﻿ Should I Pay Off My Mortgage Early? Heck No! - FranceGothic

# Should I Pay Off My Mortgage Early? Heck No!

A lot of people would love to pay off their mortgage as soon as possible. But what if you could actually make money by keeping your mortgage, even if you have the ability to pay it off?

I hate debt. Owing money feels terrible and dirty. I’ve been there.

Coming out of college, I had \$60,000 in loans and it was suffocating. I can clearly remember the day that I made the final payment, 15 years later. I still have the letter that from Sallie Mae congratulating me on paying off my loans. Good riddance.

However, I willingly have mortgage debt. My current home set me back \$176,000 and I had the money to pay cash. I briefly considered it, but instead took out a mortgage. I kept the money invested, mostly in an S&P 500 index fund. Let’s take a look at how the experiment is coming along.

## Debt Rules! (sometimes)

Back in June of 2013, I took out a mortgage for \$140,800. I put down 20% to avoid PMI. The terms were 15 years at 3.25%:

The juicy details of Mr. 1500’s mortgage

I ran the numbers and as of 2/1/2016, almost 3 years into my loan, I’ve paid this in interest:

## \$11,355,97

Yikes. That is \$11,355.97 that I’ll never see again. This isn’t small change. It hurts a little. But wait, I have something much better to show you.

Here is a chart showing how the markets have performed since I took on my debt:

Thanks IndexView for the graph!

Let’s apply this performance to the \$140,800 that I kept invested to see how I’ve done:

## 140,800 * 1.24 = \$174,592

Did you see that number ladies and gentleman? My investment has grown \$33,792 (\$174,592 minus my original investment of \$140,800).

That \$11,355.97 isn’t so painful now, is it? I’m ahead – FAR ahead.

Another way to consider the numbers is to compare them with the total amount I’ll pay in interest:

So, over the course of 15 years, I’ll pay \$37,284 in tax deductible interest. However, less than 3 years into my loan, I’m up \$33,792 on the invested money. I have a good chance of breaking even before the loan is 5 years old.

### But wait, it gets better

The recent performance of the stock market isn’t anything spectacular. I ran IndexView all the way back to 1900 which shows an average return of 9.54%. The performance of the markets in the time period that I’ve had my loan (7.98%) is below average:

All the way back to 1900

Even with the recent subpar performance of the markets, I’ve made almost 3 times more money from the index fund than I’ve paid in interest.

## But wait, it gets even better

As great as my numbers look now, they will probably look considerably better down the road for two reasons:

### 1. Mortgage interest decreases over time

The earlier you are in a loan, the more you’re paying in interest. This is how all loans work. The first full year of my mortgage, I paid over \$4,000 in interest:

Contrast that with the last full year of the mortgage when I’ll pay less than \$500:

If I’m this far ahead in the early stages of the experiment, imagine how I’ll do at the end.

### 2. Compound interest is working for you

Your invested money works in the opposite way of the mortgage interest. Dollars reproduce like rabbits. Over time, those little guys will multiply like mad.

In the next calculation, I used a very modest return of 6%. Despite that conservative number, the results are incredible:

Chart from Dave Ramsey

## Should I pay off my mortgage? (Heck no!!)

Let’s review the numbers:

• On my mortgage of \$140,800, I’ll pay \$33,792 in interest over 15 years.
• If I earn just 6% on the investment, that \$140,800 turns into \$337,435.41 over the same period of time. This is a gain of \$196,635.41.

You don’t have to be a math genius to know that \$196,635.41 beats the pants off of \$33,792. Mortgage debt, I like love you.

### One more scenario

So, what if you’re saying to yourself:

I just hate debt and still want to pay off my mortgage. Instead, I’ll pay cash and invest invest the money every month that I would have put towards a mortgage.

In this scenario, you still come out almost \$40,000 behind:

Thanks Dave!

## Why is this possible?

We live in an incredible period. Because of monetary policy meant to stimulate the economy, borrowing money is insanely cheap:

Thanks Financial Samurai for the chart!

This may not last much longer and once it’s over, it may not happen again in your lifetime. This is a gift! Take it!

If you took on your mortgage back when interest rates were much higher (5% or more), you should definitely consider refinancing your mortgage. You could potentially save tens of thousands of dollars. If you’re considering refinancing, you can quickly get rate quotes from multiple lenders here.

### This isn’t for everyone

Before you implement this strategy, keep the following in mind:

• Know how to properly invest. The idea is to put the money away in a nice, low-fee index fund and forget about it. Don’t try to time the markets. Don’t fall for silly, short-term trading strategies or screaming people on financial TV shows waving charts. For a second opinion, see the advice of billionaire Warren Buffett – the most successful investor ever.
• This strategy isn’t for you if you’re into conspicuous consumption. The money you don’t use to pay off your mortgage is not to be used for a fancy vacation or a new car or some other silly piece of status. You may only invest it.
• Make sure you have a low rate on your mortgage. If you have good credit and are paying over 5%, you should refinance. Now. Take advantage of the current low interest rate environment and get banks to compete for your business by requesting a quote at a comparison site like LendingTree. It WILL save you a TON of money in the long run!

