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Should you pay off your mortgage if you could?

by retirebyforty on March 4, 2013 · 136 comments

in investing, real estate

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should you pay off mortgage if you could?Last week I got a couple of emails from our readers asking some questions about mortgages.

…you have a mortgage in both your condo and rental property. I would like to know what your thinking process was. Why not payoff the condo? Also, why the investments in the market instead of paying off the real estate?

Another reader - Is the tax deduction high enough to justify the risk in the market?…Financing when the cash is available goes against my “sleep well at night” beliefs and everything I have read about the topic. 

First of all, it’s confession time for me. I have been avoiding this topic because I like to say that we don’t have any consumer debt. That’s true because we don’t have any credit card debt, car loans, or other outstanding consumer loans, but we currently have 3 mortgages. They add up to about $600,000… Holy Crap! That’s a lot of money. And that’s why I don’t want to talk about it. In my defense, the properties all have positive equity. We could sell all of the properties and come out with over $400,000 after paying off all the mortgage debts.

Even if we forget about equity, we could pay off all the mortgages today. It would be very painful to do, though. I can sell all my after tax investments and pay off the 2 rental mortgages. Then I could cash out part of my IRA to pay off our primary residence (the condo). If we do that, our monthly cash flow would improve by a huge amount. We would have more rental income and less housing expense. However, I can sleep just fine while owing $600,000, so I don’t think I’m going to pay them off just yet. Well, I did have that bizarre dream a few weeks ago so maybe it is affecting my subconscious somewhat.

There are many reasons why I would rather have mortgages than paying them off right away. Let’s go over these reasons.

Inflation

Here is the inflation data from the Bureau of Labor Statistics from 1996 (the year I started working) until now.

US inflation pay off mortgage

The average inflation over the past 17 years is between 2% and 3%. This means every year, your money is worth 2-3% less than the previous year. The same also applies to your debt. We owed $600,000 in 2012, but every year, that debt will be worth less and less due to inflation. 2-3% might seem insignificant, but over 17 years we saw the value of a dollar drop by nearly a third. If you had $600,000 in 1996, it would only be worth $400,000 today.

Let’s look at it from more practical terms. We purchased our old home in 2000 and got a $165,000 mortgage. The interest rate for a 30 year FRM (fix rate mortgage) was around 9% back then and we paid about $1,300 a month. This was a lot of money for us back then because we were in the early part of our careers. Fast forward to 2012, and $1,300 doesn’t seem like a lot of money at all. You can’t even rent a similar house for that much money. Inflation and the rise in income made $1,300 look much smaller 13 years from the initial purchase date. Also, we refinanced to a lower rate. Currently we are paying $900/month and the house is scheduled to be paid off in less than 10 years.

Rates are low

We refinanced all our mortgages in early 2012 before I left my job, but the rates have dropped even further since then. You can get a 30 year FRM for 3.5% these days with good credit. That’s not much higher than the inflation rate. If you take mortgage tax deduction into account, it’s almost the same as the inflation rate. Why is that important? If your mortgage rate is the same as the rate of inflation, the bank is basically letting you borrow the money for free.

It’s kind of hard to explain, so let’s look at an example. In 2012, I borrowed $100 from the bank at 3%. In 2013, I will have to pay back $103. In 2013, I got a 3% cost of living adjustment raise at my job. The $103 I will pay back to the bank is worth the same as the $100 from 2012.

My example is kind of convoluted, but I hope you get the idea. In 1996, it DID make sense to pay down mortgage debt quickly because the rate was 9% while the inflation rate was 3%. Now, the mortgage interest rate is 3.5% and the inflation is around 2%. I think it’s better to lock in the low rates now if you can.

Tax deduction

This one is just for the primary residence. The mortgage tax deduction pushes the effective mortgage rate down even further. If you are in the higher tax bracket, then having a mortgage tax deduction is very helpful. The mortgage tax deduction alone isn’t a good reason to get a mortgage, but if you combine that with the low interest rate then you can get very close to the inflation rate. The 3.5% 30 years FRM rate effective become 2.6% if you can use the mortgage tax deduction and are in the 25% income tax bracket.

Liquidity

I like being able to access my money somewhat quickly if needed. If I paid off all the mortgages, then a very large percentage of our net worth will be tied up in the properties. It’s hard to get money out if you need it quickly. What happens if I stumble upon a great business opportunity? It could take a few months to get some cash out of the properties and the opportunity would be gone by then.

I guess I could get a home equity line of credit set up, but to me, that’s not much different than having a mortgage. The bank also could rescind the HELOC whenever they want, then you’d have to refinance, and that’s a whole another ball of wax with a paid off property.  Lastly, the rate wouldn’t stay low forever. If you need a HELOC when the rate is high, then you will be paying more interest.

Older rental properties also require a lot of repair and maintenance. Over the last 18 months, we spent nearly $15,000 to fix up the 4plex. This property was a bit older and the previous owner put off quite a few maintenance items such as repairing the gutter and painting the exterior. I’d rather have more liquidity so I don’t have to worry about paying for these items. The good news is that we’re pretty much done with the big repairs so we should have some lower repair bills over the next few years.

Diversification

We don’t want to put all our eggs in one basket. If we pay off the mortgages, then most of our net worth will be tied up in real estate. I don’t think I can handle another real estate crash like in 2008, if that’s the case. I’d rather spread out our net worth into stocks, bonds, real estate, peer to peer lending, precious metals, and business investment. $400,000 is already a lot of money to be tied up in local real estate.

Positive cash flow

This one is just for the rentals. If I have positive cash flow, why should I pay off the mortgage? The rent will keep rising every year (inflation) while the mortgage payment stays the same. Every year, I will generate more income and own more and more of the rental properties. I don’t see any advantage to paying off the mortgage early on a rental property.

Time mortgage payoff to retirement

As you can see, I like having a mortgage, but I do want to pay them off at some point, especially on the primary residence. Once we both fully retire, then I don’t want to deal with the mortgage payment anymore. That’s why we are paying down extra on our primary mortgage. It should be paid off before we both fully retire in 15 years or so. When we stop having earned income, the interest deduction won’t be useful anymore. It would also be nice to live in our home without having to worry about the bank at that point.

Mortgages are good

I don’t mind having mortgages at all and if the bank let me borrow more, I probably would. It’s up to you really. If you can’t sleep while owing a ton of money (albeit with positive equity), then it’s probably better to pay cash or pay off the mortgages early. If you don’t mind having some mortgages, then I think it’s still a great time to buy some properties. Home price is rising fast and I’m glad I’m done buying. Mrs. RB40 growled “don’t you dare” when I mentioned another mortgage…

Would you pay cash for a home if you could? I wouldn’t, but that’s just me.

Have you refinanced lately?

If you haven’t refinanced in a while, you should check with your bank to see the latest rates. Also check with Quicken Loans to see if they can give you a better rate. They were fast and pushed the refinance process through in less than 30 days when we refinanced our primary home. The interest rate is very low now and I think it’s worth locking that rate down with a refinance if you could.

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{ 132 comments… read them below or add one }

Dianne @ Skinny Seahorse March 4, 2013 at 3:42 am

I am on a path to paying our mortgage off – simply for piece of mind and freedom of relocation. But I question that at least weekly. Great points here. And like you said – it’s what can you sleep with.

