On Wednesday, March 23rd, we celebrated three years since paying off the mortgage. My husband has the date saved in his phone, and he wrote it on the calendar. Today I was reflecting on the pros and cons of mortgage payoff, and decided to write about the real cost – and benefit – of mortgage freedom.
Like most large financial decisions, mortgage freedom is neither a black and white “good” or “bad” idea. Instead, the answer to whether or not you should is “it depends”. What do you value? Is your goal to get as much money as possible? Or is your goal to have ~enough~ money and the freedom to enjoy life without worrying about the pursuit of ever more? Do you have a strong reason to want to pursue debt freedom earlier in life, so saving aggressively is worth it? Or do you want more financial flexibility along the way?
Everyone is different, and that’s OK. That’s why it’s called personal finance, the right answer is unique to you. No one reading this is in the exact same situation as anyone else, no one has the exact same values as anyone else, and everyone is in a different place in life.
Choosing mortgage freedom over investing cost us real money. The inflation we’re experiencing also had a financial impact, because I paid off the mortgage with 2019 dollars. Today I’m going to calculate the exact financial cost of making this choice.
On the flip side of the hard money financial losses come the intangible benefits. Having no mortgage during the pandemic has been an undisputed blessing. Not having to pay any debts whatsoever has let us focus all our financial energy on other goals. I’ll also reflect a bit on the peace of mind and freedom that having no debt has brought us. Finally I’ll answer some questions I collected from my followers on mortgage freedom – a year ago. My pandemic writers block has been strong…
First – A Recap
I know it’s been A While since I’ve posted here, so you may not remember all the details of our story. Or perhaps you’re new here (welcome!) and wondering how and why we paid off the mortgage three years ago.
If either of these apply to you, here’s a quick recap. And if they don’t, just scroll down to gaze upon the financial impacts of mortgage freedom.
I’ve always been a personal finance nerd, ever since reading The Wealthy Barber as a teenager in the mid-late 90’s. So in my adult life, I’ve pretty much always been into saving and investing. But in my 20’s, I was married with a young family, went back to school part-time to get an MBA, bought a house and cars, and so on.
The house specifically was purchased for $345k in January of 2006, near the height of the real estate bubble. The initial rate was 6.25% on a 30 year mortgage. We put 20% down, which we were able to get from the sale of the condo I had bought in 2000, due to that same real estate bubble.
So ten years ago we were at a point where our family had a “manageable” amount of debt. Between the mortgage, a car loan, student loans for my MBA and a credit card the total was around $300k. Most of that was “good debt” so we weren’t terribly worried. It was a bit of a strain at times, especially after my husband lost his job during the Great Recession when his factory closed. But we were managing OK, and I knew over the long run if I kept up saving, investing, and not inflating our lifestyle that we would be just fine.
And then the unimaginable happened.
Ten years ago this month, my husband nearly died after going into septic shock following surgical complications and an emergency surgery. He was away from home for a month in the ICU on a ventilator, then in the hospital, then rehabilitation. He was a stay at home dad at the time, and I was getting my MBA while working full time. The sudden shock not just to our family but our finances was enormous. Luckily today he’s healthy, but recovery was a years long process.
About a year after this happened, once we could lift our heads up and get out of the financial strains of the time (daycare costs, medical costs, and so on) I realized what a burden debt is during bad times and became determined to pay everything off. Juggling payments, worrying about whether we would lose the house or car, and trying to absorb over a thousand dollars a month in new expenses was a huge strain. And this time was hard enough just dealing with my husbands recovery.
Back in June of 2013, we refinanced from a 30 year at 4.25% to a 15 year mortgage at 2.75%. I distinctly remember telling my boss at the time that “inflation would eat that interest rate”. Obviously I didn’t know that inflation would come roaring back after payoff. But I was determined to quickly be rid of this mortgage anyways.
Paying off the other debts was a quick process and by later in 2013 they were all gone. For the mortgage we adopted an unconventional strategy of paying the payment to the mortgage company (where a lot went to principal compared to my past 30 year mortgages) and saving any extra in a mortgage payoff savings account. For years, everything extra we could save went into this account.
Finally in March of 2019 there was enough in that account to pay off the remaining balance on the mortgage. So we paid it off and never looked back – until now.
