Why you (probably) shouldn’t pay off your mortgage early

Obligatory disclaimer: I’m not a CFP, fiduciary, CPA, or lawyer. I cannot be held liable for any investment or financial management decisions you make based on my blog rambling.

For me, a mortgage comes with a heavy emotional weight. When I was young, my family went through bankruptcy and we were afraid that we’d lose our house. I remember my mom talking about it a lot, and I was pretty scared of what bankruptcy was going to lead to for us. We were going to be living in our car? But no, my mom was worried we’d lose the car too. What then?!

That’s neither here nor there. Suffice it to say, when we bought our first house, I wanted to pay it off ASAP. The best we could do then was an extra $100/month, which on a 30-year mortgage typically reduces your payoff schedule by 11 years! So we’d pay it off in 19 years instead of 30.

When we sold that house 6 years later and bought our new one, I was… what, 29? Almost 30. And I was looking at our 30-year mortgage and thinking we could pay it off by the time I was 40. Score!

But I was also starting to learn more about personal finance around that time. And over the next 2-3 years, I would start budgeting better and investing more to build our retirement savings. It became increasingly clear to me that paying off our 3.875% mortgage didn’t make much sense when I could put that same money into the stock market for an inflation-adjusted return of 7% compounded over the next 20 years. (And if we just look at the last few years, I’ve been getting more like 15% per annum.)

Then coronavirus came and interest rates fell through the floor. In 2020, we refinanced our house and took cash out of our equity for home improvement projects. We switched from a 30-year mortgage to a 15-year, our monthly payment went up by ~$400, our interest rate dropped to 2.875%, and our total savings on interest will be over $25,000 compared to the 30-year, even with the increased debt from the cash-out refi. We’ll also pay off our mortgage several years sooner than we’d originally anticipated.

I just checked and we could throw everything “extra” at the mortgage and pay it off in 4.5 years. By extra, I mean reducing retirement investments and not going on vacation ever and maintaining a gazelle-like focus on paying off the mortgage. For the sake of clarity, our mortgage balance is currently $142,998.96.

Given the short time-frame, you should use 10% in a compound interest calculator to compare against investing in indexes. 4-5 years is a bit short for averaging index returns, but this is all hypothetical, so let’s not worry about it. Investing everything that we might throw at the mortgage in 5 years only returns $139,196. That’s $3,802 less than paying off the mortgage. So it makes more sense to pay off the mortgage, right? Nope.

Two reasons:

  1. The money put into the mortgage is illiquid. If we have an emergency or need cash for some reason, I can pull contributions from the Roth IRA with no penalty, or even take a loan from our 401k. With the money tied up in the mortgage, I might be able to get a HELOC or another cash-out refinance, but there’s no guarantee of that.
  2. While my end-balance when investing might be at, or even below, $139k, that money will continue being compounded past year 5. If I pay off the mortgage, then my cash flow has increased beginning in year 5 or 6, which means I can put more money into investing… but I’ve lost 5 years of tax-advantaged 401k and IRA contributions, and then 15+ more years of those contributions compounding. That’s a HUGE impact long-term.

You can’t just compare mortgage pay-off vs. investment return during the same time frame. Instead, you have to look at the long-term impact.

And for us, we can split the difference. We refinanced to a 15-year loan, so we’ll pay it off faster than our original 19-year plan. And we lowered our interest rate.

We can’t invest as much as we would if our mortgage was paid off right now, but by investing during these next 5 years while paying on the mortgage, and over the total 15-year period… This is very back-of-the-napkin made-up math at this point, but I’d put the end result of “slowly” paying off the mortgage over 15 years while investing for our retirement at:

  • Mortgage is paid off
  • $663,406 in investment accounts

Alternatively, we could pay off the mortgage in 5 years, then start investing. After 15 years, we’d be at:

  • Mortgage is paid off
  • $477,496 in investment accounts

Those 5 years of investing while paying off the mortgage more slowly (over 15 years total) make a significant difference in our investment balance.