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retirebyforty March 4, 2013 at 8:25 am

Don’t stress out to much over it. At the current interest rate, it’s not worth losing sleep over. You should do well either way. :)

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Charles April 4, 2014 at 7:27 pm

Dianne ..The secret to happiness is good health and “Be it ever so humble….There’s no place like home…A PAID OFF HOME That is”…Got the roof paid off .the rest is groceries.etc ..,It makes that song a lot easier to sing..TAKE THIS JOB AND SHOVE IT….A paid off home give peace of mind

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Pete July 24, 2014 at 7:04 pm

It’s for PEACE of mind. Thought I’d give you a piece of my mind.

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Glen @ Monster Piggy Bank March 4, 2013 at 4:27 am

Excellent write up!
I hadn’t really considered the whole rental returns vs inflation aspect. As long as it is positively geared then it really doesn’t make any sense to pay off more unless you feel your rental is going to be vacant for a long period of time.

My wife and I are at a point now where we are looking to invest in rentals and this post has made my day :)

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retirebyforty March 4, 2013 at 8:27 am

You really don’t want to prepay if your rentals is going to be vacant for a while. If it’s going to be vacant, then you need more liquidity at that point. I guess if you can pay off the whole thing, it might work. It will tie up a lot of your money though.

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Aspiring Yogini March 4, 2013 at 6:34 am

I have purchased three homes in the last 20 years and my strategy with real estate changed after the first one. When I had no money I borrowed and then paid off the mortgage as quickly as I could (about 5 years). I purchased undervalued property and then sold the first home for 2.5x the amount 14 years later and used it to generate rental income for the last several years. The next two I bought with cash and I was able to use the rental income to live off of. I still own one rental property and one home in which I live and I sleep much better that way. Perhaps I could have made more money in the stock market, but this feels better to me. I still lived on less than I made from my work and rental income and invested in the stock market so I was hedging my bets by dividing money between the two. The big motivation that helped me decide to pay down my mortgage was that I would effectively be paying 2-3 times the purchase price for the home if I paid the both the principle and interest over the life of the loan. Since my strategy for real estate is to buy at market or less than market price, this blows my chances of making money on its sale. Also, I feel that I was lucky too, in that I sold the first home before the end of 2008 and may not have made money on that home at all and yet, if I still had paid out the terms of the mortgage I would have lost out with all those interest payments.

With respect to inflation, what you say makes sense in a numerical sense. However, in the big scheme of things, money’s worth can be inflated and contracted and I don’t believe that what my money would buy me when I started working would buy me the same things now. This is because my values change and my needs change. I don’t need the same things I needed in the past, so it doesn’t matter than my money will or won’t buy those things now. Plus, sometimes I have spent a lot of money on something that doesn’t work (and is worthless) and I have spent little money on things which have lasted for years. So, for personal spending, I don’t worry much about inflation; instead I make few, well thought-out purchases. Inflation is a term that is more related to an economy and any things that are done to it, don’t necessarily effect change. In a personal home economy, there is much more control over when money is used and what money should be used for and so the inflationary aspect isn’t so important.

Sorry for the long post, but I think this is an interesting topic and is well worth thinking and discussing because we all have different comfort levels.

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retirebyforty March 4, 2013 at 8:31 am

Thanks for your input. Your view on inflation is quite interesting. It’s not true for most people though. Most people buy more stuff as they get older and make more money. Lifestyle inflation + inflation isn’t good news.
We aren’t spending much money either, but we definitely notice the inflation over the last few years. Food cost went up quite a bit and we need to raise our food budget to compensate.
I think your strategy is great too. It sounds like you’re very comfortable with it and that’s what really count.

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sin camisa March 6, 2013 at 2:04 pm

Joe; that’s only true until a certain age 50-60. Then spending goes down drastically. This is the reason advertisers only target the 18-49 year old group. Sure, medical expenses might go up later in life; but bs spending goes down.

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Russ S August 7, 2014 at 2:37 am

I like your view of inflation.

Very few people really understand inflation. This ‘inflation will pay off my debt’ reasoning is just plane wrong. Inflation does not decrease your debt. Only if your income increases due to inflation can it make debt easier to pay off.

But there is no guarantee this will happen. People lose jobs, get divorced, get sick, get well, get new jobs, and so on. Plus, in this age low low inflation/low interest rates it’s likely to make little difference.

And every dollar you don’t pay off is a dollar you still owe.

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SMB March 4, 2013 at 6:36 am

Great post timing – I just watched an old episode of the Suze Orman show last night where she said not to pay off your mortgage unless you were 45 or older and planning to live there for the rest of your life. She didn’t really provide any reasoning though, so I was left a little confused. You brought up some great points. I don’t see us ever paying off our current mortgage and I’m not sure I want to as our rate is 3.65% and I feel like we can do better than that investing the money.

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Aspiring Yogini March 4, 2013 at 8:10 am

Suzy must flip flop or it has to do with specific circumstances that you should not pay off your mortgage early, because I just found this link in which she states that she IS an advocate for paying off the mortgage early.

http://apps.suzeorman.com/igsbase/igstemplate.cfm?SRC=MD012&SRCN=aoedetails&GnavID=84&SnavID=22&TnavID=&AreasofExpertiseID=48

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retirebyforty March 4, 2013 at 8:33 am

3.65% is great! I’m pretty sure over the next 10 years the interest rate would rise and we’ll be able to make more money in bonds and other investments. We just need to lock in the rate that works well for us.

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SavoirFaire March 4, 2013 at 6:58 am

I have a goal to pay off my mortgage as early as possible. I know that working the numbers may prove this to be the wrong approach, but I have my reasons. My original mortgage was 30yrs, about a year later I did a refi for 15yrs which only added about $100/mo to my payment. I recently did another refi for 10yrs (technically lowering my payment by $1,000) but hope with a lot of over payments to hope to pay it off in no more then 3yrs ideally a bit sooner. I think looking at the interest payed go to me as I went from paying $40/day in interest to less then $8/day now. I have a hard time sleeping at night knowing I’m throwing money out the door like that and will be so relieved once that debt is gone. I just started to scrutinize our bills more closely now as we ease our way into retirement (still many years away though).

My logic is that I want to have absolutely no debt before retiring. It is also an additional tool to allow us to get through a potential layoff. We have both been out of work at one time and making the mortgage was a challenge. Paying off the mortgage will make our monthly expenses drop drastically and we can take that extra money we will have and put it towards investments that will potentially be earning more then they do today. Should we be laid off after the paying off the mortgage, we will have enough liquid funds to last a few years vs a few months.

Over the years I’ve attempted many ways to make extra money. I’ve been in the stock market very aggressively, I’ve tried a couple of things on the side, and the reality is that nothing makes as much as my main profession so distracting too much from it is not the way to go. I have a phase out plan for retirement as well as an alternate profession I’m slowly developing that will earn me some extra and keep me occupied. I will probably always be in the market to some extent, but my approach now is more longer term value investing than attempting to hit short term movements. I’ve learned that putting a lot of money on the line, like in rentals or flips is not good for me. I don’t have the years ahead of me to recover from a loss anymore. I’m slowing down now going the slow and steady route, in fact I just recently started my first CD ladder as part of that approach.

