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Whether to pay off the mortgage early is one of the most controversial topics in the personal finance community.
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.
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
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.
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.
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.