Investing vs Mortgage Payoff

If you’re a homeowner, at some point you thought how great it would be to have no mortgage. Maybe you have no mortgage already, and congratulations if that is the case. I know that to reach financial independence, I must have my home paid off. I’ve already recognized mortgage payoff as a GOAL that needs to be achieved.

 

Why Pay Off Low Rates?

The number one topic that comes up will be about having your money earn the most it can. Why pay off your mortgage principal at a 3.6% rate when ATT has a dividend paying 6.6% per share (as of this post)? Thats an excellent point. However, that debate falls apart when you’re attempting to rapidly pay down debt as well as save. Most of those examples have time on the side of debt.  Let me share what I mean by that.

 

Assumptions

 

At the end of 2018, our principal mortgage balance was $121,170.  The monthly mortgage payment is $1,000 at a 3.6% rate, which also includes escrow of $239.78 per payment.  Every year we apply $24,000 of free cash towards our goal. That $2,000 per month either goes towards the investments of our choice or mortgage payoff. Let’s assume the price of our investments never increase, and we always get a 5% annual return.

 

Investing to Pay Off Mortgage

This method takes the money we’ve earned by focusing on investments and pays off the mortgage balance at our 10-year cutoff date in 2029. When it’s all said and done, that leaves us with a $294,903 balance. How much will we make on that money monthly?
($294,903 * .05)/12 = $1,228.76

 

Paying off Mortgage to Invest


This method attacks the mortgage balance right away. The difference here is that the reason we pay the mortgage off is that we want to be able to use the amount that went to the principal to invest more.
 $1,000 mortgage payment - $239.78 escrow payment = $760.22

That means that instead of investing $2,000 per month we can invest $2,760, or $33,200 per year. Using this process to aggressively pay off the mortgage and free up more cash for investments totals $337,107 by our goal date. How much will we make on that money monthly?
($337,107 * .05)/12 = $1,404.61

 

Don’t Believe the Hype: Why Every Situation is Unique

Now that we have these numbers, I admit it’s hard to argue to not pay off the mortgage to make more money. Here is the thing though, that doesn’t feel safe to me. At this point in my FIRE journey, the majority of my income is tied to my regular job. If something happens there, like I get injured and can’t work, I’m in a world of hurt. I know many people think that they can get some piece of mind by not having a mortgage.  I totally understand that feeling. But, I have the counter argument. Wouldn’t you feel more secure with another income source in the event life doesn’t go as planned?

Maybe I’m more cautious because my finance’s life changed due to health, and I’ve witnessed how the best plans can crumble to the unexpected. You just can’t predict some things. Maybe I see investing in assets where I can easily withdraw the money as more acceptable. Maybe this is my FIRE emergency fund.

Another reason I’m reluctant to throw money into the mortgage payoff is that there is no guarantee I’ll stay in this house forever. I know that home improvement is in my future, so yet another reason to keep cash and investments somewhat liquid.  If I get 2 years into paying down the mortgage, and lose my job, I can’t get that money out.  But, having income from investments would help if it was necessary.

 

What Do You Think?

What has your FIRE experience been?  Are you facing this decision yourself?  I’d love to get other’s insights into this topic.  Until then, stay tuned for more progress.

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Dustin

Author of firein10.com Tracking my goal of achieving financial independence in 10 years.

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