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SavoirFaire March 4, 2013 at 7:04 am

(Apologies for the terrible editing I did on my comment, it reads like English is not my native language.) :-(

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retirebyforty March 4, 2013 at 8:38 am

Great comment! I understand your strategy. We’ll be a lot more conservative as we approach full retirement too. Most of the mortgages will be paid off by the time we’re 55. I’ll move more money into stable investment like CD and bond ladders by then. Hopefully we’ll see better rates in the next few years.

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Pauline March 4, 2013 at 7:25 am

I bought a house cash and know it made no financial sense but I wanted to truly own my home, and know I am paying a premium for that sweet feeling. I still have a mortgage on a rental property that I don’t plan on paying early, since the rate is low and covered by rents.

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retirebyforty March 4, 2013 at 8:40 am

Yes, I read your article. That’s great. The rate was pretty high for you right? It makes more sense when the rate is 8% like you saw.

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Mr. 1500 March 4, 2013 at 8:09 am

I completely agree. With rates so low, I don’t mind at all having a mortgage. Get a mortgage for 3% and then earn 10% with Lending Club on all of the money that you didn’t put down.

Just curious, do you depreciate your rental properties?

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jim March 4, 2013 at 1:36 pm

I can see not reason not to depreciate a rental. If you don’t then you just give up a tax benefit. And when you sell then the IRS will treat it as if you did depreciate it all along whether you do or not.

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Mr. 1500 March 4, 2013 at 1:44 pm

I agree.

Are you familiar with the IRS 2/5 year rules? If you want to sell your rental, you can move into it for 2 years before you sell and avoid capital gains. As long as you own it and its your primary residence for 2 of the past 5 years, no capital gains as long as its under the limis (250K for a single individual and 500K for a couple.)

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jim March 4, 2013 at 4:12 pm

Yes thats true for capital gains. But it doesn’t cover depreciation recapture which is handled differently. You can’t dodge depreciation recapture (after year 1997) by living in a previous rental.

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Bob November 17, 2014 at 1:28 pm

I was flat broke and dropped out of college @ 21 I set a plan on how I could retire @ 50. I bought 4 rental houses and a Mobile Home Park by age 26 and had them all paid off before I retired @ 50. (my loans were 9%) the rental houses now pay for themselves every 20 months due to inflated rents. I have very good tenants and I am now considering moving to Nv. (no state income tax), and selling the rentals to the tenants with little or nothing down and carrying the loans for 30 years (now @ 63 it should last the rest of my life), so I would still have the monthly income without the maintenance. I have lost enough in the stock market, so I will never have to pay capital gains. If I sold outright, I and put the $$ in the Bank I would get 1%, by carrying the loans I will get 5% maybe 6%. At my age, I am not interested in high risk-high gains. I want steady dependable income. My children have shown no interest in the rental properties and one of my tenants has been in the house over 30 years, so they paid for it, not me! Many would not, but I feel obligated to them and will give them a deal.
Inflation is the BIG ? Every time the minimum wage is increased, the retired people on fixed income get clobbered financially. I am currently supplementing one of my sisters to keep her in her house and who knows what are future leaders have planned to keep the Country in debt. When I started driving gas was $.24 a gallon and minimum wage was $1.50. Our best laid plans can be destroyed overnight by political irresponsibility.

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retirebyforty November 17, 2014 at 2:52 pm

Congratulation! You did very well with your finance. Investing in rentals is a great way to get ahead. Inflation is a huge issue and rental income really help. Selling the rentals to your tenants is a great idea. It’s a good way to give back and you can spread out your capital gain over 30 years. You really never have to pay capital gain? That sounds like a ridiculous amount to offset 4 rental homes and a mobile home park. Sorry to hear that.

Moon March 4, 2013 at 8:31 am

Joe this post comes in a timely manner for me. As I mentioned in your earlier post, we just refinanced our mortgage a few months ago to a 15 years, 2.875% on our primary residence. I still want to pay it off as early as I can – that’s just how I am, I don’t like to owe people money even the interest rate is low. But I don’t really have any ‘good reason’ behind it, especially when you can put your money to work somewhere else to make better return. Now on the other hand, we did (hopefully) find good use on the money that we have – we just signed a contract on a rental property 2 weeks ago. My husband has been wanting to do this for 5+ years but we are now financially able to. The property will be brand new and completed in October. I hope that I will have a chance to talk to you in more details about this and don’t want to write a book in this comment section.

I agree with not putting all your eggs in one basket; before this rental and such pretty much all our money is in stocks, mutual funds, etc. But now at least we branched out to the real estate market. Yes we will be having 2 mortgages and I am nervous (what if we can’t find renters?), but I guess if we want the return we need to accept some risks.

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retirebyforty March 5, 2013 at 11:03 pm

It can’t get any lower than 2.875%! Great job!
I think it’s great that you are branching out. The stock market is doing very well right now, but I still think it’s better to be diversified. I haven’t had much problem with vacancies. Our rental market is pretty strong right now.

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sin camisa March 4, 2013 at 8:34 am

“In 1996, it didn’t make sense to pay down mortgage debt quickly because the rate was 9% while the inflation rate was 3%”

Joe; I think that with 9% interest rates, it DID make sense to pay off the mortgage. Is that a typo or am I missing something?

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retirebyforty March 4, 2013 at 8:43 am

Thanks for catching that! That part was a last minute addition and I made a mistake. Fixed now.

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Perry at FinancialFreedomUK March 4, 2013 at 8:41 am

Hi Joe – really great post and interesting timing as I also posted on a similar topic not too long ago, which explains why it’s not necessarily the best approach to repay the most expensive mortgage, and why my preference (like yours) would be NEVER to repay my mortgage unless things changed dramatically…

I hope you don’t mind me presenting a link to my post http://financialfreedomuk.wordpress.com/2013/02/25/which-mortgage-do-you-repay-first-it-might-not-the-one-with-the-highest-interest-rate/

All the best
Perry

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Money Beagle March 4, 2013 at 8:46 am

There are many different benefits that you could argue for or against, but the one thing I think holds true is that it is never a ‘bad thing’ to pay off your mortgage. There’s always an advantage to not having that debt, and the difference is how important that is to each person.

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retirebyforty March 5, 2013 at 8:34 am

I agree. It is a good thing to pay off your mortgage.

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Justin March 4, 2013 at 8:54 am

Great post. I agree with all you points.

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Rich Uncle EL March 4, 2013 at 8:57 am

I would pay cash for a house if I had enough cash lying around. Just imagine the flexibility you can have by elminating your biggest expense. Thats just my feeling on the matter. Debt opens doors for people to buy a house while limiting your cashflow, but it also helps the banks revenue and the golden parachuts of CEO’s.

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Retired Syd March 4, 2013 at 8:58 am

I’ve just gone through this exercise for myself. I actually think in today’s interest/inflation environment it doesn’t make sense to pay off the mortgage. As you point out, the bank is basically lending you money for free. Despite that, I’m going to pay off my mortgage balance this month. Go figure.

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retirebyforty March 5, 2013 at 8:33 am

You’re at the tail end of the mortgage so the benefit is lessen. Congratulation on paying off your mortgage!

