Cashing out and enjoying a life of financial independence first requires the elimination of life’s large expenses. One of the largest expenses many of us face is a mortgage. But the idea of paying off a mortgage early draws many critics.
Unfortunately, mortgages are kind of a necessary evil in today’s society. Real estate prices have reached a level that make paying cash for a home just about cost prohibitive for most families. So, the large majority of us obligate ourselves to pay some ungodly amount each and every month for the next thirty years of our lives. Three decades is a long time.
If you are an up-and-coming thirty-something with a fast-track career and a big income to match you are probably looking to upgrade that starter home you bought a few years back. Of course, I’d much rather stay in the starter home and pay it off early, but I understand most people outgrow starter homes when they have kids.
At 36 years-old you go out and buy a $300,000 house with just enough down to get financing approved. You’ll be 66 years-old before that mortgage loan is paid off. That means for the next three decades you will have to make that big mortgage payment every single month, pretty much guaranteeing you’ll never be able to cash out.
For this reason alone, all the arguments against paying off your mortgage early are void in my book. Sure, you’ll lose some tax advantages, and the money could be invested in the market at a higher rate than your mortgage is financed, etc, etc. But for me, the freedom of not owing anyone money, especially on your home, is priceless.
Just think of how fast you could accumulate serious wealth buy simply investing what would have been a mortgage payment each month. Whether that is $900 a month, or $2,000 a month, it wouldn’t take very long to be able to seriously consider cashing out. Simple math tells us that $2,000 a month for ten years is nearly a quarter of a million dollars, and that doesn’t account for compound growth over that same decade. Imagine how much you could accumulate in three decades!
So decide what you really want – a tax advantage for thirty years, or the chance to be financially independent in less than thirty years. The choice is yours. As for us, well, we are moving forward with our plans to pay off our mortgage so we can start investing even more money towards our cash out nest egg.
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With average mortgage rates around5%, it might make more sense to invest the money if you can earn an after-tax return greater than the mortgage rate. The lower the mortgage rate, the less beneficial it is to pay the mortgage off early.
As someone from north of the border I find your post interesting in several ways:
1. Is a 30yr ammortization normal in the US? In Canada 25 is the longest I’ve ever heard anyone taking, and we took a 20yr.
2. There is no tax break for your mortgage payments here, so no advantage to taking any longer than necessary to pay it off. (Exception would be an investment property where the mortgage is a deductable expense).
3. Qualifying for a mortage is tougher here and there’s no such thing as a subprime whatever it is you folks have that we keep hearing about in the news. I’m sure there are people here defaulting on mortgages, particularly in the past year, but it’s really not even mentioned around here. It’s always in the news as a problem in the US, but not here. I guess the upside of needing a bigger downpayment and being approved for a payment that’s a smaller % of your income results in far fewer foreclosures.
4. For the invest vs. pay down the mortage question, we make automatic payments to our RRSPs (Registered Retirement Savings Plans) and the amount contributed is tax deductable (up to 18% of your income/yr). You only pay tax on it (and any earned interest) whey you withdraw it in retirement. We always contribute enough to get our taxable incomes down a tax bracket so our entire income is taxed at a lower rate, resulting in a healthy refund. We put the refund against the mortgage every year. We also pay our mortgage every two weeks (not to be confused with twice monthly) which shortens your mortgage by many years. We also rounded up the standard payment from some odd number like $761.23 every two weeks, to an even $800. It’s just easier to type/track in the spreadsheet and rounding up only helps retire the debt that much sooner.
If all goes according to the plan, we should have the mortgage paid off in just over 11 years from start to finish. We’re in year 8 now and I can’t wait to see the last payment go out. Our planned early retirement is directly tied to getting that mortgage paid off. We’ll likely work 1-2 years after it’s paid and apply the old mortgage amount to replacing windows, furnace, deck, roof, major appliances, refinishing hardwood etc so we don’t enter retirement with any big ticket items looming in the future.
I have to agree with this article. The peace of mind of no mortgage payment, especially in your 20’s or early 30’s is priceless. My payment is so low, I don’t even make the breakeven point to deduct it from my taxes. Working on paying it off early. I’ll be 33 when the house is payed off in a few years. I have big plans to invest the vast majority of my income afterwards to take an early retirement.
I agree I think if you can pay it off fast and then focuses on investing it can be a good benefit. Ultimately I think this is a person to person issue. I am 25 and bought my house about 6 months ago. I only make about 22k a year before taxes as I Just got done with college in May of 08 and this is all I can find at the moment. I bought my houses for 26k with 20% down and the start balance was just about 21k. My plane is to drop my 1st time home buyer money on to the balance which I have down to 19k already. I am planing on paying it off in the next year to year and a half. I got 5k in an IRA and plan on maxing out my IRA every year after I get the houses paid off. Along with buying 1 new property each year until I am about 35 and moving to Ecuador.