### Peace of mind will cost you

The decision to leverage mortgage debt is controversial. Sean Cooper even wrote a piece for FranceGothic awhile back explaining why he paid off his mortgage in 3 years instead of investing.

When I mention the benefits of leveraging mortgage debt to people, they frequently tell me this:

I just love the peace of mind that a paid off mortgage gives me.

Or this:

Any and all debt is bad! No thank you!!

I will never argue with folks who say that debt is risky because it certainly is. If you stop paying your mortgage, the bank will send over the local sheriff and remove you from your home.

However, I will always argue that being too conservative is risky too. If you have a long time horizon and your nest egg is in a bank account or CD, you’ll probably leave loads of money on the table. I don’t love that at all.

Do you know what I do love? I love cheeseburgers, chocolate mint ice cream and my family. But I digress. Even more than unhealthy food, I love the security and options that a huge pile of money gives me.

So go ahead and pay off your mortgage for short-term peace of mind. However, I encourage you to consider investing the money instead. Put those dollars to work for you. Long term peace of mind is better.

And if your mortgage rate is 5% or higher, you should strongly consider looking into refinancing while interest rates are low. You can quickly find some of the lowest refinancing rates available at a comparison site like LendingTree.

## Mr. 1500

Mr. 1500 loves to write about personal finance, early retirement and anything else that has to do with money. When not thinking about numbers and dollar signs, you can find him with his family playing in the beautiful outdoors of Colorado.

1. wsok

March 17, 2016 at 6:04 pm

What you are describing is corporate finance 101. If return on assets > cost of debt, you can increase your return on equity (your net worth) by taking on debt, provided that the risks of holding that debt can be managed.

• Mr. 1500

March 17, 2016 at 7:02 pm

I’m glad that my silly musings have some substance then. While I don’t know much about corporate finance, the very basic math let me know this was probably a good idea.

You’d be surprised at the number of people who prioritize paying down a low-rate mortgage over investing…

• March 18, 2016 at 10:47 am

Thanks for this comment. I was a little confused at first but by only focusing on the return on assets (stock market return) vs the cost of debt (interest rate), it makes a lot more sense.

2. March 17, 2016 at 10:28 pm

Great point by wsok. The cost of debt is often cheaper than cost of equity. Hence a lot of the corporate stock buybacks in the news or the stories of apple raising bonds to issue dividends instead of repatriating cash.

Another great benefit that I didn’t see mentioned: You create a massive asset buffer in case of emergency. You can view it as a 2nd emergency fund (if all else fails).

If you rush to pay down your mortgage and lose your job, the bank will still expect next month’s payment. You don’t get any credit for early payments. Having that 2nd level of an emergency fund means you are left with more options in case of a rough financial patch.

3. March 18, 2016 at 8:01 am

1 – Why does it have to be an either or choice?

– You chose a 15 year mortgage, so essentially you have chosen to pay off your mortgage early, as you could have taken out a longer 30-year mortgage.

2 – Do most people have the mental toughness to hold forever? That is an extremely long time period…

– Most people do not.

3 – What if history means nothing in the context of future returns? The time frame you choose make all the difference.

– How would you had felt about this decision when using indexView during the 2000 – 2016 historical returns, where your total return was 93.43% through February of 2016 and your compound return was only 4.45%. Over this 15 year period the \$140,800 that you invested would had only grown to \$272,349 vs. paying off the mortgage and investing what you would had paid in the scenario above likely would had performed better due to dollar cost averaging over the entire period vs. your lump sum that was fully invested during a very volatile time.

Would the 1.20% out performance been enough to justify the risk and volatility you had to endure?

I guess like all personal finance topics, it all depends on the individuals risk tolerance, goals, and circumstances.

• Mr. 1500

March 18, 2016 at 9:15 am

1) Yeah, I thought about the 15 versus 30 year mortgage when I was writing the post. The answer is that I’m not sure what I would do if I could do it over again. 30 years mortgages have higher rates which make the strategy slightly more dangerous, however my monthly payment would have been less, allowing me to shovel more money in.

2) If you can’t hold long term, this isn’t for you.

3) In that time period, I probably would have been better off dollar cost averaging, but in most scenarios, this would not have been the case. You picked a start date where the markets were in frothy territory. A couple years earlier or later would have made a huge difference. I never said that the strategy wasn’t without risk, but the risk is one that is minimal.