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Leigh March 4, 2013 at 9:24 am

I’m paying off my mortgage aggressively, with the hopes of having it completely gone within 5 years. So far, I’m on track with that plan.

If I do stay here for more than 5-6 years, the overall split of my assets will be out of whack with a lot of it in my condo, but if I leave early, I will walk away with most of the profits and the money I put in (after paying closing costs, i.e. the realtors), so it’s not necessarily a terrible deal.

I buy the inflation argument, but I’m not comfortable investing in the stock market when I have > $200,000 in debt, no matter how low the interest rate. I’ll most likely re-evaluate each year, but for the rest of 2013, I’ll keep paying the mortgage down aggressively.

I would definitely pay cash for a home and have no mortgage. That would be awesome!!

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retirebyforty March 5, 2013 at 8:33 am

I like your idea too. Whatever works. That’s a lot of money in one item though. :)

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Kurt @ Money Counselor March 4, 2013 at 9:46 am

You make a great case Joe. Though our situation differed substantially from yours and rates were not nearly so low as today, we paid off our home mortgage about a decade ago. For me, the main benefit was freedom to pursue opportunities that may or may not immediately pay off financially but that were interesting, fun, and potentially lucrative. Hard to take a risk like that when you’ve got big fixed expenses like a mortgage. (Though one could argue that you did! Good for you!) In your case today, I’d probably do as you’re doing.

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retirebyforty March 5, 2013 at 8:17 am

The low rate today is a big factor in our decision. We are still paying down our primary home mortgage, but we are not in a big hurry at all.

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Nick March 4, 2013 at 9:49 am

I think you make a good case for why you are ok with your mortgages. Personally, I have two mortgages (one we live in, one rental). I hate our mortgages and want them gone as soon as possible. For me, the benefits do not outweigh the risks.

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retirebyforty March 5, 2013 at 8:19 am

What are you risks?

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John S @ Frugal Rules March 4, 2013 at 9:52 am

I would have to agree. With rates the way they are, and should be for at least another 12 if not 18 months, then I would not pay cash for a house. I’d put 20-25% down and then invest the rest into something else.

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Brick by Brick Investing March 4, 2013 at 10:59 am

I believe financing a home is ideal for a rental property. As a homeowner, I believe all should put as much money down as possible or pay it off in full. I say this because when you live in a home you consume it as it grows older.

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krantcents March 4, 2013 at 11:08 am

My mortgage will be paid off in less than 5 years to coincide with my retirement (again)! I expect to move one more time to a single level home or condominium, but I don’t think I want another mortgage. I may change, but I will look at opportunity costs to determine my choices.

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retirebyforty March 5, 2013 at 8:21 am

If the rate remains low, then it might be good to get a mortgage. It will be difficult to get a mortgage once you don’t have a W2 though.

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Brian March 4, 2013 at 12:03 pm

On paper it makes more sense to have the mortgage, especially with the rates right now and the tax advantages. However, in reality it is nice to have that safety net of having the home paid off. I think it just depends on the person.

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retirebyforty March 5, 2013 at 8:21 am

You’re right about that. It just depends on your temperament.

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jim March 4, 2013 at 1:43 pm

With todays low rates I am favoring not paying off early in general. 3-4% is dirt cheap interest.

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nicoleandmaggie March 4, 2013 at 2:50 pm

We can and we’re not, mainly for diversification reasons.

http://nicoleandmaggie.wordpress.com/2010/07/31/the-pre-paying-the-mortgage-question/

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Canadian Budget Binder March 4, 2013 at 3:08 pm

We’ll be paying our mortgage in full as of April this year 4 years into a 5 year term over 25. We could sell it for 100k more than we bought it now but are going to stay here for the moment. I’m only in my mid 30’s so lots of time to make magic happen with the money I’m not spending on a mortgage. It’s personal either way, rates could go up and down like the cost of petrol so I’ll take what I know is a sure thing and that is the rate of my current mortgage. Peace of mind, you bet. I think it’s personal for every individual or couple and how much risk one is willing to take. Cheers and good read.

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retirebyforty March 5, 2013 at 8:22 am

I think you did great. Congratulation on paying off your mortgage! Peace of mind is the key.

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Tony@WeOnlyDoThisOnce March 4, 2013 at 5:16 pm

Awesome post. The math is what the math is…but I am the kind of guy who sleeps at night when I am debt free. I am going to pay off the mortgage viciously until all gone. Period…

Thanks for the great post!

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retirebyforty March 5, 2013 at 8:23 am

Good luck with the mortgage!

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papadad March 4, 2013 at 5:30 pm

i like to see so many bloggers on here and responding. great discussion.

I was in your camp, Joe, for the first 10 or so years of being a landlord with rental units kept them on a mortgage and let someone else pay them down. Works great in a decent rental environment but…then the rental market in my area started going bad — neighborhood declined, renters stopped paying on time, hard to evict them, then building maintenance costs escalated, and then to top it all, the RE market crashed. I was glad i made decision to get out entirely of those. I sold at a paper loss (but since renters had been paying the mortgage and interest, it was not as painful as it would have been otherwise…at least psychologically)….

Anyway, I sold those rentals and decided to pay off my primary residence becoming truly 100% debt free (Dave Ramsey fan…minus the religious blah blah that he spews)…

For me it is just peace of mind…. knowing if I meet my demise, my DW and kids have a place all paid off to live w/o worrying about mortgages etc.

However, points by you and Retired Syd and others are valid – rates are SO low, this is probably once a century interest rate environment and taking out a big loan over 30 years is almost free money. Warren Buffet was on CNBC yesterday and basically said the same thing…. go buy a nice house, finance it for 30 years….interesting.

It will be even more interesting when FED stops QE3… shock of interest rates rising hits…….will the economy be able to hold up pricing, or will prices of housing suddenly drop by 20% or more as buyers hit the exits due to higher rates.

Being debt free is such a smug feeling…cant describe it. But it’s very very liberating psychologically.

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retirebyforty March 5, 2013 at 8:24 am

Sorry to hear that. I probably would do the same thing if the area turned bad. Hopefully that won’t happen.
You have the right to be smug. You’re in the little minority that do not owe any money! :)

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Lance @ Money Life and More March 4, 2013 at 5:34 pm

I’m so excited to be reading a lot of bloggers NOT wanting to pay their mortgages off ASAP now that rates are so low. I think it is a great move to NOT pay your mortgage off any faster than your fixed rate term especially with inflation. Kudos to you for running your personal finances like a business!

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My Financial Independence Journey March 4, 2013 at 7:42 pm

In my opinion it all comes down to what else you could be doing with the money. There’s not point in paying down a 3-4% mortgage when you make 8% total returns with 3% of that being dividends in the stock market.

Now you could easily imagine a scenario where the tables are flipped and it’s better to pay off the mortgage as soon as possible to stop wasting money on interest.

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retirebyforty March 5, 2013 at 8:26 am

The interest rate will go up at some point and then it will be better to pay down the mortgage for those that got the mortgage at high rates.
By locking in the low rates now, we have a lot more choices in the future.

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writing2reality March 4, 2013 at 8:12 pm

I think it depends on your situation and end goals. Me personally, for a personal residence I have no issues with holding a mortgage, yet would look to progressively decrease that debt load as I age until that debt has been repaid. With any sort of investment property, I see absolutely no reason not to maximize the use of debt to leverage your purchasing power, while preserving your debt ratios.

