Living Debt Free – That’s Means The Mortgage Too!

How can you find a secure 5-15% return on your investment with NO risk at all? Simple – start paying off your debts. The FIRE lifestyle begins with paying off the bank, credit cards & mortgage. Debt is a four-letter word that needs to be banished from your financial vocabulary.

There are a few simple strategies to do so. One approach says to pay off the debts you have with the highest interest rates first. These are generally unsecured debts like credit cards and personal loans. Another approach (espoused by Dave Ramsey, the radio host) is to pay off debts starting with your smallest first. That leaves bigger secured loans – like car payments & mortgages – for last. Either can work. The key is attitude. You need to go to war against your debt or you will never live financially independent or have a chance at early retirement.

Some people think that mortgages fall in a special category of debt. Because the interest (for some) is tax deductible, they look at mortgage debt as a low-cost way to borrow money that could then be invested in the stock market or other investments. The problems of this thinking are many. First, mortgage interest isn’t deductible for everyone – only folks that are itemizing deductions (not taking the standard deduction). This also excludes anyone that has an income that puts them above the AMT (alternative minimum tax). All told, less than half of Americans itemize their taxes, according to the Tax Foundation. Second, other investments don’t have the 100% guarantee of return that paying off your mortgage does. The most secure investments (say a bank CD) pay pretty close to 0% today, so adjusting for risk, paying off your mortgage is one of the best relative investment deals you can get.

I have a good friend who disagrees with me. My DW and I paid off our mortgage in 2011 (at 45 years old) and I’ve never looked back. Taking a different view, with interest rates low and the economy on the rebound from the Great Recession, my friend Michael kept his dollars invested in the stock market. Over that period the S&P500 has grown +54%.

It certainly looks like he made the better choice, but did he? The outcome isn’t always the best way to evaluate the strategy. If he successfully bet his ‘mortgage money’ on lucky 13 at the roulette table and doubled it, would you also have thought him a savvy investor? I think not! Risk is risk and while he timed the market very well – no one can know what the future will bring. One needs to compare investments with their best viable alternative. Paying off your mortgage is heads & shoulders above other risk free investments. Don’t believe me? Take out a second mortgage on your house and invest that in the stock market!

13 thoughts on “Living Debt Free – That’s Means The Mortgage Too!

    • Thanks – I know when my job situation changed a few years ago, I was certainly happy to have my house paid & secure!

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    • It is a huge thing to pay off. It doesn’t seem like a lot of people ever do it. I am always shocked someone would buy something so expensive that they can never afford to pay it off. Your whole house will feel completely different once you know it is YOURS.

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    • Way to go – that’s HUGE! It is true what they say – that living in your house feels a lot different when you know you own it 100%. Enjoy the good feelings!

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    • I’m always amazed that people think it’s ‘smart’ to have a mortgage. I was just talking someone last week about it and he played me the old song about how cheap mortgage interest rates are compared with putting money in the financial markets. I said, “how has that worked out for you over the last 12 months when the market is down 2% and you are paying 4% in interest?” I think your Airstream plan is really cool. I hope you’ll make it up to the Twin Cities at some point. We have a RV park right by our house and it would be great to take you and your wife out for dinner!

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      • Deal! We haven’t planned things out that far yet, but we will definitely make it out your way in the next few summers, and you can be sure that we’ll connect! Haven’t been up to the Twin Cities area before, so it’ll be a nice opportunity to explore the situation up there. 🙂

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      • My advice… Don’t come in the winter! 😃. Summers are beautiful and 10,000 lakes!

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  3. Paying off your mortgage still leaves you with your home insurance and taxes. So in reality you are still left with a monthly payment (in my case that would be almost $500/mo *currently*, and will obviously increase over time). If you look at how much time it takes to pay off the mortgage versus how much time it takes to build up enough investments that then would be able to *pay your mortgage for you* the answer is obvious: invest, invest, invest. For my situation it would take ~$300k of actual contributions to provide ~$450k of investments (lets say built up over a 5-10yr period), that would then pay my mortgage for me (if I so desired), and could potentially grow significantly over time even including taking withdrawals for the remaining mortgage/tax/insurance payments. Compare this to $400k of actual contributions in order to pay off the same mortgage (and leave me nothing to cover the taxes and insurance that would continue indefinitely). So not only would I get to that position using $100k LESS by investing in the short term, but I would *ALSO* then have a nest egg that would cover the taxes/insurance forever. A significantly better financial position. On top of all of that, all of your investments over the 5-10 years could be usable in case of significant emergencies (including paying for mortgage payments). Even just $100k in investments provides many years of mortgage payments in the case of significant impairment. There is just no question: the 30-year mortgage is debt that you *should have* (if you choose to own, that is), so long as you are also investing 50%+ of your income in the Vanguard total stock market index fund. The math always, always, always works out better by making investments over a 30-year mortgage (presuming society does not collapse). All of this is predicated on a conservative stock investment strategy based on low-fee index funds, of course.

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