First off, I have to acknowledge that we are very lucky to be in the position to be able to pay off our mortgage. It's not something I will ever take for granted! We are fortunate to work in a well-compensated industry that has made it possible. Living below our means has also made this possible, but I know it's not something many people are able to do in their 30s like we did.
Why is it controversial?
I think most financial advisors would tell you that you should not pay off your mortgage - here are a couple of reasons:
1. The primary reason it's controversial and not typically recommended is that instead of paying off that debt, you could invest the money and your return could/should exceed the interest rate on your mortgage. If you took out a mortgage prior to 2022, your mortgage rate was likely at a historically low level. The lower the rate, the less your investment will need to yield in order for you to be better off investing.
2. You lose financial flexibility when you pay off your mortgage. You could take out a home equity line of credit if you had a cash need, but there is a cost associated with setting that up.
3. When you pay off your mortgage in the US, you lose a tax deduction. I can't speak to what happens in other countries, but in the US, you are able to deduct the mortgage interest on your primary home.
Why we did it anyway
1. While we could have been better off by investing that money instead of paying off our mortgage, the feeling of not having any debt is priceless for us. We were able to pay it off but still max out our 401ks, contribute to brokerage accounts, etc. We met with a financial advisor back in 2020 and the financial models confirmed we are on track to be able to retire early - if we want to - so we aren't pushing out our retirement date for the sake of not having a mortgage. Our financial goals are to have the option to retire at an earlyish age and to pay for our kids' college education. We do not aspire to, say, leave an inheritance for our children. If we happen to? Great, but it's not part of our financial plan. So if we can achieve the goals of our financial plan AND pay off our mortgage, it felt like an easy decision for us.
2. Not having a mortgage means that our monthly expenses are significantly lower than they would be if we had a mortgage so it does give us financial flexibility in that we need to generate less income to cover our monthly expenses.
3. The interest tax deduction never felt very valuable to us. It certainly wasn't valuable enough to push us to not pay off our mortgage.
Bottom line
I don't think anyone could convince us to make a different decision. My husband and I both have our MBAs and are CFA charter holders so we certainly understand the arguments against paying off a mortgage - but it was still the right decision for us.
I'll end by saying that this decision is a personal decision that takes a lot of factors into consideration. I didn't write this post to convince anyone to make a similar decision - I just wanted to explain our thought process about this decision. But I know that my friend Kyria, who also works in the financial services industry and is a CFA charter holder, feels completely different about this!
18 comments:
So fascinating! Thanks for sharing this info. I love reading about others’ financial priorities.(This is Suzanne by the way.)
We have masters' degrees in economics and we also paid off our mortgage. It was in 2004, so that was before the housing boom. We don't get the tax deduction here, and I think that the mortgage rate was 6% at the time (it's hard to remember!). For us, it was not having debt that made so much sense, and that freed up a lot of money for monthly use. I feel the exact same way as you. Sure, we could have invested that money, but our house itself turned out to be an investment. I think we paid $182K and now houses in our area are going for $600K+ so while I don't always think real estate pays off, it did in our case. But there are so many factors, like you say, and everyone is different.
Thanks for sharing this! I think the one thing that you did not mention, but I know you have talked about in the past, is that another reason it is good for the two of you to be debt free is that you both work in the same industry, which is a fickle one! If something like the 2008 crisis happens, you both could lose your jobs, and the value of your company stock (if applicable) could be zero, and if you were invested in the markets more instead of in your house, the value of your portfolio would also drop sharply, therefore leaving you in a sticky place. You have basically "diversified" by putting your investment into your house.
I have not paid off my mortgage for exactly the reason you have said. Especially now, when you can get ~ 5% for "cash" it doesn't really make sense to be paying down a 2.75% mortgage. However, regardless of the math, I do pay extra each month because I refinanced and it made sense to me to NOT lower my monthly payment, but I do have that option if I am in a pinch.
Not exactly the same situation, but my in-laws downsized recently and were able to buy their new house in cash with the proceeds. We don't know their financial situation in detail, but it seems to have freed up a lot of cash for them to travel and do cosmetic home repairs (which is something that my MIL really enjoys).
I suppose another reason to pay off your mortgage is that - in the event you decide to move - you can bring more cash to the offer and possibly don't have to make selling your own house a contingency.
You know how I feel about this, Lisa!!!
Our accountant has long decried our aggressive approach to paying down our mortgage, but for me it is 100% about the mental side of things. I hate paying interest and it is a guaranteed return I am getting by saving years and years of interest payments. We recently had to renegotiate after our first 5-year term and the rates are so much higher now! We are set to finish paying off our mortgage less than 2 years, so a total of <7 years after buying our (first) house. We've also paid cash for all the renovation work we've completed which should, given the current market in our area, have allowed us to double the value of our home.
There are so many considerations when it comes to investing and all personal finance, but I'm so, so glad we went with our gut. I cannot WAIT for the day we own our house outright and am thrilled we made the decision to do it quickly. We drive an old car (only have a single vehicle) buy clothes second-hand etc...and I wouldn't trade any of those items for more expensive purchases in exchange for the freedom to pay off our house.