Choosing to pay off a low-rate investment rather that invest has a real financial opportunity cost. After all, the mortgage was 2.75% and the historical gain of the market is around 10%. Some people would say the fact that it was tax deductible means the real interest rate was even lower – however, changes in the mortgage deduction rules and the fact that the 15 year mortgage meant low interest payments means deducting the interest wasn’t really a factor.
Instead of sending my payoff fund to pay off the mortgage balance, what if I had invested it as a lump sum instead?
For the purposes of this exercise, I calculated what I would have today if I had taken $171,220.18 (which was the final wire transfer amount for the mortgage balance) and invested it into VFIAX – the Vanguard S&P 500 index fund admiral shares. Simple index funds are my favorite way to invest, and there’s no reason why three years ago me would have invested in anything else.
Today I would have had $315,305. Meaning that if we had invested rather than paid off the mortgage, today that money would have made another $144,084.82.
So financially, in just three years, directing the money to investment rather than mortgage payoff would have left us with enough extra money to buy a condo in cash.
That’s not the entire financial story, of course. If we had continued to have a mortgage the past few years, we would have had to continue principal and interest payments rather than re-directing them to investments. We could have invested as we went along rather than a lump-sum scenario, which could have made the financial cost higher.
So if your objective in your financial life is to make as much money as possible – this obviously is NOT the right choice for you.
You don’t know of course how an investment will turn out – it could easily have gone in the other direction. However, it didn’t, and so I’ve “lost” about $150k. If you’re interested in running some backtested numbers yourself, here’s the link to the one I used.
Inflation Made Payoff More Expensive
Inflation is something I didn’t know was going to be a significant issue over the past three years – but oh well, here we are. For many years inflation was negligible, meaning paying off a $10,000 debt in 2015 or 2019 was about the same real dollar value. But of course in the past year especially, inflation has taken off, and it’s had a surprise effect in just the past three years.
For this one I used the US Inflation calculator located here.
First a bit about how inflation impacts the payoff of a debt. When you borrow money, you borrow it in today’s money but pay it back with tomorrow’s money. In a really simple example, and very generally speaking, if your monthly payments are $100 and inflation is 5% per year, next year your $100 payment “costs” 5% less. If you have to make monthly payments over a long period of time, that monthly payment will eventually seem very small thanks to inflation. This happened a lot in the high inflationary periods in the US in the past, but hasn’t been much of a factor the past twenty years.
This is really hard to calculate with accuracy. After all, I saved this money over the course of years, and if I had delayed payoff of the mortgage, I might have saved over different periods of time. This means all the money would be “worth” different amounts. Regardless I decided to do a simple calculation – how much was my 2019 payment “worth” in 2022 dollars.
It’s worth $189,992.74 – an increase of 11%, or $18,789.94.
So although this is just an estimate, I count it as a cost of mortgage freedom. If inflation continues at a high rate, this cost will increase exponentially. However, if inflation drops back down again, it will stagnate. A low-rate mortgage is typically considered a good hedge if you believe inflation will continue. So you may not want to rush to pay yours off.
Navigating The Pandemic Without A Mortgage
When the pandemic hit, we both said “thank god we paid off the mortgage”.
No one knew what would happen with jobs, the job market, or really anything else back in March of 2020. But having been through what we’ve been through, we knew that not having to deal with debt, owning our home and cars and everything else free and clear, meant that no matter what happened we would have a roof over our heads.
We had formed a comfortable emergency fund, since paying off the mortgage. We were also able to divert extra money to savings, to cover us in case of a job loss. Today we have about two years expenses in cash saved up, and we feel comfortable that will let us weather almost any storm.
When the worst happens, the last thing you want to be worried about is money. And thanks to mortgage freedom – we weren’t. This to us was invaluable.
Also, as a bonus, when we paid off the mortgage we took a celebratory trip to Japan using money I had been saving ever since my honeymoon in Japan in 2001. We were so grateful we went in 2019, since even today Japan is closed to tourists.
Accelerating Other Investments and Goals
Mortgage freedom has made it possible to fast-track our other financial goals.
Now, while paying off the mortgage, we didn’t neglect other financial goals like retirement, saving for college, and slowly saving for big dreams like that family trip to Japan. But we didn’t supercharge them either. Instead we contributed every month and increased slowly over time while aggressively saving for this big goal.
But once there was no more mortgage, and no more need to direct savings to go towards the mortgage payoff, we were able to supercharge other priorities. Our 401k’s, HSA’s, 529’s – all are able to be funded at much higher levels than before. In fact, just this month I finished my 529 College Compact goal for my six year olds college fund. The older two – one who is in college now and the other a high school freshman – also have enough saved!! This is the kind of thing I could only have dreamed of back in my first job making $22k a year.