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My Wealth Desire March 5, 2013 at 2:01 am

My wife and I decided to pay off our home mortgage within two to three years from now. We are putting together about 25% of our monthly income to pay our home mortgage.

We believed that we have to manage our money wisely to ease from paying big amount every month for home mortgage. Our decision is based on our financial perspective, our dream and our wealth desire to live with financial and personal freedom.

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retirebyforty March 5, 2013 at 8:28 am

I think that’s great too. Whatever works for you. Good luck finishing off your mortgage.

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Mike March 5, 2013 at 8:37 am

I think it’s important to look at each case individually. Some people are fine with making the longer term payments on mortgage(s) and others are not. And you never know what other things could be going on financially with other individuals (some people have a lot of debt and others might be working a lower wage job, etc). Each case is going to be slightly different.

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retirebyforty March 5, 2013 at 11:04 pm

I assume most people would elect to payoff higher interest loans first. It doesn’t make any sense to pay down the mortgage if you have a credit card debt.

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so March 5, 2013 at 11:36 am

We have been both mortgage-free and not; we actually borrowed on our current residence to fund two apartment building purchases (but we are 35). Once we are done buying, we’ll start paying down the mortgage. At 45-50, we will likely retire any mortgage debt by selling rentals, like papadad.

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retirebyforty March 5, 2013 at 11:06 pm

Good luck! Apartment sounds like a lot of work. I looked at a few listings and our market is too expensive for me.

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Financial Samurai March 5, 2013 at 12:10 pm

I really like the $1 million mortgage amount (if one can afford) b/c it maxes out the government subsidy. Gotta get our gov’t handouts while we can right? If the interest deduction ever goes away, then I’ll pay it off. Otherwise, let it ride. It’s just accounting.

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retirebyforty March 5, 2013 at 11:06 pm

Wow, that’s a lot of money to owe. I don’t think many people can get that kind of loan.

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Darwin's Money March 5, 2013 at 12:36 pm

Financially savvy people put money to work for them. I’m sorry, but chasing an effective 3% return paying down a mortgage early is just not a good use of capital. I’d sooner do anything from invest it in stocks to other asset classes to save for real estate or do something else with it.

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Kin @ Journey of Success March 5, 2013 at 1:24 pm

My thoughts are pretty much the same as yours. I plan to carry my mortgage for as long as possible, at least until I have enough saving to pay it off while retaining liquidity. While we still have the mortgage interest deduction, it also makes sense to take advantage of that.

Between low interest rate, liquidity, and opportunities to invest else for higher return, it seems the only logical decision to slowly pay off the mortgage over time, unless it’s just a emotional burden to carry the debt.

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Kensington Pearl March 5, 2013 at 5:44 pm

Great post. I’ve been humming and hawing about the same thing. Being Canadian, we don’t get to write off property tax unless it is a rental so I maintain at least 60% mortgaged on our rental and transfer any equity to our primary residence since it doesn’t have any deductions.

I’d really love to pay off my primary residence and stay home and work on my business but for now I must stick with my 9 to 5.

Thank you!
Kensington

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Matt March 6, 2013 at 5:06 am

My Primary I paid cash for – I think that using a mortgage for Primary Residences can lead to acquiring more than you need, which might prove wasteful over time. For rentals which have clearly projected income and expenses I would certainly use mortgages for and leverage their benefits.

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retirebyforty March 6, 2013 at 3:36 pm

That’s a good idea. It’s too easy to borrow to buy a McMansion.

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sin camisa March 6, 2013 at 2:18 pm

I always knew that my cash “could” be doing better than my 4% mortgage; BUT WHERE? It was just sitting in my bank getting 0.8%. The market? No, thank you; I couldn’t gamble while I have a mortgage.

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My Own Advisor March 6, 2013 at 3:27 pm

I’ve love to own my home and forget the banks for good!

9 more years!

Mark

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Diane C March 6, 2013 at 10:19 pm

What people fail to consider is that taxes, utilities, insurance and upkeep NEVER go away. It’s important to make sure that you have enough reserves that you never have to worry about those payments. Yes, you will lose your PAID FOR house if you don’t pay the taxes.
The reason to start your cash savings and investments early is so that compound interest can work its magic, over as much time as possible, allowing you to extract in your retirement years lots more money than you ever put into savings. Save early, pay the mortgage as scheduled and continue to save as much as you can. Later in life, once your savings have grown to the point where you are positive you can cover all the secondary expenses, plus put food on the table and pay for your medical care, you can pay the house off. To do so sooner than that is just plain foolish. Who is going to cry that they lost their “paid for” family home and who is going to keep steadily withdrawing exactly what they need to meet their obligations while the rest of their assets keep growing?

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retirebyforty March 7, 2013 at 8:02 am

That’s true. I know someone who paid off his mortgage, but his house is so cluttered that the insurance company refuse to cover it.
Maintenance, repair, and tax has to be a priority too.

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Travel in Stylez March 16, 2013 at 7:43 pm

I pretty much agree. Paying off your mortgage does not mean you can’t lose your home. If you don’t pay taxes or HOA fees, you could stilll lose your house. You are not “free” as they say.

Basically if you have extra money you should pay more into the principal. It never hurts to do that.

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flow March 8, 2013 at 10:58 am

The most valid point I think people omit when deciding whether or not to payoff a home mortgage is actual dollars spent over the mortgage term.

Let’s be real people, we do not really care about inflation in our daily lives. It’s just one of those things that comes up when we suddenly realize a few years ago gas was $1 a gallon now it’s $4.

The inflation percentages, mortgage interest, tax write-offs etc will never add up to the money you keep in your pocket (or spend) by making mortgage interest payments.

For example, if you are paying on average $435/mo in mortgage interest for 30 years or 360 months that is $156,600 you will spend on your home if you never make a single additional payment. If you pay your home off in 10 years or 120 months you will spend
$52,200 in interest, that’s over $100,000 cash you saved.

The only way to avoid paying an additional $156,000 for a home is to pay it off as quickly as possible. It only makes sense. Why go to McDonald’s for a $0.99 burger and give them $5? You wouldn’t right, at least I hope not. So don’t do the same with your own mortgages.

I too am in a similar situation as Joe, as I have my own mortgage and a rental mortgage. My rental has positive cashflow of about $900 but when it is paid off early that cash flow will increase to $2,200 that is pure profit less all expenses.

Our home mortgage is significantly higher so the money kept when it’s paid off will mean even more green saved. Which translates into less money needed for expenses when we retire by 40 plus more income from our rental.

I think for most people the only reason they don’t consider paying off their mortgage early, is not because of the interest rate mumbo jumbo it’s purely because you can’t envision parting with that extra cash and it may take years of hard work. Most people aren’t willing to do either of those.

But if at the end of your mortgage term you realize you saved hundreds of thousands of dollars, I think you will be glad you did. By the way I don’t think taking money from a retirement account ever really makes sense to payoff a mortgage, there are just way too many penalties for early withdrawal and it’s not smart to risk your retirement future. It’s better to get a second job. (I know that’s weird)

I like daveramsey.com he has a lot of tough, but sound advice.

