I want to pay off our mortgage. I’m sure people reading this are having mixed reactions. Some may think it’s crazy because mortgages are generally low-rate debt and you can make more on that money by investing it. Others may be thinking how in the world can you just pay off a large chunk of money like that? And others may feel completely indifferent to mortgages. Here are the reasons why I want to pay off our mortgage.
I am personally very debt averse. This is something I have always felt. When I was 18, I got approved for my first credit card. It was a store credit card for Express and my approved limit was $100. I wanted a faux leather jacket for $90. I didn’t have enough money in my checking account for the leather jacket and the gas I knew I would need to fill up by Jeep Liberty to commute back and forth to my college classes and my job for that week, so I charged the $90. A few days later the physical credit card came in the mail and I called up the number and paid the balance over the phone. The idea of having this debt made me feel so uneasy that I could not even wait for a bill.
Fast forward 7 years and I finally decide to buy a new car. At this point I had been driving the car my parents bought me for my 16th birthday for 10 years. I wanted to buy a car I loved because I knew I’d be driving it for another 10 or so years most likely. I decided to go for a certified preowned Mercedes Benz ML 350 (see my post on Why I Bought a Luxury Vehicle). My husband and I had the funds to pay the whole thing if we wanted, but we decided to finance just $10,000 of my new SUV because the interest rate was just 0.99%, so the payments would be small enough that it would only have a minor impact on our budget and we had other plans for that cash. About 7 months later, we had a large cash inflow and the first thing we did was pay off the remaining $10,000.
My husband and I were both fortunate enough to graduate college with no student loans. We had a completely debt free wedding. We never carry balances on any of our credit cards, nor do we ever plan to thanks to our emergency funds. We just do not like the feeling of debt looming over us.
One Debt Remains
One debt we have yet to pay off, however, is our mortgage. We bought our house in 2013 with a down payment of about 50% and a 30-year fixed rate mortgage at 3.25%. At the time of this post we still owe $163,885 and have 23 years left if we continue making just the regular monthly payments of $837.
For the area we live in, the amount we pay for our mortgage and taxes combined is actually significantly cheaper than most people’s rents. The average cost to rent in our area from 2013-2020 is $2,913. Our taxes have averaged $780 per month (we put this amount away monthly so we have the full amount saved when taxes are due each year) over the last 7 years. This makes the monthly cost of owning our home $1,617. Truthfully our mortgage payment is not putting a financial strain on us. So, why then do I want to pay off our mortgage?
Why Pay Off Our Mortgage?
As mentioned above, my husband and I are extremely debt averse. We are of the mindset that if we can’t afford something at the time of purchase, then we shouldn’t be buying it.
You may be wondering why we wouldn’t have paid for our house in cash then. We didn’t want to completely drain our brokerage account for a house. Putting 50% down allowed us to keep a large chunk in our brokerage account, which would continue to make money and gave us a good cushion if we ended up needing it for any reason as we adjusted to being homeowners for the first time.
No Tax Advantage Anymore
When the tax laws were updated for 2018, it made more financial sense for us to take the standard deduction versus itemizing on our tax return. Without itemizing deductions, we are no longer able to claim mortgage interest on our tax return.
Paying off our mortgage would free up $837 a month forever. While I did say above that the $837 doesn’t put any financial strain on us, it would provide us with many opportunities if we had that extra money in our pockets. That $837 a month is $10,044 a year. That money could be used towards funding our IRAs, investing, home improvement, vacations, college savings for our kid(s), a down payment on a rental property, etc. There are endless things we could do with an additional $837 a month.
Paying Above Purchase Price
If we take the full 30 years to pay off our mortgage, we will end up paying $109,000 in interest. To date, we have paid $67,797 in mortgage payments. Of that total, $28,615 of it has gone towards principal and the other $39,182 to interest. That means about 58% of the money we have paid over the last 7 years is a fee owed because we decided to borrow the money rather than paying for the whole thing in cash. That is crazy to me.
Why NOT Pay Off the Mortgage?
The argument for not paying off your mortgage is a good one. Over the last 7 years, from 2013-2019, the average annualized return for the S&P has been 15.34%, which is clearly much higher than the 3.25% interest we are paying. So, I have no regrets regarding our choice to keep money invested rather than using it all for the house at the time of closing.
However, I think since we became a single income family the idea of freeing up more cash is even more enticing than before. Also, at the time of this post, with the current COVID-19 pandemic, the S&P 500 is yielding a -12% return year-to-date.
At this moment, paying off our mortgage would be a better investment than investing in the S&P 500. But even with annual historic returns of 10%, the S&P has its ups and downs, so by not making any additional payments towards our mortgage and investing that money instead we are not GUARANTEED to be making money. Having $10,044 of cash freed up each year once the mortgage is paid off gives us the flexibility and freedom to invest if we please, though, or do whatever else with it that we would like. Opportunity cost of investing is hard to compare to the feeling of financial freedom.
As of right now, we do not have a strict plan in place to pay off our mortgage, nor do we have a deadline; however, it has become a goal of ours to just simply pay it off early, and the earlier the better. I will be sure to update you all on our progress and if/when we have a clearer path to paying it off.
In the meantime, let me know: have you paid your mortgage off or are you working on paying it off early? All the tips and advice are appreciated!