You can see this comparison easily yourself by going to https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator and put in the amount you can invest for retirement right now for the duration of your mortgage (15, 30, 20, whatever). 7% is a good estimated rate of return over longer timeframes because indexes tend to average 10%, less 3% average inflation rate. The number you’ll get is present value, not future value.

Then, run it again but add your mortgage payment (just the mortgage, not taxes + insurance) to the monthly contribution amount and change the length of time. For me, my first calculation is 15 years, and the second is 10.

So, generally speaking, no, you shouldn’t prioritize paying off your mortgage. I would add, though, that is only true if your interest rate is below ~5%. And if it’s not, you should see if you can refinance and lower your rate. We used RocketMortgage and it was a great experience.

It has taken me a couple of years to set aside my emotions on this. It was really hard for me. But a lot of fiddling with undebt.it and YNAB and spreadsheets and my mortgage lender’s amortization calculators helped me see that paying off the mortgage early is purely an emotional decision and not a good financial one. There’s almost no situation in which paying off the mortgage early makes sense for us. I’d wager that it doesn’t make good financial sense for most people.

If we somehow hit our first FIRE (Financial Independence Retire Early) goal (3.25% SWR with $50,000/year) before our mortgage is paid off, then I may reduce investments and pay off the mortgage a bit sooner just to lock FI status in, since I can’t RE with a mortgage payment. Even then, I would recognize that paying off the mortgage is more of an emotional than a financial decision.

And that’s OK. The most important thing is that you’re able to sleep at night. I can now, but I used to really stress about this stuff. If your mortgage keeps you up, then pay it off sooner. But know that long-term it’s going to cost you a lot.

A long overdue, and subsequently brief(ish), update post

My last post was in June, and I haven’t written about the pandemic or anything else really going on in my life these days. Future-me might want to be reminded of some things, so here goes.

Work

I have 8 jobs, Bob. 8!

Right now, my focus is split between:

  1. Head of Education (developing and managing strategy for the Adaptavist product portfolio)
  2. Product manager for Learn for Jira
  3. Support person for Learn for Jira
  4. Lead for the Adaptavist Learn content team
  5. Education team personnel manager (5 direct reports and 5 indirect reports)
  6. Documentation toolsmith (managing the configuration and tooling for Adaptavist product documentation)
  7. Product manager for the Adaptavist Library
  8. Support for the Adaptavist Library

As part of all this, I also handle releases for L4J, work with marketing, meet with every other product manager monthly 1-on-1, work with managers in other teams at Adaptavist, and do a few other things.

Suffice it to say, progress in any one area is pretty slow. Thankfully, we’re getting some more people onto the teams and that will help a lot.

My goal is to have less of my time on the day-to-day, sprint-to-sprint work, and more time focused on 12-18 month strategy and quarterly goals for the 4 teams I work with.

The Library was only added to my portfolio about 4 weeks ago. I am very conscious of the fact that I only have about 2 months before our baby is due to get things solid before I disappear for two months.

I maintain my sanity by trying to stick to only 8 hours a day and 40 hours a week. There is an unlimited amount of work for me to do, but I’ll get nothing done if I’m exhausted and burnt out. It’s pretty hard to keep my head above water as it is, and there are some weeks where I fail even if I mostly stick to my 40-hour limit.

But if I can play with Simon for an hour before work, and take off at 5 to have dinner with him and play and put him to bed at 7, then everything else is OK.

Church

We haven’t met in-person since March. In the last 5 months, Simon has gone from falling asleep in my arms during the church service (which is being streamed online) to needing to run and jump and wrestle and eat and then go down for a nap during the church service.

Suffice it to say, I don’t really attend the online church service anymore.

Without in-person church, even over Zoom, I’m actually finding my weekends to be more restful.

April and I have been doing an online Bible study this year. We have a set of chapters for each day (I listen to them, while April prefers to read them), and then a daily podcast. I regularly fall far behind, but I eventually get caught up.

