Why We’re Going To Pay The House Off Early

Homes may not be a path to guaranteed wealth, but we're still paying ours off early.

Before we even signed on the dotted line to have our home built, Kristin and I knew we were going to pay off our house early. Ever since I paid off my car, I’ve avoided all debt. Kristin worked her ass off in college to avoid taking out student loans.

It’s fairly accurate to say that in general we are pretty debt-averse. To us debt feels like it weighs us down, limits us, and just is another thing to think about. The less of it we can have, the better off we will be.

But a mortgage is a different type of debt than we’d had in the past. It wasn’t credit card debt or a loan on a depreciating “asset”. It warranted an additional discussion before we arrived at the decision. Ultimately though, we agreed: we’d be paying off the house early for a variety of reasons.

Establishing Goals

Deciding to pay off something as big as a mortgage was not a simple 2-minute discussion. The most important thing, really, was figuring out what our goals are. We knew that we hated debt, but should we overlook our hate of debt to focus on other goals? Would paying off the mortgage actually hinder our goals by tying up our money?

Our main goal is simple: Retire by 50. Can we get there sooner?

Yes, there are a ton of ways we could get there earlier. Some of those include selling our house and downsizing later. We could start a business and use that to inch that date up. As our incomes grow we can (and will) focus on controlling our expenses so that our savings rate increases.

Neither of us feel comfortable retiring with debt. Even if we could cover the cost of our mortgage with passive income, we both agreed: one less thing to worry about is better.

Our revised goal is still simple: Retire by 50 with no debt of any kind.

There’s just one little problem: the mortgage. A 30 year mortgage doesn’t jive with our <20-year time horizon. Mortgage…you’ve got to go.

What Does The Internet Think?

Ask someone on the internet if you should pay your mortgage off early and you’ll hear loud cries from two camps.

Camp A loves to pay off the mortgage early. Having no debt is better than having some debt, even if it’s a mortgage. Their argument mostly comes from the psychological benefits and actual realized cashflow gains you’ll get with a paid-off house.

Camp B is the opposite of Camp A. They frequently cite the lowest interest rates in history, and mortgages being “cheap debt”. It’s not uncommon for them to cite things like benefits of having a mortgage (the deductions!, they’ll cry) and opportunity cost. After all you could invest your money and make 7% more!

What’s ironic is that it’s the folks in Camp B that always tell you “past performance doesn’t guarantee future returns“. And yet, when this point is argued with them, they are often quick to ignore this tidbit.

Regardless of where you stand, there’s one truth that cannot be refuted. Paying off debt is always a guaranteed return on your money.

Also, paying $100 in interest to get $25 back isn’t exactly my idea of a winning situation. Most people also tend to forget that it’s only a gain on the difference between the standard deduction and what you itemize for. Overall this is a small incentive at best.

Our Balanced Approach

So the internet is pretty torn. Coincidentally, despite avoiding debt as much as we can, we’re a bit torn as well. But we arrived at a balanced approach that lets us hit our 20 year payoff goal AND hit our nest egg goal to retire by 50.

Here’s our super complex plan in all of its glory:

  • Focus on maxing out 401(k)’s, HSA (whenever we’re eligible), and IRA’s. These tax-advantaged accounts are great ways to save for our future and it’d be foolish to completely ignore them in favor of paying off the mortgage.
  • Pay additional each month toward principal. We’ve calculated how much extra we need to pay to hit our goal. For example, on a $200k mortgage at 4%, this amounts to an extra $260 each month.
  • Save additional in our ‘opportunity fund’ each month. If that gets to a point where it’s a significant chunk of change, evaluate if we want to throw it at the mortgage, keep it saved up, or use it for something else.
  • Split raises, bonuses, and any side-hustle money into equal parts of mortgage payoff, short-term saving, and investing.
  • Continue to live off one of our incomes. If we can’t make it work on one, then we can focus on growing that income to make things easier.

Following all of these will let us hit our mortgage destruction date and hopefully retire exactly on schedule (barring any sort of catastrophic market crash).

It’s not exactly Camp A, and not exactly Camp B, but it fits our goals. Ultimately, that’s all we need: OUR goals to be met.

The Pros and Cons of Early Payoff

This strategy comes with its own set of pros and cons.

Pros:

  • Hits all of our goals. Retire, debt free, by 50.
  • Still focusing on maximizing tax-advantaged accounts.
  • Flexible plan with raises, bonuses, and side hustle money.

Cons:

  • Potentially not maximizing investment returns (extra money spent on principal is tied up in the house instead of earning a return in the market)

Really the pros outweigh the cons here for us. The fact of the matter is we have goals, and those goals can’t be achieved without paying off the mortgage early.

Plans Change

We’ll have some flexibility with this approach as well. As our incomes (hopefully) grow, we can choose to save more, pay off the house more quickly. We could enjoy our money a bit too, knowing that we’re still on track.

We can change course at any time. If we’re in a place to refinance to a 15-year loan in the future, this may become a moot point.

What we like about this approach is that we’re not really sacrificing anything significant to be able to hit our goals. We can speed things up if we decide we want to. And if we prefer to step on the gas with investments, we’ve got the ability to do that, too.