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mayanqueen March 9, 2013 at 6:37 pm

I believe that if you don’t retire at 40 as planned your home should be paid for, it looks as if yours will be. For others I say pay off your home ASAP. Refinancing to 30 years makes sense to continue with a house payment forever! For example if you owe $90,000 on your home at 3.5% interest rate, you will make monthly payments of around $400.00 but you will end up paying $55,000 in interests! If, on the other hand your send an extra $250.00 extra payment per month you will be off the mortgage in 15 years instead of 30 and paying only $25,000 in interest. I say send twice your mortgage if you can and be done in 7 1/2 years! Now that is debt free. Be 40 and have NO MORTGAGE. Also stay away from PMI. Please note that in my numbers I did not include PMI or property taxes. I am mortgage debt free and I love it! With rentals? That’s another ball game, but do pay off your primary home.

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Travel in Stylez March 10, 2013 at 11:30 am

I admire your blog very much. I am only 37 years old and would like to quit my software engineer job and retire as you.
I have 175K remaining on my mortgage. I have enough money to pay off the mortgage and quit my job. Should I pay off the mortgage and rent out my townhouse (live at mom’s place) or should I keep my monthly mortgage. If I pay it off I still have 125K left over but I don’t know if I can live on my rental income and my savings. If I don’t pay it off, I will be still be paying a lot of interest but I don’t have to worry about finances for a while.

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retirebyforty March 10, 2013 at 4:05 pm

If you are going to rent your townhouse, then you probably shouldn’t pay it off.
Do you have positive cash flow on your rentals?

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mayanqueen March 12, 2013 at 11:07 pm

I think I would pay off the mortgage only if the property is worth more than what you bought it for, if it is upside down…I wouldln’t. Invest what you have in multiple investments. Buy some other rental properties. No, giving up freedom from parents not a good move either! From mom’s point of view, she loves us dearly but returning not a good thing for parent’s retirement plans, ha ha. It is just too difficult for parents to say NO to their babies.
You also have to look at how much is your homeowner’s association, if it is too high it might be a bit difficult to sell. Remember pay it off if you plan to live there forever or at least 5 years +. Try to find out how much the last townhouse sold for in the complex and that might help you make up your mind. Attend the home owners meetings and find out if everyone is in good standing with their monthly fees and that nobody is facing foreclosure, etc. I have cked for properties in Trulia.com to see how much the neighbor bought for, etc. Good luck! I say buy more properties!

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retirebyforty March 13, 2013 at 3:40 pm

That’s a good point. I wouldn’t want to pay extra if the property is underwater.

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Travel in Stylez March 16, 2013 at 7:37 pm

Thanks for your advice
I wish I could buy other rental properties. But I want to truly quit my job.
That is what this blog is about isn’t it?

My parents would not mind me moving in with them. As I see it, Medicare and Social Security is going to be cut likely in the coming years. We need to save money by living under one roof.

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Jeff Ehrlich March 10, 2013 at 5:08 pm

Joe, I am going to put in my 2 cents from a guy that is 61 years old, was $150,000 in debt 6 years ago not including our mortgage. My wife and I have had jobs over the last 35+ years with no layoffs and our income continued to grow well above the six figures and we still lived paycheck to paycheck. (embarassing) In the last two years I received a $40,000 pay decrease in my salary and am potentially going to see another 20% of my salary decreased if the sequestration cuts actually go into effect as a DOD employee. My wife recently lost her job earning close to $50,000 when the company she worked for went through a buy-out and relocation. If we had not paid off our debt to include our mortgage over the last 6 years we would be facing foreclosure or even bankruptcy today. At the very least a couple or individual should time it so his primary mortgage is paid off by the time they retire. It is amazing how much you can give, save and invest when you have NO payments and you don’t owe anything to anyone. RISK is huge and a person has to ask themselves if they have a number of mortgages and lost their jobs and renters could they afford to make the payments or would they be a couple of months from going under?? Cash flow is huge when you leverage your money – that is how Dave Ramsey went bankrupt in his 20’s even though he was a millionaire on paper and was on his High Horse. When interest rates go up, typically home prices go down – could you take a 20% hit on the value of each home or would it put you in an underwater situation?? With NO payments it is amazing how quickly your investment portfolio builds in a bull market like we have had since March of 2009. Our TSP went from $40,0o0 in March of 2009 to $206,000 today. Not a bad increase and talk about leverage if the S&P or Dow goes up 1% in a day we are increasing the value of our account by over $2000 for the day. Better return than housing prices which have averaged 5% a year over the past 50 years. If you had been investing $1500 a month (instead of mortgage payment) over the last 4 years you would have seen a 100% increase in your retirement account. Lastly, I am amazed by people that feel the interest deduction is so great – they will gladly pay $10,000 to the bank in interest but don’t want to pay the $3,000 in taxes to the government for the extra income. You are right, it all comes down to the individual but I can tell you after being on both sides – It is much better to be completely debt free. In fact even walking on the grass feels different when the bank no longer could take it away from you. Here is a great article on 3 reasons to pay off a mortgage from a website that always did not think that way. Pretty good read to get the other side for those that made a comment. http://www.askmen.com/money/investing_200/245_investing.html You did a great job with the article and getting people to think and comment.. Wow, over 70 comments. Keep up the great writing. Just some thoughts from a guy as old as dirt..

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mayanqueen March 12, 2013 at 11:25 pm

Jeff,
I agree with you, debt free is the answer. I have been able to manage that so far. I just have tremendously difficult investing, trusting, risking. I did a bit when the banks were paying high interest rate but I did it very conservative, I was very happy with a 10% on CDs. Now banks don’t pay anything and I want to learn to invest. I am very naive on creating a portfolio, buying shares, etc. How do I start? Who do I call? I know there might be more risk but I have been debt free for a while…I am ready. Any advices?

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retirebyforty March 13, 2013 at 3:44 pm

I hope we see 10% CD again at some point. I would talk to a fee-only financial adviser. I’m not sure who’s available in your area though. You might need to ask around to find a good one that won’t try to sell you anything. You can also try Personal Capital. If you have over $100,000 in invest-able asset then they will put together a financial plan for you (free.) It’s not bad and it should give you an idea of how to get started.

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Jeff Ehrlich March 14, 2013 at 1:12 pm

Mayanqueen, If I were to do it again this would be my retirement plan.. I would make sure I had an emergency fund of $1,000 then I would tackle any and all of my consumer debt with the exception of the mortgage or a HELOC (Home Equity Line of Credit) of over $25,000. I would have started auto deducting from my salary into a company match 1st, then max out my Roth IRA. Bottom line, in my opinion eventually get the investment part up to 15% and have it auto deducted. You can talk with your HR department to get more details. We have been spreading ours out over Small cap, Large cap, International and Fixed. Once I tackled all debt then I would get my Emergency fund up to 6 months of expenses in case we lost our job or suffered a huge pay decrease which has happened to both my wife and I. I would have a category savings account for the yearly expenses and a car replacement fund. After all of that was set up then I would start paying down my heloc and mortgage. Once the mortgage is paid off then you can give, save and invest like never before to include rentals if that doesn’t scare you. My feeling is debt = risk and you never know what is going to happen with the market or real estate. Becoming debt free takes out much of the risk and you can live for much less when you have your cash flow under control. The income you earn from your profession will be your main source to get ahead – I have seen way to many folks in my time go under because of leveraging. Leveraging is great if you are living well below your means but the majority of Americans are living paycheck to paycheck. Jeff

