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Financial Pilgrimage is a site about family, finances, and faith. Our family has paid off nearly $200,000 in debt (including the mortgage) since 2011. The next phase of our journey includes pursuing financial independence. We are a family of four with a four year old boy and newborn baby girl.
Why We Decided To Pay Off Mortgage Early
If you couldn’t tell already, that wasn’t a great feeling. I could physically feel the weight of that debt on my shoulders. This certainly wasn’t the reason why I worked so hard through school and in the early years at my job.
I was a finance major in college and even elementary math tells us that the 8-12 percent returns of the stock market far outperform the 4 percent interest rate we had on our mortgage. Why not just invest the extra money in the stock market, real estate, or a business with potential returns of greater than 10 percent? Even someone who isn’t financially savvy can do the math here. In addition, mortgage interest is tax deductible, right?
The Turning Point
By 2016 we had built up more than $50,000 in savings and were ready to invest in buy-and-hold rental property. In order to get the best deals we made a decision to buy with “cash”. What we actually did was line up a home equity loan on our primary residence to purchase the property and planned to use our savings to fund the rehab.
In the end, the potential rental property was most likely a good deal. However, using home equity to purchase an investment didn’t exactly feel like freedom. In fact, that potential purchase weighed on us more than any other financial event in our lives. We ended up deciding that it wasn’t worth the risk.
One other quick note. We did not completely forgo investing to pay off our mortgage early. My wife was putting away nearly 30 percent of her income as a public school teacher into her retirement account (not by choice). Teachers in Missouri are required to put nearly 15 percent of their paycheck directly into a retirement account, which is then matched 100 percent. At my work I was putting 13 percent into a 401(k), including the company match. The point here is that I don’t agree with completely forgoing investing to pay off the mortgage faster.
Why Did We Decide to Pay off the Mortgage?
After having the rental property under contract we made the decision to go all in to pay off our mortgage fast. After pulling money out of savings to pay down the principle we had just over $60,000 remaining on the mortgage balance. At that point we went into full attack mode. As of August 3, 2018, we are officially mortgage free!
Below are additional reasons why we decided to pay off the mortgage early.
The Behavioral Aspect
The behavioral benefits of being debt free spill over into all aspects of life. There is less stress and worry with the largest bill in most households being eliminated. I also believe there is real power in knowing that a bank can’t call my loan if I miss a payment or two. While life may be good now, the next recession, unexpected death in the family, job loss, or a number of other events could change our financial situation in a flash.
In the end, I’ve never interacted with anyone who has regretted paying off their mortgage. Most have said that it’s not only freeing, but is also a springboard into many great opportunities afterwards.
Guaranteed Return on Investment
In August of 2018 the stock market is at an all time high and real estate is booming again. With the stock market on a nine year bull run, a simple understanding of business cycles tells us that this run will not go on forever. We don’t know when the next recession will hit, but it will come at some point.
If we were sitting here in 2011 when stock prices were low and real estate was practically being given away in some areas, I’m not sure we would have been paying down the mortgage aggressively during the past several years. However, now that we are back at market highs, a 4 percent return on investment with zero risk doesn’t seem so bad.
Decreases Monthly Expenses
This one is obvious, but as we pay down debt our monthly expenses decrease. For those of us in pursuit of financial independence, the goal is to have passive income that exceeds monthly expenses. Housing expenses can amount to 30 to 40 percent of your budget, with most accounted for in the mortgage.
Achieving financial independence is a relatively simple equation. Earn more than you spend and invest the difference. While you can certainly increase the earning side, there is a significant benefit to lowering the expense side. After paying off the mortgage, your monthly cash flow will go through the roof and you’ll be able to quickly ramp up your investing.
Remember 2008? The further we get away from the great recession, the more people seem to forget about how rough of a time it was. Being in my late 30s, I can recall hearing about families falling apart due to the housing crash. By aggressively paying off mortgage debt we make ourselves more resilient during a recession. Having a paid for house will significantly reduce the amount of stress in the next downturn.
Are You Really Going to Invest the Extra Money?
The toughest part of personal finance is the discipline. If you have a significant amount of money sitting in an investment account you’ll continually be tempted to use it. Maybe you have more discipline than I do, but I was constantly pulling money out of my investment account to buy new vehicles or to fix up our house.
Given my personal experience, I really question if that extra money will go towards investments. Again, personal finance is more of a behavioral game than anything and many of us will find reasons to spend extra money on something that will not lead to financial independence.
Taking all of these factors into consideration we decided to go all in to pay off our mortgage early. For the past two years approximately 50 percent of our income has gone to mortgage payments. My wife and I combined make a low six figure gross income, though our take-home pay has never been in the six figures. Yes, we make good money, but combined it’s about average for a dual income family with two college graduates.
Since we just made the final payment on our mortgage, it will take time to realize the full benefits. With that being said, what I do know is it’s hard to put a price tag on being able to sleep well at night. Knowing you’ll have a roof over your head regardless of just about anything is almost impossible to duplicate in an investment.
Personal finance is just that, personal. In the end, do what is best for you and your family. I’ve been on both sides of the fence when it comes to paying off the mortgage and there are many valid reasons for choosing not to invest instead. In my family’s unique situation, we decided to go for it. Follow our journey at financialpilgrimage.com to find out how our story ends!
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