Why We Decided to Pay off our Mortgage Instead of Investing.

On May 8th 2017 my wife and I paid of our mortgage and became completely debt free. We bought our house in February 2010, just in time to snag the $8,000 first time home buyer credit. Our original home loan was for $125,000 and we financed it for 30 years at a very agreeable 5%.

Other Debt

At the time we had no other type of debt. I came out of college with $35,000 in student loans, but we paid that off as soon as I got my first job in accounting. Paying the student loans was an easy choice. We both used our pragmatic degrees to land $60k entry level jobs. We were used to being poor college students and spent about $30,000 that first year (which felt like a king’s ransom).

My path wasn’t quite as straightforward as my wife’s. She went right from the classroom to the cube, but I floundered a bit before heading back to school to get a Master’s. My Finance degree wasn’t working for me like I had hoped, so I reset and began down the accounting path.  A semester into grad school I got a solid internship (pretty common for accounting majors) and used the money to pay tuition as I went. No more debt please. That is until…

We Bought a House

Neither of us minded living in an apartment, but we felt a little pressure with the first-time home buyer credit ending and everybody (our parents mostly) wondering why we hadn’t bought a house yet. Thinking back, we were very much influenced by the societal assumption that buying a home is just sort of what you do. Having since looked at the numbers, buying a house isn’t necessarily better for wealth-building than living in an apartment.

So there we were. Proud owners of a brand new starter home in the ‘burbs and $125k in the hole for our troubles. We set our mortgage payments on auto pilot and didn’t give it another thought.

6 Years Later

I had just finished updating at our statement of net assets spreadsheet for 2015 when I had a revelation. We’d been in our house for 6 years and still owed $109,000! Finally doing the math I realized we wouldn’t truly be home owners until 2040. I’d be in my 50’s! This suddenly seemed unacceptable, so we decided to refinance into a 15 year mortgage. Luckily rates had dropped, so we got into a 15 year mortgage for 3.75%. This was February 2016.

We felt pretty good about this. Our payment barely went up, we knocked that pesky PMI off our bill and were all set to own our home in 2031. In short order my wife, now a second-time mortgage signer, began bemoaning the new payoff date. We’d refinanced because we didn’t like the far-off ownership date. Moving it forward 9 years was great and all, but not really what we were hoping for.

Once Again Societal Norms Guided our Decision.

We didn’t want a mortgage, but owning a home out-right is only a thing for old people. To society the extreme option for a young person is to get a 15 year mortgage instead of 30, I mean, that’s just good sense. But we didn’t want to finance over any period. We just didn’t freaking want a mortgage. My wife, graciously, began to really drive that point home. I sat down and actually looked at when we could pay our house off, and the results were very intriguing.

At the time we’d already been hit by the I’m not so sure I want to work until I’m 67 bug and were saving a good percentage of our income. We were faithfully plugging this straight into our 401k’s first, my employee stock purchase plan (“ESPP”) second, and an after-tax brokerage account third. We’d done well to build up a nice combined balance of about $40,000 in the ESPP and brokerage account.

By my reckoning, if we threw that money at our mortgage and contributed less to our 401k’s, we could pay off our mortgage in July 2017. She did not believe me. I showed her the excel spreadsheets and still, she did not believe me. Every few days she would make another off-hand complaint about our mortgage, and every time I’d quote July 2017 as a potential pay-off date.

One day, after a particularly rough go at work, she came home and asked to see the spreadsheet again. This time she really dove in and sure enough, she declared, it was plausible. I think once again societal norms had influenced her into disbelieving. I mean, who ever heard of newly minted 30 year old’s paying off their house? Well I mean I had, but she doesn’t read the same blogs as me. 🙂

So finally, in August 2016, six months after refinancing, we decided to pay off our mortgage. For my wife the decision centered around a changing mindset. She was programmed to believe people just didn’t pay-off their house until they had gray hair. It took a lot for her to overcome this. Eventually though her faithful job had worn her down just enough to genuinely question following the status quo.

Opportunity Cost

For me the decision to pay-off our mortgage was a very different one. I had moved past the status quo bias years earlier. Thanks to blogs like Mr Money Mustache, Root of Good, and FrugalWoods I knew living a drastically different life was possible. I also kept tedious records of our income and spending. We had the $40k in savings and were generating enough surplus to come up with the other $70k within a year. To me it wasn’t a matter of if we could pay-off our mortgage, but should we pay-off our mortgage.

A quick note on taxes. Many people tout tax benefits as a reason to own a home. As I discuss in this post, there really aren’t tax benefits to owning a home. I mean there are, it is tax advantageous yes, but the benefits are soooooo small you really should not be basing any home buying decisions on potential tax savings. Really, don’t do that. The 2018 tax reform makes it even less tax beneficial.

Back to 2016 me and the question I was facing: should we use our surplus to pay-off our mortgage or should we use it for something else? Neither of us had interest in spending more, so it really boiled down to investing vs. debt pay-off.

Everyone with the remotest interest in investing is probably screaming at me right now – invest invest invest! After all the stock market averages a 7% return and I was paying 3.75% in interest. That’s some easy math. But for me it boiled down to a bit more than just math (gasp!)

There is a hugely negative psychological association with debt. When we first bought our house I certainly wasn’t cognizant of it, but after going through the re-finance process I could not escape it. Our house was not our house. It belonged to Wells Fargo. We felt like we were in charge of our spending, but really, $10k a year for the next 15 years was ear-marked for Wells Fargo and there was nothing we could do about it.

The Payoff

Well that’s not entirely true. There was one thing we could do, and we did it. Beginning in August we began throwing everything we had at the mortgage. Ok maybe not everything, we kept spending the same amount, but we stopped allocating our surplus to savings and started tossing it Wells Fargo’s way. We reduced our 401k contributions to only what our companies matched. We stopped putting money in our after-tax account and sold all my employee stock. For us paying of our mortgage became an emergency.

Check out my post showing how we allocated our money while paying off the mortgage. Also check out the post detailing our 2016 expenses

My original prediction was that we’d have balance $0 in July 2017, but I was wrong. We made our final mortgage payment in May. It feels amazing. I cannot describe it. Even though our lives have not changed in any measurable way we feel liberated. Our house is finally our house.

Retrospective: would I do it the same way again? The stock market has been on a tear this whole time we’ve been paying off our house. Had we invested instead our net worth would be the better for it. I still don’t care. We have no debt. None. I can’t make a rational analytical argument here. I don’t know how to quantify the feeling of freedom it has granted us, I can only say that for us personally it is greater than the foregone investment gains.

From an investment perspective.

Paying off your mortgage is not completely ludicrous. I do pride myself on being a practical person and paying off a 3.75% debt is not a completely illogical choice vs investing in a market that averages 7%. The crux of the matter is risk.

Paying off a 3.75% debt grants us a guaranteed risk-free 3.75% return. We quite literally saved ourselves 3.75% of interest expense every year, which is akin to earning 3.75% income. All you investment wizards out there – go find me a risk-free 3.75% investment. That’s what I thought. Presently the closest things are Treasury notes, which earn about 2.3%. Well, I beat that. The 7% returns afforded by the stock market are only potential returns. It is no guarantee. As anyone alive during 2008 can attest, the market sometimes goes down.

So that’s our debt story. If you have any thoughts or questions please share below.

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