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the other jim March 27, 2013 at 6:13 pm

Jeff,
As another guy (almost as old as dirt – ha) I loved your response. I’d like to run something past you, given your years of working and experience. Spouse and I were on track to have our mortgage paid off by Jan, 2016. We’re throwing an extra $2500/month at it. Then our youngest announced he wants to go to law school. Long story short – he got a full ride scholarship, but he’ll be going to school in NY and he’ll need a good $12,000/year (from us) as well as a $20,500 loan for each of the 3 years. Our mortgage rate is only 3.25%. His student loans will be between 6 – 9 %. I can’t stand the thought of him going into that kind of debt ’cause he’s been debt-freee his entire life and hasn’t a clue what debt means. Do you think we should reduce our mortgge payment and cash flow his law school? spouse would like to retire in 5 years, but I’m good for another 10 years. She makes $100,ooo and I make $50,000. We’ve got no debt other than our mortgage. Thanks for any insights.

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Jeff Ehrlich March 28, 2013 at 10:43 am

The other Jim, When we received your comment this morning we just happened to be in Texas with our daughter, 31 and her husband, 32 so everyone decided to get involved with your scenerio. Your son is obviously a hard worker earning a full ride scholarship and am sure you would love to help him reach his dream of becoming a lawyer. My wife would just pay all of it but I am the opposite and a little more selfish as we get closer to retirement so we have to compromise. The concensus was to write a check for $2000 a month to pay for living expenses and part of the loan. Our thoughts were to have this as an interest free loan with the expectations that it would be paid back in the future but it would not derail your retirement if it were not paid back. You could still pay an extra $500 a month on the mortgage and if your son does pay you back in 5 years or so you could pay off the house when your wife is ready to retire. We had a number of questions to ask in order to really give you a well informed answer. Did you pay for his college education or did he contribute some? Do either you or your wife have a pension plan? Do you have an emergency savings of 3-6 months of expenses for an unexpected loss of job? Do you have an IRA (traditional or Roth)? Robin and I figured we could maintain our lifestyle on $5000 per month with us being completely debt free so we need our streams of income to add up to that and that is not including unforeseen medical expenses which can break the best of us. We have had secure employment for almost 40 years and certainly did not expect me taking a $40,000 a year pay cut and my wife losing her job ($45,000) and at the ages of 61 and 60. That is a $85,000 hit. Thank the Good Lord we have no debt and lived on 50% of our income before this happened or we would be facing foreclosure or bankruptcy today. Would love to talk more @ 7192102692 if you want input based on any new info.

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Mike Ehrlich March 11, 2013 at 4:27 pm

Interesting article and a variety of reader feedback… Achieving “debt-free” status should be the new American dream… And, learning to live within one’s means is perhaps one of the hardest lessons to learn in our lifetime… Our generation typically experienced just a couple of career jobs in our working years – however, today’s generation can expect several job changes during their working years – and many, may (will) face months of no work waiting for that next job to arrive. This increased job uncertainty is one huge reason why minimizing one’s debt is so important. One day (and we never know when that day will occur) our earned income (cash flow) will be significantly reduced or come to an early (unexpected) halt. The question is: will you be ready? Is your emergency fund fully funded? Have you set aside 3-6 months of living expenses? How much of your monthly living expenses are used to pay for the debt you’ve accumulated? Imagine if you had no debt how much further your monthly living expense dollars would go…
Where to invest your dollars is always a highly debatable subject – some have made millions and swear by it… others are upside down (although, I suspect many took out a lot of equity when their home values were at their all time high…). One should plan on having their house paid-off before reaching retirement eligibility – even the grass under your feet will feel different. Mike

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Johnny Moneyseed March 14, 2013 at 9:38 am

Your thinking is totally in line with the way I do business. I don’t contribute any extra money to my mortgage (which is at a 3.25% fixed rate 30 year). I put all of that extra cash into investments, that will grow, and that I can touch whether I’m in a bind or like you said, if I find a good business idea. Awesome post! This goes against the Dave Ramsey way of thinking and I like that!

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Diane March 16, 2013 at 10:45 am

Re: Jeff Ehrlich – While your comments are well worded and you offer a lot of food for thought, I take yours to be a cautionary tale. Your conclusions are based on a series of less-than-optimal decisions over a long period of years. In contrast, Johnny Moneyseed’s comments make a lot more sense for someone who hasn’t made the same mistakes. Your equation of debt = risk can be better stated as cash = freedom.

Start early, save steadily, invest in a diversified portfolio, avoid consumer debt, buy a house you can afford with a low-interest mortgage, and do not prepay it until you can really afford to (see Retired Syd and Mike Ehrlich’s’s comments).

Had someone given you that advice early in your career and had you chosen to follow it, you would have written a much different comment at this stage in your life. I admire that you have managed to dig yourself out of debt before you were ruined financially, but I do not fully agree with your advice. I’m writing this comment in the hopes that younger readers will learn from these examples.

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Mark Ferguson March 20, 2013 at 7:10 pm

Great article! With interest rates as low as they are now I am not paying off anything extra on my cars or personal residence. I can get 20% cash on cash return on my rentals and I am paying less than 4% interest on my loans. My plan to retire early involves buying as many rentals as I can and I use my extra money to buy more properties. I do use cash flow to pay off my current rentals one at a time because of the difficulty finding financing on more than four mortgages.

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retirebyfifty March 31, 2013 at 12:53 pm

rb40,

I have always been a proponent of paying off the mortgage and stumbled across your blog after I had made the decision to pull in my IRAs to do so. I do have a remaining 401k that I am not touching.

Why am I doing this?

Facts and opinions:

1. Interest is alway front loaded on a mortgage (20k paid in interest in my first 2 years in this home, I’ll never see that cash again…)

2. Paying greater than 300k over the life of the loan

3. My house has appreciated 15% since I purchased it (short sale); it’s beating my investments in the market and is much more stable. (Opinion)

4. I will sleep easier.

5. Though I plan to work in to my fifties (currently 39), I now have additional clarity and no burden of debt impacting my daily life.

6. I will be tripling down on investments and savings over the next 10 years.

I welcome your feedback on my strategy.

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Mark Ferguson March 31, 2013 at 2:12 pm

#3. Your house is appreciating 15%, but you arleady own your house. Paying down your mortgage faster or slower does not increase or decrease your appreciation rate or returns. It only pays down your mortgage and decreases your debt. I chose to buy more Appreciating Real Estate with my money instead of pay off my mortgage, which multiplies my returns and I have cash flow coming in and don’t have to wait for my house to be paid off or sold before I see any actual returns.

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retireby50 March 31, 2013 at 5:20 pm

My point on #3, is about placing my money in something that is more secure than what it was in (IRA that could drop 50%).

Mark, when you multiply your mortgages, you are multiplying money paid to the bank in interest that you will never see again… I would agree with your statement if you are turning a significant profit on rent (unlikely) and you are holding for the long haul with the expectation that your property will appreciate by 50%+ over the life of the mortgage. Of course you have to worry about keeping a “good” renter in it.

