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Whether to pay off the mortgage early is one of the most controversial topics in the personal finance community.
Some bloggers, such as Mr. Money Mustard Seed and Our Next Life, have found great peace of mind and financial freedom from paying off the mortgage on their primary residence early.
However, other bloggers, such as Mrs. Frugalwoods, believes in taking advantage of the difference in interest rates (mortgage rates < market rates) and investing in low-cost index funds instead of putting all the cash in home equity.
Why we want to pay off the mortgage
I understand the math component of the decision to not pay off the mortgage early.
If the stock market rate is 8%, and the mortgage rate is only 3%, we can take a 5% return differential on our cash by investing it in stocks.
However, Mr. FAF and I still stay in the mortgage payoff camp for three main reasons:
First, we both hate debt whether it’s good or bad.
If there’s a mortgage on our house, it means that the bank can take away our home if we can’t make the payment for whatever reason.
The last thing I want to happen to our family is that all of us will be homeless.
Paying off the mortgage to get rid of the bank is something we want to do for ourselves and our kids.
Second, we are extremely risk-adverse. While market rates fluctuate wildely, our mortgage rate will always stays the same at 4%.
In other words, by putting extra money towards our principal, we are making 4% on our investment for sure instead of having to ride the the tide with the market.
Third, once our house is paid off, our monthly expenses will be greatly reduced, which will free up money for our other investment, including stocks.
Currently, mortgage and daycare are our two biggest monthly expenses. Getting rid of the mortgage will give us almost $1,500 each month to spend, save, and/or invest.
And no bank will be able to tell us that we can’t stay in our house just because we can’t make that $1,500 payment every month.
Related: How Hubby & I Discovered We Will Be Millionaires By Doing One Thing
The extra mortgage payments
After Mr. FAF started working in late August 2018, we have made two big extra payments to our mortgage:
September 2017: $19,000 (Thank you, Mr. FAF, for contributing part of your sign-on bonus and 1st paycheck after tax to this purpose!)
April 2018: $15,000
Total: $34,000
As you can see, after Mr. FAF started his new job in late August 2017, we made only one big payment in September 2017. After saying good-bye to that huge amount of cash (by our standards), we got a bit nervous about getting laid off and decided to up our emergency fund from 4 to 7 months of expenses.
We got a bit paranoid about being unemployed since Mr. FAF was new at his job, and the new administration under President Trump introduced a lot of uncertainty to the job market.
We were also afraid that my mother-in-law (MIL) might have some health problems that we would need to use money for (she doesn’t have health insurance).
Now that everything is becoming more stable and my MIL is leaving in early June, we revisited the mortgage topic the other day and decided to put the extra cash in our emergency fund to work and save us money in mortgage rates.
The $15,000 consisted of our savings, tax refund, and annual bonuses (Mr. FAF also got a small bonus after working for only six months).
I manage our mortgage account and was the one making the extra payment. Before clicking the Submit button, I got really nervous. “What if something happens and we need $10,000 tomorrow or next week?”
That what-if question drove me crazy. I shared my thoughts with Mr. FAF, but he told me not to worry too much. We still have a 4-month emergency fund to cover any surprises.
Plus, our jobs seem secure at least for now. The sooner we can make that extra payment, the less interest we will need to pay each month.
Related: How Our Lives Have Changed After A 128% Increase In Income
What it felt like
I mustered my courage and clicked the Submit button. Once that happened, I breathed a sigh of relief. We paid $52.38 less in interest rates the next month ($52.38 saved!).
Both of us were happy we were one step closer to realizing one of our financial goals: having a paid-off house. It motivated us to save money for the future, curb our temptations to splurge even on a $28.99 bottle of red wine, and enjoy life in a frugal way.
The extra payment also reminded us that hard work will pay off. That $15,000 didn’t just pop up in our bank account one day and sat there waiting to get spent.
It was days of cooking at home, eating dinner leftovers for lunch, hunting for grocery deals, using hand-me-down clothes, shopping at yard sales, and picking things up from the curbside for what we needed.
It was days of trying to do a good job at work to deserve that annual bonus. And it was days of saving up our money relentlessly even if it’s $0.25 for a better financial future for our family.
After getting such great gratification out of that extra payment, we decided that we will try to put $2,000-$3,000 extra towards the mortgage every month while increasing our emergency fund to six months of expenses again.
And we will do that while maximizing our 401(k) and 403(b) and having no consumer debt.
Related: Rental Property After Our House Is Paid Off
Conclusion
Mr. FAF and I have gone a long way in our marriage. Sometimes it still feels like a dream to me to go from living in a windowless $300 basement room in DC one summer to having our own home. And we definitely don’t take it for granted.