This is my fourth time going through the Bible and I am engaging with it very differently than before. In the past, I would describe my reading of the Bible as more academic. I studied it, and it was interesting, but I didn’t emotionally connect with much of it. Perhaps because I’m listening to it instead of reading, it’s having more of an impact on me. The book of Jeremiah has been heartbreaking.

The podcast is fantastic. April and I are going to subscribe to the Patreon next month to start supporting them because we get so much value out of it.

Right now, listening to that podcast and the Bible app are my church. But they obviously don’t meet the community purposes of the church. I’ve got a pretty big lack of community right now, but I’m not feeling poorly because of that. Turns out, pandemics are less rough on those of us on the far end of introversion.

Pandemic-times

For the first few weeks of quarantining, back in March, I had a lot of anxiety and some depression. After 3 weeks, it became more normal. These days, it’s not usually a big deal at all. But I still struggle with wanting to see people normally, and having to be hyper-aware of (and asking about) other people’s travels and interactions and quarantines.

I’m OK being around (but physically distant) people who are following similar precautions to us. But if I know they’re not being cautious or I don’t know them… here in August, I’ve reached the point of avoiding altogether. Masks are great, and we wear them, but they mostly prevent you from spreading. If other people aren’t following mask best practices, then we’re not protected from them, and that’s no good.

I reckon we have a few more months until a vaccine and anti-virals are out, and then we can move on and return to normal socialness. For now, with a baby due in ~2 months, I’m going to be even more isolated than I have been the last few months.

We’ve been having our groceries delivered, getting take-out once a week, have a plethora of hand sanitizer bottles, several cloth masks each, and are trying to do our best to maintain distance from people.

There are a couple of people I play games with online occasionally. I talk with Jennie on the phone once every month or so. And that’s pretty much it for me.

I’m doing alright, but it sure would be nice to get together with some people and have a beer and talk about stuff without having to sit outside and 6+ feet away from each other.

Volunteering

I joined a professional organization as part of the Boys and Girls Club of Springfield named Club Blue. I actually became the Secretary, and ran a vision/mission workshop, and then wrote the vision and mission statements based on the outcome of that workshop:

Mission

Developing community leaders to serve as ambassadors for the Boys and Girls Club of Springfield.

Vision

We envision an inclusive community of businesses and professionals with inspiring empathy who share a desire to listen, serve, and mentor so that Springfield can better meet the needs of the kids who need us most.

So Club Blue has been a growing part of my community outside of church, and that has been kind of nice. For years, I feel like I have met so many people who only plan to live in Springfield “for another 5 years or so.” I don’t know why it’s always “around 5 years,” but that is often the case.

It’s nice to meet people who are committed to being in Springfield and improving it. And it’s doubly nice that we share the same value and vision for how to make Springfield better: by investing in our young people.

Kids

Simon is 23 months old. Almost 2 years!

And his baby brother will be here in 2 months, give or take.

Every day is awesome. I miss Simon after he goes to bed. I’m a bit sad when I have to work instead of getting to play with him. We have a lot of fun together and I’m just such a fan of him.

I have become one of those people whose pictures on Facebook are mostly of their kid.

I just ordered a Nugget.

Being Simon’s dad is great. I know having a second kid will change this dynamic, but I’m reasonably confident it’s just going to make things even better and it’s so wonderful.

House

A couple of years ago, before Simon was born, we finished the last major renovations needed on our house to make it solid. These were things that aren’t visible but which improve the house dramatically.

At long last, we’re going to start improving things that are visible and make our lives better, but which are less foundational like plumbing or a roof.

Simon loves to be outside, but our yard isn’t really nice for April and me right now. Our plans include tearing out the deck and having a larger covered deck put in, landscaping the flowerbeds with stone (instead of wood mulch) and native plants, adding 1-2 more rain gardens, building a playground for the kids (with rubber mulch below), some stone paths in the backyard, building some garden boxes, and planting a couple of apple trees.

We’ll have seating, and a dining table, and a new grill (turns out, the griddle was a huge mistake and I regret it), and more shade, and it’ll be lovely.

