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