The other benefit which I didn’t write about in the article, but that is very important to me, is having the money available to me. While I haven’t invested in anything besides the markets with it, there may come a day when I stumble upon a rental or fix and flip that won’t take ‘No’ for an answer…

• March 20, 2016 at 8:04 pm

Hope you don’t mind me playing a little devil’s advocate here (or the 10th man):

What about getting a home equity line of credit?

I totally understand the liquidity argument. But with a paid off mortgage you can also get a home equity line of credit that would allow you to tap the equity for rental properties as well (a strategy we plan to deploy). You could be more competitive with the appearance of paying cash, and then could always figure out the financing of the property later.

Is the money really that liquid when you need it…meaning if a opportunity of a lifetime for a rental comes up and the value of your stock positions is down by 50%, would you still be willing to cash out then?

You are totally right I chose a time period that would support my argument and make for good demonstration.

Anyways, it was a great post and very sound logic.

• Mr. 1500

March 20, 2016 at 9:16 pm

Nah, it’s all good. You’re are a smart dude, so I appreciate you questioning it. Debate is how we arrive at the truth after all.

I have a line of credit now actually. The thing that scares me a bit is the interest rate. It’s 4% and will be 4.5% at the end of the year if the Feds execute the planned rate hikes. I don’t mind using it, but don’t want to if it climbs to 6 or 7%.

“Is the money really that liquid when you need it…meaning if a opportunity of a lifetime for a rental comes up and the value of your stock positions is down by 50%, would you still be willing to cash out then?”

That would have to be one helluva deal! However, any great deals are more likely to come around in times of economic distress, so this is something I’d have to run the numbers for.

• Nate Tsang

March 18, 2016 at 9:55 am

I guess like all personal finance topics, it all depends on the individuals risk tolerance, goals, and circumstances.

I think you summed it up here nicely Dominic.

I think some people would definitely feel more comfortable with a 100% paid off mortgage no matter how cheap it is. Others don’t feel comfortable unless they’re maximizing every bit of leverage they can get their hands on and squeezing out every possible drop of ROI out of their investments (I see this a lot on BiggerPockets).

Everyone else falls somewhere in the middle, but as long as we’re actively thinking about the long term ramifications of our choices and making them consciously, rather than out of ignorance or fear, we come out ahead.

• Mr. 1500

March 18, 2016 at 11:28 am

“Everyone else falls somewhere in the middle, but as long as we’re actively thinking about the long term ramifications of our choices and making them consciously, rather than out of ignorance or fear, we come out ahead.”

Right on brotha!

Most of us in the personal finance community are incredibly bright and light years ahead anyway. We plan our lives carefully and with deliberation. The fact that we’re even writing and debating posts like this is proof. All of us are going to be just fine.

4. Kinnick

March 18, 2016 at 8:04 am

There is no arguing the math side of the equation, it is clear you should not pay off your loan early. Since we are all human though we have to fight the urge or “feeling wealthy” that comes with a larger liquid portfolio than if you had a paid for home. Most people I see splurge on stupid stuff because they feel rich. So why under these circumstances would you ever have a paid for home? Even in retirement? Only a dummy would not borrow money at 3% to make 10%! That is where this argument is flawed and should be considered circumstantial. If you are young and shooting for the stars using leverage makes sense, but once you are in your 40’s with a sizable portfolio it is all about risk tolerance and piece of mind. I contend that if you are disciplined enough to pay off your house your pile of money will grow way faster than if you try to eek out a few percentage points difference on the leverage. I do not deny though that the math is clear & wouldn’t think poorly of anyone who wants additional risk. Once you cross a certain financial threshold though having any debt is just a nuisance .

• Mr. 1500

March 18, 2016 at 9:06 am

“I contend that if you are disciplined enough to pay off your house your pile of money will grow way faster than if you try to eek out a few percentage points difference on the leverage.”

Why would a smaller amount of money grow faster than a larger pile?

“Once you cross a certain financial threshold though having any debt is just a nuisance.”

Not for me. Will I be happy when the home is paid off? Yes I will. Does it cause any pain for me now though? Nope. The mortgage company vacuums \$1100 out of my savings account at the start of each month and that’s that.

• Kinnick

March 18, 2016 at 11:29 am

I guess here is why in a very simple analogy we can all relate to…not one person would argue that money is more important than your health right? of course it is because without your health your money doesn’t mean jack. But all of us (myself included) could eat healthier or exercise more, but you work hard and say well that’s good enough. The exact same things happen to people with their money. The markets go up and they feel like hey it’s good enough and loosen the belt a little bit while they still have some stubborn belly fat (aka mortgage). I see it with everybody without exception…that is why beyond a shadow of a doubt it’s better to have zero debt. It’s is real six pack abs type discipline. If you really felt leverage was a good thing you should borrow against your portfolio to invest(I can borrow at 2%), but a prudent investor wouldn’t do that because it is more akin to gambling. I love reading your stuff mr1500 & I agree with 99.782% of it, but you have to remember that most people are not as disciplined to stay the course as yourself! I haven’t had a mortgage or debt for almost 15 years now and I think it singlehandedly has been the biggest factor that allowed me to join the 3 comma club.