We’re also replacing our 6 ft. privacy fence with a 4 ft. picket fence. After 5+ months of quarantine, we’d like to be more connected to our neighbors, not less.

I want to get a couple of signs. I think this idea is hilarious and April disagrees.

  • For the front of the house, a sign by the door that says, “The Stublefield’s”
  • For the fence by the double gate, a sign that says, “The Stublefields”

Get it? Because the gardens and trees and playground are all part of the Stublefields… fields, eh? get it? get it?!

I love the subtlety of it. April wants “The Stuble Fields” on the fence. She may end up winning this one, but we’ll see.

Finances

To fund the outdoor renovations, I refinanced our house and took cash out of our equity. Turns out our house is worth $40,000 more than when we bought it, and we had paid off a chunk in the last 5 years. Not saying we got anywhere near that amount out, and what we did get in cash isn’t enough to complete all the projects I want to do, but refinancing helped a lot.

It also switched us from a 30-year mortgage to a 15-year, decreased our interest rate, and we’re setup to pay off our mortgage 2 years sooner than we were going to with about $25,000 less in total interest paid. So that’s pretty cool.

I would recommend Rocket Mortgage if you’re looking to refinance.

Thanks to YNAB, we’re doing better financially than we ever have before. In the last year, our net worth is up 117% and I think YNAB has played a huge role in that.

Thanks to this Reddit post, I have opened a 529 account for Simon.

Thanks to the magic of investing and compound interest, Simon already has about 5x in college savings than I had when I started college. We’re getting about $1.30 added to every $1 we put in (or to put that another way, we’re getting a multiplier of 2.3x on our investments–by way of example, $100 turns into $230).

I’m working towards retiring early. I don’t know if I’ll actually want to retire, but right now I’m shooting to have enough invested and saved that I could retire around the age of 46, and definitely could by 50. The age of 50 is really what I’m shooting for. By then, kid number 2 will be 15 and Simon will be 17, our house will be paid off (probably for a few years by then), and I’ll have been at Adaptavist for 19 years (which, of course, something might change between now and then… but I certainly wouldn’t mind still being at Adaptavist!).

It’ll be interesting for future-me to read back over this and see if I hit those goals.

Philosophy

Coming out of my Bible studies this year, and having lots of time to reflect, I’ve been ruminating on “the end justifies the means.”

To make a long story short, I increasingly disagree with that statement. When I was younger, I was very utilitarian. These days, I’m leaning much more towards “the means must be justified and just, but I also recognize that humans are terrible at being just or recognizing the difference between unjust and just.”

I’m also trending more towards pacifism. Again, this is a big change from my youth.

I won’t go into more detail here because this blog post is supposed to be concise. Hopefully sometime soon I’ll be able to sit with some beers and talk about my thoughts with some people. Maybe next year.

Typographed Bushism

The AP is running an article about the bill signed into law today by President Bush to help provide mortgage relief. I’ve been following this bill after my mom brought it to my attention with the claim that it will provide a $7,500 tax credit to home buyers if they purchased their home between April of 2008 and April of 2009. It turns out that was an inaccurate claim (it only helps those who purchase foreclosed homes, which are usually banks and fix/flip scams, ironically), but that’s neither here nor there.

What really caught my attention was Bush’s motivation for signing the bill he had, until recently, threatened to veto.

Bush didn’t like the version emerging from Congress, and initially said he would veto it, particularly over a provision containing $3.9 billion in neighborhood grants. He contended the money would benefit lenders who helped cause the mortgage meltdown, encouraging them to foreclose rather than work with borrowers.

But he withdrew that threat early last week, saying hurting homeowners could not wait — and even blaming the Democratic Congress’ delays in action for forcing an imperfect solution.

I know, it’s probably a typo and was intended to say “helping homeowners,” but I found it amusing.

UPDATE 2008-07-30_14-33:: Ahh, I get it! He meant “homeowners who are hurting!” What a poor choice of words!