If everything goes according to plan, we expect that we will pay off the entire mortgage by the end of 2019 (about 1.5 years from now).
I don’t know what we will be missing out on the stock market during that time. But I know that if we keep making extra payments to our mortgage, one day we will own our home free and clear.
We both believe that the fewer people have the right to access our money, the more control we have of our lives and our finances. And that, to us, is part of our journey to joining the million dollar club one day no matter how long it might take.
Related:
The Pain Of Home Ownership – Our $3,000 Headache
How This Family Slashed Their Mortgage Payment By $700/month
A Landlord’s Worst Nightmare Comes True
Our Pledge For The Million Dollar Club
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Dang Mr. FAF got a fat sign up bonus! Hippo’s was only $20k (before tax) – I’m so jelly of them sometimes.
There’s not much going on in recent months with overall stocks but funneling money into anything be it RE or stocks…is addicting.
When we dropped $200k in May into our main brokerage. I couldn’t look!! The $200k could have paid off our remaining mortgage actually. (Why am I so slow, didn’t even connect the two before I wrote this..)
After reading your comment, I started thinking about what we’d do if we had a $200k windfall hehe. We’d probably pay off the mortgage and put the rest in a marketplace savings account with a high interest rate to wait for the right time and buy our next house. Or we would also put the rest in a brokerage account. That’s such a fun thought to have 😀
Congrats! I’m sure that felt awesome… I get the whole peace of mind thing as a solid reason for paying off the mortgage early, it’s all about personal preference. Whatever helps you sleep like a baby at night!
Congrats again, you guys are killing it!
Thank you! I think we’d be super happy when our mortgage is paid off 😀
Nice! Congratulations – that’s amazing progress. 1.5 years away might seem far from a month-to-month perspective, but just think of the feeling once you get there.
As you mentioned, opportunity cost – whether if you invested in the market or toward the mortgage, etc. – will always exist. But just think of all the additional cash flow you’ll have without a monthly payment toward your house.
Either way, congrats and thanks for sharing. – Mike
Thank you, Mike! I do think about that additional cash flow often, picturing how our monthly expenses would be greatly reduced. It’s def a motivation for us!
Nice job! Your target date is pretty awesome. It’ll be great to have no debt in just 1.5 years. Keep at it.
Thank you, Joe! I do dream about that day a lot. The day of being 100% debt-free! 😀
Wow, that is so awesome FAF! I sometimes think about buying a place in NYC, and the fact that you will have paid off your mortgage by 2019 is amazing to me! I’m sure you feel so good about this decision. As for something comparable, my husband got a sizable bonus and we put it in investments, and knowing that money will grow was a nice feeling.
It’s great your hubby for a great bonus! I think it’s a hard-earned reward that can yield a good return or just help us pay off debt. Either way, it’s great to have extra cash hehe 😀
Wow! You guys are doing so great! I was okay with debt and opted to invest in the stock market for better returns but that slowly changed. Now, I hate debt so much that I would rather pay off debt with any extra money we have than to put it in the stock market.
Thank you, Thu! I think one reason why we don’t invest in the stock market is that we don’t really understand it. But we have experience buying a home, so we feel better about real estate. But we do need to diversify one day 😉
That is awesome! We’re getting ready to sign in for another big mortgage and I’m sad… want to have it paid off! But we’ll get there! So excited for you guys that you’re so close to getting it paid off!
Thank you, Laurie! Congratulations on closing on your house! Just enjoy your new home and work on the mortgage one step at a time. We will all get there one day 😀
WTG- FAF!! We paid off our first home (a condo) after a windfall from profit sharing ( a long time ago) We never regretted paying off the mortgage, it gave us so many options. 8 years later, we aimed to buy a single family home for cash, it took us a long time for the market to be just right and we moved into our home 5 years ago. I’ve never regretted being mortgage free–in fact debt free is the only way to go for us. And yes, we live in a very HCOL area and have managed on one income (High paying) but have made sacrifices and limited our spending to reach financial goals. No inheritances, or any other windfalls have come our way, we’ve just kept our goals front and center. Thanks for a great post.
Whoa, now that’s a LOT to pay in one sitting. You did a great job and you’ll surely see the benefits from paying off your mortgage as soon as possible. I’d do it, too, since we also hate the idea of being in debt.
I’m also a big fan of making extra payments against the mortgage to pay it off as soon as possible. Like you, I understand the math of why it may not always be the best thing, but I also like the fact that it is a risk free return. I also have an aversion to debt, it just used to worry me when I was in debt.
