Our first question of the month comes in from Patrick from California:
Hey Andy, can I pick your brain real quick about paying off your mortgage?
I just bought a house here in San Diego and got a 30 year fixed on it.
If I wait 30 years to pay it off, I will have paid $162,000 in interest which doesn't sit very well with me.
What was your reason for paying off your mortgage?
I was thinking instead of making extra payments on the principal that I would instead invest that money. After 8-10 years I would have amassed enough to pay off the mortgage in a lump sum.
What are your thoughts on that? Invest the money or pay off the mortgage?
My reason to accelerate paying it off is that:
1. I hate debt
2. Lower my monthly expenses after loan is paid off
3. Save at least $100K in interest payment
Many thanks bro!
Thanks for connecting with me on Twitter, Patrick!
First of all, way to go on running the numbers to see how much you’ll be paying in interest over the years. When you look at the numbers like that, it’s hard to ignore for sure.
Let me answer your first question …
Why I Paid Off My Mortgage Early
When my wife wanted to upgrade our living situation in 2013, I felt nervous because of the monthly mortgage payment we’d have to make on the new home. We were making good money at the time, but I didn’t like the idea of always having to make a big income to live our lifestyle. And Nicole was planning on leaving her job shortly to become a full-time Stay-at-Home Mom.
I always had the thought in my brain …
“What if I get fired? Or …
“Or what if I want to leave my job, but I can’t because we have this big mortgage payment?”
So we decided that we’d get the house, but we agreed to pay off the mortgage in 5 years. That way, I could live without the worry of the mortgage and she can have the house she always wanted.
And that’s what we did. We paid our $195,000 mortgage off in less than 5 years. My motivation was purely emotional … not mathematical.
Did I run some big calculations beforehand to see if investing the money would have been smarter? No, I did not.
Would it have been a smart thing to do? Sure!
Am I mad that I didn’t run those investment calculations? Not really. I like living mortgage-free. My stress level has gone way down.
Do I think everyone should pay off their mortgage instead of investing? No.
I think everyone’s situation is different and unique and only they can make the right decision for them.
Related Interview: Simple Millionaire Investing Strategies with 401k and IRA
Now, to answer your second question …
Should You Pay Off Your Mortgage Early or Invest?
A big part of this decision to pay off the mortgage or invest is your age, your income, your financial situation and your overall financial goals for the future. This is a lot of information I don’t have. I did check out your Twitter profile and website so I have a guesstimate that you’re around 47 years old.
Given that, I would agree with you that I wouldn’t want to be making mortgage payments in my 70’s.
Before you go paying off the mortgage early, check on a few things:
- How are you doing with your retirement savings? With mortgage rates as low as they are today, it might make more sense to stock away money in your 401k, IRA or HSA.
- Do you have any other high-interest debt in your life? If you’re still paying a 6% student loan or 15% interest on a credit card, it would make more sense to me to pay those off first before your mortgage.
- What are your spouse’s thoughts? If you’re married, check with your spouse and get their feelings on the situation too. I’m more of a happy marriage over an optimized financial portfolio kind of guy, but that’s just me.
1. Invest the Money in a Taxable Brokerage Account
If you have no other debt, your spouse is on board and you’re feeling good (or continuing to contribute) with your retirement funds, then I like your idea of investing the money in a taxable brokerage account and then deciding at 55 if you want to pay it off or not.
No one knows how the stock market will perform over the next 8-10 years, but if you diversify your investments and invest based on that time horizon, it could be a great idea. I’d highly recommend meeting with a fee-only Certified Financial Planner to work out the plan. It’ll be well worth the investment.
My opinion might be helpful, but I thought I’d add in 4 more to help you look at some different angles. I reached out to some friends in the personal finance community who had some ideas as well.
2. Pay Off Your Mortgage Early
Janneke from Financially Independent Mom said, “If you sleep better at night when your mortgage is completely paid off, then you should go for that option. But if you're financially stable and aren't scared to take some risk, you can start investing some of your money and get a nice return.”
“In the end, the most important thing is that you feel comfortable with your balance of risk and return.”
3. Invest Now and Pay Off Mortgage Later
Joseph Hogue, CFA said, “We need to get over this knee jerk disgust with debt and make smarter financial decisions. Do you ever wonder why Apple has $26 billion sitting in the bank while it still owes $94 billion in debt? It's because it can borrow at those ultra-low rates, reinvest that money and make profits off the difference.”
“So with mortgages in the sub-4 percent range, invest your money and pay off your mortgage as you're collecting that interest.”
Related Article: 3 Smart Reasons for New Investors to Choose Index Funds
4. Save Extra Money for a Rental Property Instead
Real estate investor, Dustin Heiner said, “What I did was not pay off my mortgage early, but I saved up my money to buy rental properties. Now I have a mortgage paid off because I had passive income coming in to pay off the mortgage. And I still own the rental properties which make me money every single month.”
5. Accelerate Mortgage Payments Today
Mike Anderson from the Smart People Money Show said, “If you're thinking of investing money in the stock market for 8-10 years and then taking that money and paying off your mortgage, that really is a foolish proposition. There's no guarantee in what the market will do over the next 8-10 years.”
“Look at the other side. If you do accelerate paying off your mortgage, you will know that every time you're paying down the principal, you are saving money, thus making money .”
As you can tell Patrick there are many opinions on this “Pay Off Your Mortgage or Invest” debate. But the opinion that matters the most is yours.
Best of luck with your decision Patrick.
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