage principal and half will be invested in a low cost taxable account.
We will share our progress with you
I will provide regular updates on the blog on our progress plus the financial (and other) benefits/costs of each method. Keep in mind, we won’t always have much extra to throw at this project, so some months will have little to show. (Though I’m guessing in the spirit of sharing publicly, we will be selling some items on Craigslist when all else fails!)
This post serves as the baseline data. Future posts will share the baseline compared to the extra payments and investments made.
Let’s take a look at the huge mountain of mortgage debt we have to tackle, shall we?
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I know, there’s not much to look at here, as we are just getting started, but we are motivated, so stay tuned for updates!
That sounds like a good compromise. We have gone back and forth about this issue, but in the end we just wanted the freedom and flexibility of becoming 100% debt free. We aren’t there yet, but we’re closer than I ever imagined we could be.
I hear you, Kalie! Great to hear you are further along than you expected to be. 100% debt free sounds amazing to me too. It will be interesting to see if we eventually decide the same and use that taxable account for complete debt freedom.
It’s a neat idea, but I would suggest thinking about one thing: What’s the timeline committed to the experiment?
The reason I’m asking is because the best time to make money in (stock market) investing is by buying when the market is down. That means that during the best time to put money into the market, you’re comparison will show the mortgage pay off as having much better results. It might take years for investing to pay off. And stocks are still pretty close to their all time high despite weak earnings and mediocre demand, so we may see some declines soon.
So you may need to commit to a multiyear timeline to keep your experiment going in order to be able to run it effectively.
I completely agree with you on the timing and market returns skewing results. To answer your question, yes, it is absolutely a multi-year commitment (there is no choice here, it will take years to pay off the mortgage). We are having fun with it and creating the accountability to motivate us to actually work on it, rather than just keep talking about it. We fully fund our retirement accounts, but being completely debt free becomes more appealing ever day.
We struggle with this question, too! Since we’re just about a year and a half away from early retirement, and the numbers say it’s better for us to have no mortgage in ER, we’ve decided to pay down our mortgage rapidly. But we question ourselves literally every single month, especially when the markets are high, like they have mostly been lately. But like you said, it’s guaranteed return, and we’re pretty sure it will feel amazing to have our house paid off. That last point is worth something, too, even if we can’t put a price tag on it! 🙂
Congrats on being so close to ER! I don’t blame you at all for working on the mortgage…the peace of mind is worth so much. As we get closer to ER, I would at least like to have ours knocked down to a more reasonable amount – paying it off at this point seems like a huge mountain to climb, but we’ll just take baby steps right now.
All the best with your new plan! We’re doing something similar (though we’re putting more against the mortgage than into savings), and I’ve found it challenging. I find it more satisfying to take as much as possible off the mortgage, and it’s taking a real discipline to stay faithful to our savings goals. I’m sure I’ll feel more satisfied by our accumulated savings eventually. And you’re right: posting your results will be a great incentive. Accountability is a great thing in this game!
Thank you! I don’t blame you for putting all the extra toward the mortgage. Only time will tell if we end up just focusing on the mortgage a couple of years down the road. Discipline is the key – we’ve been selling stuff on craigslist and ebay for the extra $, but I find myself wanting to keep the money instead, probably because I know progress will be slow on the mortgage.
It’s a difficult one isn’t it. People don’t like to talk about paying the mortgage off for some reason? It’s thought of as a ‘good’ debt though…personally I want it all gone! 🙂
It’s a personal decision, for sure. I’m getting to the point where I want it gone too!
This is definitely a difficult decision to make! I would probably agree with your husband, considering current interest rates (clearly the two of us are more risk-averse). I would then invest the rest in something more stable than the stock market – like an eREIT or P2P lending platform.
But I look forward to hearing the results of your experiment! Which way will prevail? 🙂 Thanks for sharing
I hear you, Rob! Yes, my husband is more risk averse, which is why we will be able to retire by 50 🙂 I’m the saver. I like the P2P lending idea, have been reading about it for years, but haven’t taken the leap yet.
Time will tell which way will prevail, but I’m pretty certain it will sway toward the investment. I’m just happy to be saving more, one way or another! Thanks for your comment!
We’re all in paying off our mortgage because of peace of mind. I want to have a home no matter what happens. But I completely understand the struggle! We grappled with it when we started our FI journey.
The peace of mind is my top reason for wanting to pay it off!
Excellent plan! This will be fun to watch. Both goals are important and you have found a way forward with each one. Congrats on
A winning compromise.
Thanks, Mila! We are happy with the compromise and making it public has created a great incentive!
We also compromise on this. But it looks different. What is important to us is to have the house paid off at retirement. So we figured out what the balance of our mortgage will be at retirement. We then figured out how much we need to save every month to have accumulated the pay off amount. So we can participate in the market now and yet still know we can not have a mortgage in retirement. Another benefit is that it is liquid if something catastrophic happens. This is another kind of peace of mind.
Great plan, Becky! Your plan is the best of everything rolled into one – getting market returns, having an emergency fund, and eventually, a paid off house at retirement. Perfect! Thanks for sharing.
Great post. Sounds like a tough decision with merits to both sides. We were toying back and forth between keeping our house and having renters pay off our mortgage slowly OR selling it. It’s currently up for sale now and we’re hoping to get it sold soon. Ultimately, we decided that we wanted to be mortgage free, especially now that we are living out of state.
Good luck with the sale of your home, Julie. I understand the desire to be mortgage free. I really think it depends upon individual circumstances and what makes you feel most comfortable. I get frustrated with the amount we still owe, but know that if we need to, we could sell the house to move to a cheaper one if we want to be debt free sooner. Right now we are okay with the mortgage as long as we are at least working on paying it down.