In addition to this, I felt that I perhaps saved harder to get the funds to make the extra payments, which was money that I may otherwise have frittered away. So that made a difference to me.
I paid off my mortgage a while back, and I still remember what a fantastic feeling it was – there haven’t been many other days where the sun seemed so bright and the sky so blue as the day I cleared the mortgage!
No one can argue your decision. It is such a personal decision with no right or wrong. Money is supposed to be used in a way that is align with our values and you are doing just that. The mortgage free club is a great club too and well worth the entry fee!
Congratulations!
I paid off my mortgage last month, and it is SUCH a relief. In the time since I bought my house, my 401K value has fluctuated wildly; even taking into account employer matches, the balance has not grown 8% per year – market downturns contradicted that. But each month for 15 years, I had the satisfaction of seeing the immediate increase in the amount applied each month to my principal instead of my interest. While the value of my house could decrease in the future, I’m celebrating the fact that my income-to-debt ratio (or whatever the official financial term is) has ceased to exist. The mortgage is gone, and it is all my doing – it was not affected by a company’s decision to buyback shares, a government’s decision to begin/end any particular program, or the public’s love/hate of any particular product. Independence is worth it, to me.
You made the right decision. Paying the mortgage off earlier than scheduled gets you close to DEBT FREE! That should be everyone’s goal. Forget that nonsense about the difference between your mortgage rate and investment rates. The next bear phase in the markets (probably within 12 months) will wipe out that logic as investment rates will be flat to down for awhile.
It’s far better to not owe anyone anything. Keep up your extra principal payments. It’s the route to take.
My husband and I are discussing whether to increase our monthly mortgage payment or max out our 401k. So did you stop maxing out your 401k in order to put $15,000 toward your mortgage principle? Or are you doing both?
We are doing both 🙂 We just haven’t contributed anything to our Roth IRA yet.
Thanks for the quick reply! You guys are so good and dedicated! I can’t believe you will get your house paid off in just 3 years with Mr. FAF doing a postdoc and a toddler in daycare! You guys have seriously inspired us. Thank you!
I feel your pain of hitting submit on such a large mortgage payment. Several months ago, I made my largest ever principal only payment ($2k). I was so nervous to hit submit for the same reasons you explained. Psychologically it is so much easier for me to send $300-$500 extra each month.
The psychological value (safety) of having a paid off mortgage is priceless. $220,000 to go. Uggh!
Congrats – it is amazing what you can accomplish when you have a goal!
Any update on your progress. We make weekly regular payments and are making a big chunk. I will top out by paying 1/3 to 1/2 soon. After that the money saved in interest is low. The whole diminishing returns bit. Its also a bit of diversification of our assets imho.
Thanks for checking! We paid off the mortgage in Nov 2018. You can see the update here.
Congrats on paying your mortgage principal down so quickly! What a great accomplishment! I’d like to add a little perspective on putting extra cash towards mortgage principal vs emergency savings or the stock market.
First you mentioned that you had an emergency fund equivalent to four months income. A year ago I would have told you that is a fantastic amount and more than you’d ever realistically need. After all, even if you lose your job, you’d find another one way quicker than four months, right?! Not necessarily. I lost my full time job over a year ago. While I’ve done one three month contract project since then, I’ve yet to find a full time position despite applying to more positions than I can count. I read recently that the higher your income, education, or specialization, the more difficult it is to find a new position. I fully agree, especially if you have my luck and end up in this position during a recession. I now firmly believe in a six month emergency fund if possible.
Second, I understand your dilemma about paying extra on the mortgage vs investing. I’m sure being mortgage free provides a peace of mind for hard times. However, I do want to point out that if you are ever unable to pay due to a financial crisis, your lender will offer loss mitigation options to pause your mortgage for six months to a year. Mine has been paused for an entire year and I actually qualified for a hardship forgiveness program that pays the balance at the end of that time. Knowing this I don’t worry as much about how to pay the mortgage during a financial crisis.
Mathematically I would go with the investment option. You’re right that your 4% mortgage interest savings is guaranteed on principal only payments. However over the long term the same amount invested in an index fund would generate almost 12% return (average over the past 95 years). Yes there may be some bad years but it always bounces back within 2-3 years. I’d recommend crunching the numbers to calculate how much more money you’ll make putting the same amount in this fund for 5/10/20/etc years, then using the profits to pay off your mortgage. You’ll likely get there much quicker this way. However in the end this is a personal decision and I fully understand there’s no substitute for peace of mind. Good luck on your mortgage payoff journey!