Question:

How do (or would) you personally balance paying off a mortgage with other financial goals?

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10 Comments

  1. Hi Dave, I really enjoyed your tweet – “waits for all the math nerds to tell me I’m dumb.” I suppose you might think that I would say you should not pay off your house – since I wrote only yesterday that you should take a car loan! 🙂 However, math is only one leg of the proverbial three legged stool. Its certainly a leg you should study carefully because it provides a nice check on our emotions, but its only one leg. In your case (and I suspect in most cases), the mortgage is such a heavy burden on your mind its just worth it to get rid of it. And in the end, this whole search for FI is all about getting a nice clear head for your short time on earth.

    1. Haha I figured some people would love that! 🙂

      And yeah math is definitely just one leg. We didn’t ignore it, it just didn’t win our on this decision whereas on others, it would! You’re right – that’s the whole point of this FI thing.

  2. I’m with you — especially going into retirement. You don’t need a noose around your neck when you walk away from steady income.

    Our NY condo sale allowed us to purchase our home outright. Yes we could have invested the money and taken a mortgage but having no mortgage was the ultimate freedom for us. Because even though we were not FI yet, we relocated not knowing our job situation. If we had to take $10/hour jobs it would have been no big deal to cover our basics. That was a big comfort. Now that we’re retired, no mortgage is even more glorious.

    Often times it’s not just about the numbers. It’s about what makes life stress-free.

    1. Yeah that’d be a huge weight off your shoulders I’m sure! Even if we decide not to retire when the house is paid off, at least we have the OPTION to and a lot more flexibility with what we decide to do for money at that point. Making sure we aren’t neglecting our saving up until then should mean we’re ready to rock and roll with early retirement around the same time we pay the house off too.

  3. We paid off our 30 yr in 9 yrs. Like you said, guaranteed return on money by not having to pay all that interest. Also, paying a lot of interest so you have some deduction on taxes is not worth it. We still kept doing our 401k and did some private investing. It has been great not having to pay the home loan the past nine years. We just paid what we wanted or could every month. Some months, $500, other months $200. That part was flexible due to how the bills went. Be flexible on adjusting the extra payment every month. Don’t make high extra payment if at the end of the month you are eating bread and water.

    It is a marathon, but wouldn’t a marathon be easier catching ride every so often so you will be done sooner? That is how I thought of making extra payments.

    1. Haha that’s a great analogy, I love it. We’ve got kind of a baseline amount we want to put toward it each month and can easily make that work with our budget, but have the flexibility like you said to adjust if we need to. Bread and water sounds like a horrible diet. 🙂

  4. And to this I say, AMEN MY FRIEND! Personal finance is personal for a reason, it sounds like you found an excellent way to balance all of your goals. And it will be such a great comfort to retire with no debt at all hanging over your head I’m sure it is worthwhile. FI is all about freedom and choices, and being able to have those things.

    PS can you share your calculator or however you do your math to balance those goals?!? As a math-averse person I’d really like to see how extra payments vs investments balance out and have a more exact idea of where we are going than “sometime before we’re 60 I hope” 😉 Feel free to email.

    1. You don’t need to do anything crazy. I made my own amortization table that lets me input extra payments of varying numbers each month if that’s what I want. This is useful for me because we have PMI, but most calculators won’t let you say “put $X toward principal until I get rid of PMI, then do $X + $Y” which is what we’ll do.

      For a very basic look, you can use a simple online calculator like the one that Dave Ramsey has on his site: https://www.daveramsey.com/blog/mortgage-calculator?snid=tools.mortgagecalc#/entry_form

      For figuring out our FIRE number I know basically what our ballpark amount is based on the 4% rule (so just 25x our annual expenses) and then I pad that a bit. You can then just use a simple ROI calculator to say over 20 years how much will my money grow, based on our automatic investments and a modest rate of return (I use 6% most of the time even though it’s generally accepted that it’s more like 7-8…but I’d rather save too much than too little!)

      If that hits our numbers, great; if not, then I see how we need to change things. Since we’re just dollar cost averaging (putting money in each month) you can do simple things like 401(k) Contribution Limit divided by 12 to get amount per month invested ($1541.67 based on new limits for 2018). I fiddle around with this one but any ROI calculator should be able to run things for you https://www.dinkytown.net/java/InvestmentReturn.html

      I don’t get super complex into tax planning and things like that yet, because we’re still quite a ways out. As we approach our target number it’ll become more important, as will figuring out a drawdown strategy that works for us, etc.

      There are REALLY complex tools you can use (like FIRECalc) to plan out more in-depth, but these don’t seem like they’d be your cup of tea 🙂

      Hope that helps and gets you a start! If you’ve got more questions, ask away!

  5. Interesting perspective. Most people are in control A or camp B. I like that your willing to be open minded and split the difference. For me, I’m paying the mortgage slowly today to build investments. I’ll do plan to re-evaluate every once in a while though.

    1. Yeah I am sure we will reevaluate as time goes on, too, and adjust if we aren’t happy with the progress on the mortgage or on our investments. The great thing is we can always change plans!

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