• March 20, 2016 at 8:07 pm

3 comma club?

5. Midwestern Landlord

March 18, 2016 at 2:30 pm

I became FI before the age of 40 by the use of leverage (low rate 30 year fixed interest rates) and buying rental property. So obviously I completely agree and have no desire to pay off any of my mortgages early (including my personal residence). I just do not see the upside relative to the risk given the “gift” of long term fixed interest rates that we are seeing today on mortgage debt. I agree that it makes more sense to invest the extra money available which over the long term should exceed a 3% to 4% return. But even if the return does not exceed the interest cost, having a lot of excess funds available has a lot of value and peace of mind. I have seen situations where people pay down mortgage debt aggressively without regard to having a good amount of liquid funds still available. Then they lose their jobs and are in trouble and ultimately lose their home. Would you rather have \$100,000 in house equity and no job or \$100,000 in stocks, etc and have no job. It is hard to pull that equity out with no verified income source. Also, even with no mortgage debt there is still housing cost (insurance, taxes, etc). So are we ever truly “debt free” on our personal homes?

Now when rates were 7%, 8%, 9%, then there is another case to be made. But at 3% to 4%? Not in my mind. Granted, there are some people that already have a large nest egg and want to pay off their home early. Nothing wrong with that if that is what makes you feel good. At least in that case, there are other funds to fall back on if financial trouble comes along.

• Mr. 1500

March 20, 2016 at 9:19 am

Glad we’re on the same page Midwestern Landlord!

“I just do not see the upside relative to the risk given the “gift” of long term fixed interest rates that we are seeing today on mortgage debt.”

Yes, the people who argue with this strategy may not realize that rates under 4% are incredible by historical standards. It won’t last and when it ends, we may not see it again in our lifetime.

6. March 19, 2016 at 1:33 pm

I definitely see your point on not paying down the mortgage. I am in the middle of trying to refinance to a lower rate and even less time, just because it will save us in interest. However, it is when we go away from mortgage debt that I have my issues. I have a very low-interest rate on my student loans. However, based on my current rate I won’t pay it off for 10 years. My biggest thing is should I just keep paying it off at my current rate and shove more money in the market or pay it off and put that full payment somewhere else. The relief of having the debt gone vs. my knowledge of compound interest always makes me go back and forth. Sometimes ignorance would be bliss.

7. March 20, 2016 at 2:52 am

I agree that keeping the loan is a better deal. However, one flaw in your analysis is that you didn’t consider the extra money you can save with a paid off property. If you didn’t need to pay the mortage, every year you would’ve saved an additional \$989×12=\$11,868. With 6% return every year, in 15 years, that extra money saved will turn into \$292,814. However, if you didn’t pay off the loan, with the investible \$140,800 growing in 15 years you’ll get \$337,435 in the end, which is still \$44,621 more than \$292,814. So overall, it’s still better not to pay off the loan in the beginning.

• Mr. 1500

March 20, 2016 at 9:15 am

Ha, I did cover that! Look towards the end of the post for the “One More Scenario” section. Our numbers come out identical! Nice to see we’re on the same page!

I don’t think this is a bad idea for those who just can’t tolerate debt. As Dominic pointed out early, in turbulent times, you may even come out ahead. However, as Michael Kitces points out, most of the time you do better by dumping all the money in at the beginning: https://kitces.com/blog/dollar-cost-averaging-versus-lump-sum-how-dca-investing-can-manage-risk-but-on-average-reduces-returns/

• March 21, 2016 at 9:21 am

Ha, didn’t see that in the beginning.

8. RhMonkey

March 30, 2016 at 8:13 pm

No mention of timing and what if things tank. I paid off the last few years of my mortgage last year, just before everything went down, after discussing with my financial adviser. Good advice, I managed to sell high and am rebuilding account while prices still low. If I buy a car, I will do just as this says, finance car as my account continues to grow at higher rate than loan. Do your homework to see if this is right for you, home, car, any big expenditure. And yes, feels great to not have a mortgage.

9. April 15, 2016 at 2:45 pm

You have hit what I think is the center of a holy war in the FI world. There are a bunch of people who feel all debt is evil, and then there is a whole set of people who believe in “good” debt. I am in the good debt camp. I just refinanced and rolled the costs into the new mortgage. My intent is to slowly spend in the money I got from the escrow and savings and pay a little (200 dollars a month) to pay down until the amount I owe equal the amount I would have owed in the original loan (and coincidentally also causes it to end at the same point the old loan would have ended). Then whatever is left starts to get invested.