A few years ago, my wife and I paid off our mortgage early.
This is the first we’ve broadly shared it.
We purchased our home for $185K and made a 25% down payment (effectively allowing us to avoid PMI). That left us with a 15-year mortgage of about $140K. The interest rate on the balance at the time we took out the loan was 5.83%.
We could have gone with the standard 30-year mortgage, maximizing the overrated mortgage tax deduction we all hear about.
We could have re-financed once or more, at the cost of a few thousand dollars each time, to lower our interest rate.
And we could have done as most others do and “up-sized” to another home after a few years (on the contrary, we had already done the opposite and down-sized after buying too big of a home the first go-round.)
Thankfully, we did none of those things. Instead, we executed a mortgage payoff with 11 years remaining. Let’s call it the “4-year mortgage”.
Here’s why we did it:
1. Paying Off your Mortgage Early Results in Guaranteed Returns
Guaranteed returns, even if small, are still guaranteed.
If we had kept our mortgage for the full length of the loan, we would have averaged 5.83% in interest payments per year (or about 3.25% if we had paid the fees to go the refi route).
That’s far better than the near zero interest rate returns we’ve seen on CD’s, savings accounts, and money market accounts.
And it looks even better when you consider interest versus principle payments for the first half of the loan. Amortization schedules lead to you paying nearly one-third (15-year mortgage) or two-thirds (30-year mortgage) of your monthly payments towards interest instead of principle for a number of years. Banks win, you lose.
2. No Mortgage Payoff Penalty
Many mortgage lenders will pre-emptively try to block you from paying off a mortgage early by putting in a penalty-clause for early mortgage pay-down. This can be negotiated away by simply saying, “I won’t sign if all mortgage payoff penalties are not removed from the contract”. We did, and removing this negative reinforcement penalty freed (and motivated) us to pay off our mortgage as early as we could.
3. Enhanced Cash Flow Brings New Opportunity
By making the move, we were strengthening our balance sheet considerably. Paying off the mortgage early effectively wiped out almost half of our expenses. This allowed us to save more than ever before. This went a long ways towards my wife being able to quit her job and go back to school to become a nurse.
We had already known how tough things can get when you unexpectedly lose a job. If one of us had lost a job after paying off our mortgage? We’d have gotten by just fine with the enhanced cash flow. It’s a game changer. And a huge stress reliever.
4. It Helped Prevent Lifestyle Creep
If we had ever had the urge to “upgrade” and move in to a bigger, nicer, sexier home, it would have come at a big expense – going from zero mortgage back to a mortgage. We rather liked our new less-burdensome lives. Paying off our mortgage early created a massive disincentive to get sucked in by lifestyle creep.
Last, but definitely not least, paying off our largest debt was an incredible weight off our shoulders. The liberation in doing so is hard to describe in words.
Note: many financial gurus will encourage you not to make this move, and invest your savings instead. In hindsight, if I had instead invested 100% of what I put into paying off the balance, I would have financially come out ahead. But there were no guarantees that would be the case. And if I had gone that route, I would have missed out on all of the lifestyle improvements highlighted here. So, crunch the numbers for your own analysis and factor that in to your personal decision – we have to choose what is best for us individually.