With our financial oxygen masks firmly in place, we’re also able to be generous in giving to others. We plan to start some scholarships, with a focus on the inner city magnet school my oldest son used to attend. And having additional financial flexibility makes donating generously to causes we care about much easier.
It’s partly having the extra money every month that used to go to that mortgage payment. In combination with the extra money that used to go into the “extra” account. But it’s also the discipline, the fact that we repeated those savings and actions every month and every year for years on end. Discipline doesn’t vanish once there is no more mortgage. As long as you’re clear on your other goals and dreams, it just switches to the next thing.
Peace Of Mind & Mortgage Freedom
This is, to my husband and I, the most important thing. The peace of mind and feeling of freedom that comes from not owing anyone anything, and owning everything, is immeasurable. I told my husband how much we “lost” in paying off the mortgage early and he cringed, but then said “still worth it!”. Especially the last two years, when there was so much to worry about, it’s been a good thing.
We learned this the hard way a long time ago. Obviously we didn’t know that the emergency that would come our way was a worldwide one, throwing everything into chaos and turmoil. But the lesson was the same. When bad things happen, there’s enough to worry about without also worrying about money.
Peace of mind goes far beyond not worrying about job loss. There is peace in not being forced to do things you disagree with for the sake of keeping a roof over your head.
A friend shared a story of a manager saying, of a group of people being asked to do something they don’t want to do, “You know they’ll do it because they have mortgages to pay!” And it’s true. When you owe someone something, and have to pay a mortgage, a car loan, or a student loan you fear they’ll be taken away. You may put your head down and do things you don’t want to. Or put up with a bad job situation, or any number of other things in pursuit of money.
Freedom might mean the flexibility to opt for part time work. Maybe to start your own business. Or maybe it means working within your organization in the way you want to. In the original Your Money Or Your Life, I remember someone who had reached the “crossover point” excitedly exclaiming how he was bulletproof at work. Because he could do what he believed was right.
Not that the need for money goes away of course. You still have bills to pay (like the darned oil bill), need to buy food, and have to put gas in the car. So overall you still need money. And you may feel pressured to do things you disagree with for the sake of your finances. But likely, if you have no debt, that pressure is significantly lessened. And over time, as you continue to save and invest the money that used to go to debt, it goes away.
Answering Long Neglected Questions
A year ago I asked my followers on Twitter & Instagram what questions they had for our second mortgage payoff anniversary. Sadly those questions lingered in my photos, as I continued to struggle with pandemic writers block. So finally, here are the responses to the questions my friends had on mortgage freedom:
Samara at @Budgettobefree on Twitter: “What is the bad part about not having a mortgage?” The financial opportunity cost is the only drawback I see.
Anne at Unique Gifter @UGifter on Twitter “Did you every regret your decision during the journey? If so, What did you do to change paths of keep yourselves going? Have you done a financial comparison to investing that money?” No regrets or changes along the way for us. But we’re in an unusual situation where our motivation was extremely strong. And I did the financial calculation in this article. Is it painful? Yep!
White Coat Investor @WCInvestor on Twitter asked “What’s the bad and ugly aside from opportunity cost?” The opportunity cost is the biggest thing. The only other part that comes to mind is that we could have done a lot of lifestyle inflation with that money instead of putting it to the mortgage. But I don’t like an inflated lifestyle anyways. The only things that have change since paying off the mortgage is that the money goes to different financial goals. Not that we’ve started living it up.
Coco Plans @coco_plans on Twitter asked “Would you ever consider getting back into debt again?” Not really, from a personal perspective, no. We like being debt free more than we like the extra money we could earn by getting into debt. And investment real estate doesn’t interest us. But for a business – maybe. It would depend on the opportunity.
Diana @Storysinger81 on Twitter asked “Are you more or less tempted to move/upgrade?” We don’t want to move, but have done some upgrades in the insulation. This year we’re looking into potentially creating a home office in the basement for me. I’m getting tired of working in my bedroom staring at the wall for two years straight. So slightly more tempted on the upgrade side.
In Short, Mortgage Freedom Is Personal – Just Like All Of Finance
If you have a goal of amassing the most money possible – not a great choice.
If your goals is peace of mind and financial freedom – great choice.
Let me know what you choose, or would choose, in the comments.