Smart Financial Decisions: Paying Off Our Mortgage

Financial IndependenceA few months before starting Retiring On My Terms, Mrs. ROMT and I made one of the biggest decisions of our financial lives.

We decided to pay off our mortgage.

There appear to be at least two very vocal camps in the personal finance community when it comes to discussions about paying off one’s mortgage and other debt.

The first camp is passionate about eliminating all debt as soon as possible.

The second camp believes almost any debt is ok, as long as you expect to earn a higher rate of return on your investments than you are paying in interest.

As with many things, I think there are good cases for both sides of this debate.

Eliminating debt is generally a positive thing. It’s hard to make a lot of progress financially if you are spending a significant portion of your income on interest payments. For some of us, the numbers we’re targeting for financial independence or early retirement seem much more realistic once a large monthly expenditure for housing is off the table.

That said, many people with mortgages today have locked in historically low interest rates. If you’re paying 5%, 4%, or even 3% or less on your mortgage, and you expect to earn 6%, 7%, 8%, or more in the stock market over time, don’t the numbers suggest you’re better off keeping your mortgage and investing any excess funds you have in the market? Especially since then you may be able to keep claiming the mortgage interest tax deduction?

I think there is merit in what both sides have to say about the issue. But I tend to be conservative by nature, and in our situation, when we found ourselves with a large amount of cash after saving for many years and receiving my annual bonus, we decided paying off our mortgage was the right decision for our family.

Thinking only about the long-term average returns of the stock market, relative to the interest rate we were paying on our mortgage, I admit the decision to pay off the mortgage instead of investing the money was wrong.

But I still did it.

While the interest rate on our mortgage was low, paying off the mortgage at that rate effectively represented an immediate and guaranteed return on our money. We probably could have invested that money and earned more over the next several years, but there were no guarantees. We could have put the money into the stock market, and the S&P 500 could have fallen by 5% the next day, and by 20% over the next six months.

In retrospect, that didn’t actually happen. But it certainly could have.

Some may argue that choosing a smaller guaranteed return over a reasonable probability of a larger return is not a good decision. To us, however, this decision wasn’t solely about the numbers.

The freedom and relief we feel after getting out from under what was our largest regular monthly expenditure is hard to describe. It is incredibly liberating to know that as long as we pay our property taxes, our family will always have a place to live.

Owning our home outright will provide us with additional options after we have reached early retirement and financial independence. If we decide to downsize, we’ll be getting the entire check to invest as we see fit, based on our financial circumstances at that time. We could purchase a smaller home and invest the difference, move into a rental property and have even more to invest, or even go live in a van down by the river!

The path to financial independence and early retirement appears more straightforward now that we no longer have a mortgage. While the net worth number I calculate every quarter took a hit following this decision (I exclude our home equity from this figure, and focus solely on liquid assets we could easily monetize to fund our lifestyle in the interest of conservatism), our regular monthly expenses also declined by a significant amount.

Add in the solar panels we installed on our roof earlier this year, and our subsequent lower electric bills, and the ongoing amount we need to spend each month to finance our lifestyle has declined dramatically in 2017.

And those lower ongoing monthly expenditures have helped open up a multitude of potential options for the future:

Could I leave my current stressful job for one that is lower paying, but offers a much better lifestyle?

Could I take a couple of years off to spend more time with the ROMT children while they are still young, and then return to work in the future?

Could I potentially retire from the daily grind a decade earlier than many of my peers, and then spend my time working on what I want to?

I probably wouldn’t consider any of those options if our mortgage was still on the books.

But with our mortgage gone, those three options (and many others!) are now on the table.

I may do all three of them in the coming years.

Or I may do none of them.

But not having a mortgage provides me, and our family, with options I wouldn’t have dreamed of a year ago, that may help significantly improve our quality of life in the coming years.

And that, to me, is priceless.

Have any readers paid off their mortgages? In retrospect, are you happy with that decision?

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  • Robbarino

    October 28, 2017

    Paid off our house in August – lost the job yesterday, I am so thankful it is paid off!! So worth it now!! And I am not thinking about market returns today as I look at my list of bills.

    • ROMT

      October 28, 2017

      Sorry to hear about your job loss Robbarino. That is certainly another angle where not having a mortgage to pay can make a huge difference. Did you pay off the mortgage in anticipation of possibly losing your job, or was it completely coincidental? Best of luck, and hope you can sleep a little better in the coming days without that big bill to worry about.

      • Robbarino

        October 28, 2017

        It was a completely unexpected job loss. I knew when we were making all those extra principal payments that one day we would be SO glad. Not having that huge bill makes me so much more relaxed about it. Thanks for your timely article!

        • ROMT

          October 28, 2017

          Wow. That really stinks that it was completely unexpected. Great job making sure your financial house was in order, and hopefully that will help you remain more relaxed about things as you consider your next move.

  • LeisureFreak Tommy

    October 28, 2017

    I paid off our mortgage after my early retirement. The other benefit I love is that it takes less money from my portfolio to fund our lifestyle and thus I pay less in income taxes too. So it is more than just the mortgage interest savings calculation to consider. I no longer had enough deductions to file Sched A so losing the interest deduction wasn’t an issue. For us paying off the mortgage was the best way to go.

    • ROMT

      October 28, 2017

      That is a great point. You are right that realizing capital gains to pay bills will result in a tax liability, so the fewer bills you have to regularly pay in early retirement, the better!


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