As you point out in your own situation, we are incredibly fortunate. We have the flexibility to make this decision and I would never want anyone to think this is necessary, especially as it DOES tie up significant liquid assets at the time and could, in the long run, not provide as good an ROI as some other investment vehicles.
Loved this post and could talk with you about this all day :)
Take it from me. Three cheers. I was so bad with my mortgage. First I had a 30 year. I bought my house when I was in my 40s, so think about how stupid that was. Then I refinanced to a 25. Equally stupid. When I retired, I refinanced to a ten and paid it off in a little less than eight. If I was still making mortgage payments, life would be very tough right now as a retired person. One can always refinance if it becomes necessary but that interest is a killer and when I think about what I paid above the price of my house with interest, I cringe. Well done, Lisa.
We aren't aggressively paying off our mortgage, mainly because I don't want to give up the flexibility we have right now, but I am on board with people who do pay off their mortgage. It sounds awesome, but we have a few other short term goals to hit first. Because of my parents experiencing the fort Myers hurricane, I don't foresee us owning a second property, and I especially wouldn't want to take on a 2nd mortgage.
Yes, this was interesting. I know it's a personal decision, but in the end there's a peace of mind that comes from having your house paid off. We had our previous house paid off, but then we had kids, moved to a bigger house, and there's no way we'll pay off this mortgage. It's still my husband's dream, though!
We made the opposite decision for one of the reasons you state - we have a 15 year mortgage under 3% interest so investing that money just made more sense. If we suddenly came into a lot of money though I would love to pay it off to be debt free!
I fully agree that financial decisions are totally personal and should not be taken out of the context. I switched from 30 to 15 years few years ago to finish paying mortgage by the time Sofia goes to college. I went through a fase of saving agggresively but now I’m much more relaxed and don’t see the point of saving for the sake of accumulation, especially after reading the book die with zero. Again totally personal decision.
We paid off our mortgage early too and then was never a doubt between us that we wouldn't pay it off early. Like you, we also still invest/save and what not but could also pay it off. We lived very below our means right out of college to pay off our loans/house/car and our goal is to always pay crap off as soon as possible. I did have to buy a brand new car recently because my 12 year old one needed to not have money put into it anymore and because of the market new was the way to go. We were able to pay 30,000 down and only ended up with a very small loan. Because we invested money a few years ago that we could then use for this purpose. We will also pay off my car loan early but will wait awhile because we got a very low rate and we may end up needing money for something else without having to bust into savings first.
I'm with you there. Not having any debt is absolutely the best thing you could ever gift yourself in American culture. We're about 2 years away from paying ours off and I can't wait.
Thanks for explaining why this decision is so controversial. It makes a lot more sense now! To me, it seems like it would be a great thing to be able to pay off your mortgage so soon after buying, but the downsides do seem reasonable for some people. What an amazing thing, though, to not have to pay a mortgage!
This is great to know. I guess it would be a good decision for people like us who DO NOT save the extra money and instead spend it on silly things like dance school tuition and travel baseball LOL (but also SOB)
We can only claim a tax deduction on interest for loans relating to income bearing assets, so not the home mortgage. In Australia, most times it makes sense to pay off the mortgage because most people would need to earn between 32-37% more than their interest rate on any investments due to tax an the income earned and our interest rates never dropped as low as the US.
I love your insights and reasoning behind it. Thank you so much for explaining. I think you're right - it comes down to what's possible - and important - to someone individually. I know that there are people like you, who just don't like the feeling of having "debt"... and I am one of these people too. So if it still makes sense financially, why not take away that mental burden?
Very interesting! We had kids young and sort of zoomed right into daycare bills and then that morphed right into private school tuition and lots of activity and family travel expenses, so paying off our mortgage has not been something we have worried much about. We did VERY VERY aggressively pay off my student loans immediately when we got married, though, and then we bought a house at a very low interest rate and also bought an older house that has a very reasonable mortgage, IMO. It became even more reasonable as our incomes increased quite a lot over the past years, too! We do pay extra on it every month, but with the kids' ages they are and the expenses we currently face... definitely going to remain a low-moderate priority for us!! But fun to read about your journey!
I always heard that you don’t want to be house poor. In the area where I live, and you’re familiar, people like to have really big houses! They pay a lot of money each month to fund the lifestyle. When I first got married we talked about a bigger house but I think we’ve settled on staying out and paying off this house and potentially investing in a second home. My husband throws this out every so often so I know it’s on his radar. I have only become someone financially responsible in my 40’s. He’s way better about finances than me but I am trying to do better. It had honestly never occurred to me that you would want to pay off your mortgage before retirement, I guess that’s what getting older and hopefully somewhat wiser has opened my eyes to, LOL! I appreciate the example that y’all set and it’s so true everyone needs to either meet with a planner or educate themselves so that they are able to make the best decisions for their family be that as a single person or couple of couple with kids.
Lori
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