A quick trip through the personal finance universe will lead to many contradictory articles discussing whether you should pay off your mortgage early. Some argue that you cannot be truly financially independent if you still have a large debt hanging over your head. Others argue that the low interest rates coupled with tax write-offs built in to carrying a mortgage have their own benefits that outweigh having one last debt. I am not interested in joining the argument on one side or the other. All I can do it discuss my own intentions and desires. My feelings on personal finance are that there are no hard and fast rules that can be applied to everyone equally. It is called “personal” finance for a reason. Each person much come to their own conclusions as to what is the best option for them.
Over the past few years, I have vigorously attacked consumer debts that I had accumulated before taking control of my finances. I started by paying off high-interest credit card debt as quickly as I could. I then turned my attention to a car loan and took care of that much more quickly than I expected.
Each time I set my sights on tackling a new debt, I approached it in a similar fashion. I reviewed my current budget to determine the amount that I could apply to this debt. Using that information, I crafted a payoff plan. Then I fought any urges to stray from that plan. Additionally, I looked for any additional monies in the budget or monies I could make outside of my normal budget and applied that to the debt as well. I found that this activity was somewhat addictive and took on a momentum all its own and the result in each case was the ability to pay off each debt ahead of the planned schedule.
At present, the only debt I have left is housing debt. This includes my primary mortgage and a home equity line of credit (HELOC). I have started to attack the HELOC first in the manner described above. I have found that this time around, the momentum is slow to come. I have made the scheduled payments each month but when it has come to additional monies, I have not been applying those to this debt as regularly as I had with the credit cards or car loan. When I have been able to come up with additional money, I have diverted it to my taxable investment account. I am not sure why I have made these decisions, but I must guess that it is psychology at play. Psychology similar to the arguments mentioned in the opening to this article. Perhaps subconsciously I have had this argument as to which is more important or the better use to money. This realization has led me to seek out information on this topic and brought my own decision making to the forefront of my consciousness. It has forced to me ask myself where I fall on the “To Pay or not To Pay” spectrum.
As I mentioned, I am currently carrying two housing debts. While they are against the same property, I consider them as separate and am attacking them as such. My current plan is to pay off the HELOC first. During the accelerated payoff period, I will pay my normal monthly mortgage payment on my primary note. Just to feel like I am doing more, I have added an additional $100 to my monthly payment each of the past 3 months to apply to principal. It is not a large amount but it is also one that doesn’t bust my budget so I hope to continue that additional payment until the time when I can turn all my attention to this note.
I did set a goal for 2019 of reducing my balance of the HELOC by a certain amount. After reviewing my progress in last week’s article, I realized that only two months into the new year I have nearly hit this goal. Obviously, my goal was not aggressive enough. So as of today, I am adding a “stretch goal” component to that item. I had previously said that my goal for 2019 was to get the balance of that debt under $30,000. Now that I have almost reached that amount, I will now attempt to get that balance under $20,000 by years end. This may be a little too aggressive but after veering too conservatively originally, I will try to push myself in the other direction. With 10 months remaining in 2019, this works out to a net reduction of approximately $1000 per month. I believe I have achieved this without any dramatic changes to my budget and without any negative impact on my current savings and investing plans.
With that goal being attacked, I will then attempt to pay the debt in full by the end of 2020. At that point, I will turn my attention to my primary mortgage. I have a strong desire to retire “early” but at present I don’t know what that looks like. When I started on this path, I superficially threw out the target of 10 years. That was 2 years ago. I have not yet figured out exactly if that is the date I should be targeting. I have not fully worked out the financial or emotional details of that type of decision. But at this point in time, I can safely say that my current plan is to pay off all debts—including my mortgage—before I pull the trigger on retirement.
I fully understand the arguments on both sides of this discussion. I believe each have merit. But for my personal situation and based on my personal mental make-up, I think the comfort of knowing that I am debt free will far outweigh any additional financial gains I can make by keeping a management debt load and using that money for alternative investments.
Where do you fall on this spectrum? Will you pay off your mortgage sooner rather than later? I would love to hear from you.
2 thoughts on “Should You Pay Off Your Mortgage?”
What I’ve always heard was that people would take advantage of relatively “cheap” money for a mortgage (single digit percents, 5 or less percent for many years) and then make money with the funds that could have bought the house. The theory being that if I bought a $1 million house at 5%, even though I had the money, that money is costing me 5% to borrow instead of using my own. However, if I then take that $1 million and instead earn *anything* north of 5% on it, I’m getting “free use” of money from the bank. On top of that, you have the tax benefits that you mentioned, as well as the ability to now use the house as leverage for other investments. So, you now have the money and the power to borrow against that money’s worth (the house) on top of the money itself.
Now, is that practical for average middle-America? I don’t know. High Net Worth individuals play a different game, but learning about it and applying it where possible probably doesn’t hurt.
Would it be better for you to pay off the HELOC and then just pay somewhere around the minimum on your primary mortgage and dump the rest on investments that pay more than it is costing you to have the debt? Probably, unless you fear the market is going to literally tank to crap. But, easy to say on behalf of someone else’s money 😉
I agree with all that you said. That is why to me it is more a question of psychology. I understand the math in that I believe I can average a higher rate of return on invested dollars than those same borrowed dollars would cost but for me the peace of mind would be greater knowing that i did not have a debt hanging over my head. I find that when I am finally able to pay off a large debt, that invigorates my savings even faster and further.
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