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Mark Ferguson March 31, 2013 at 7:56 pm

I have 6 rental properties, except for the last two that I just bought all have returned over 20% cash on cash investment in the first year. My mortgages are all under 4% interest rate. I cash flow well over $500 per property each month. I pay minimal payments on my personal house, cars and all rentals but one. I sink all my extra cash flow into paying off one rental mortgage at a time. I do this because it gets harder and more expansive to get more mortgages after you have four in your name. Otherwise I would keep leveraging my money and use that cash flow to buy even more properties.

That 20% does not include normal equity pay down, tax benefits(IRS lets you depreciate rentals), or any appreciation. If I included those figures and a nominal appreciation rate of 5%, then my returns are well over 60%! The beauty of rentals is the money you make is based off the 20% I put into the house plus repairs, not the entire purchase price.

I detail all of this on my blog and break down the numbers on the properties I own.

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retirebyforty March 31, 2013 at 8:04 pm

20% return is great! What state are you in? Our real estate market is on the expensive side and it’s hard to make that kind of return (Portland metro.) I think it’s much harder in CA from what I understand.

retirebyforty March 31, 2013 at 7:58 pm

You have to do what’s right for you. I think you made a great decision because it sounds like you hate debt. It’s never a bad thing to have no debt.
For me, I don’t mind the low interest mortgage debt. I rather diversify my investment and have rental properties and stock at this time.
Rental properties will get better over time. Our 4 plex is not making much money right now, but in 10 years, rent will go up while the mortgage payment stay the same. The rental properties are inflation hedge for me.
Being a landlord is a big PITA though.

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Mark Ferguson March 31, 2013 at 8:10 pm

I am in Colorado. I know of other investors in the midwest making much higher returns than that on their rentals. The key is buying them right and taking time to get a good deal.

Buy & Hold Blog April 9, 2013 at 3:33 pm

Great post Joe. I like having no debt. So, my plan is to pay it off within a couple of years. Use the cash savings and divert it for other causes like private school education for kids or investing. I guess, the moral of the story is that everyone should go with their comfort level.

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Chrissy April 14, 2013 at 5:39 am

I do not agree with your statement you made regarding rental property and that you will grow your income every year (presumably by increasing the rent). Just like the housing market the rental market fluctuates. Rents can increase and rents can decrease. I’ve been an avid real estate investor since my 20’s and I’ve seen it happen. It is erroneous to suggest you can have ever increasing rents. That’s simply not true and misleads others into thinking that is a viable plan. It is not.

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Mark Ferguson April 14, 2013 at 10:07 am

Chrissy,
I am not sure who your comment was in response too, but my plan does not need rents to increase or houses to appreciate. I am making over 20% cash on cash returns on all my rentals in the first year.
Appreciation and rent increase is a bonus. I am in it for the long haul, history shows rents and houses will appreciate over time just like the stock market.

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Intend to be Mortgage-Free at 32 & 35 yrs April 25, 2013 at 10:58 am

Great article!

I come from a family of seven kids; very humble beginnings, saw lots of financial stress in parents’ marriage (burning of credit cards, $ arguments) and lots and lots of hand-me-downs from my older siblings.

A bit about myself: I got married very young, at 21 yrs old (2002) with “no money,” immigrated from U.S. to Canada and lived with wonderful in-laws’ basement apt (rent-free) for 4 years.

2006 – Bought our first home in 2006 for $270K — a steal at the time in Toronto — and spent total of $30K renovating ourselves with intention to flip for profit…but moved in instead. Almost nothing put down for downpayment (under $10K)

2007 – Five-year wedding anniversary trip – toured all of Italy – three-week trip.

2008 – Started making WEEKLY versus MONTHLY mortgage payments

November 2008: I’m midway through court-reporting school when I was laid off from my job — a month after my husband was laid off as well!!
No savings to live off of; just unemployment cheques from the government to “barely get by,” just enough to pay mortgage and bills. Luckily we had (and still have) no credit card debt or car loans, etc. or we would’ve lost the house, I think.

-Feb. 2009 – Husband got his job back at a lesser salary making enough to just “get by” as I continued going to school.
Canadian government approved (through special grant) to pay for my $30K tuition in full. (Thank you, God; Thank you, Canada)

-March 2010 – I finished school, started working.

September 2011 – Changed mortgage to VARIABLE – started making $1,000 all-principal payments per week on mortgage, and husband started contributing an extra $250 per week towards principal on top of original mortgage payment — Paying a total of $1,450 per WEEK

August – 2012 – Took a ten-year wedding anniversary trip to the beautiful Greek Islands for two weeks

Spt. 2012 – Bought brand new car after having same car since 2000; no interest with Ford

April 2013 – I’m now 31, husband is 34. Remaining mortgage today: $97,000. Anticipated mortgage-free date: August 2014 — at 32 yrs old and 35 years old. Counting down the days!

…and…

We hope to be able to start a family right after that, and enjoy our kids with no financial stress!!

Our house’s value today? Well over $500K, say several real estate agents. Quite a profit from the $270K + $30K we put into it, I would say.

I think if my mother were still alive today, she’d be really proud of my husband and I.

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retirebyforty April 25, 2013 at 10:34 pm

Great job! Your tenacity is inspiring. I think it’s great that you are paying off your mortgages so aggressively.
You will feel great once the mortgage is gone.

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Andrew P April 26, 2013 at 2:41 pm

I am very comfortable making the following statement: If you max out your 401k, IRA, kids’ college savings, fund your emergency fund, and pay off any consumer credit, it is CRAZY to not pay off your mortgage early.

I do not understand how people consistently overlook the fact that even now on a 3o year loan, you will pay the cost of the principal in interest. That $300K home loan is not a $300K home loan; it’s really a $550-600k loan. So you get to deduct the interest? Who cares? It’s just that, a deduction, not a credit. You still have to pay all that interest, and in reality it’s barely subsidized by the deduction. I am 33 and have just over 13 years left on a fairly recent refi of a 15 year, $210K mortgage at 3.375%. It used to be a 30 year $330k loan at aorund 5% (can’t remember exactly). We bought the house in 2007 so at the current rate it will be paid off entirely in 19 years, though we won’t let it take that long. I will then own it outright, be 46 years old, and be able to sock away that $1,488 mortage payment for the rest of my life, putting it in growth stocks and tax free municpal bonds after that market crashes. The whole time I have maxed out my 401k, my Roth IRA, wife’s IRA, put away money for our little girl’s college fund, and have an emergency fund of between $30-35k. I know this editorial seems really braggy, but the point is that I believe it would be insane to not pay off your debt early. Why on earth would you want to carry debt on something that is only truly an asset if it provides positive cashflow? Also, a house isn’t always an appreciating asset depending on your timeline…ask anyone who bought a house in 2008. Now you’ve got a house that’s worth a lot less than you paid for it, AND you have all that interest to pay on top of the already outrageous principal, even with super low rates.

Not to get political, but I am quite sure mortgage deducitons will either be eliminated entirely or capped off in the near future (most likely capped). I’m pretty sure that will end the argument completely about not paying off your mortgage early, though I do realize the argument is less effective when rates are 3.5-4% and not 7% plus like they were in recent times.

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Mark Ferguson May 10, 2013 at 2:38 pm

It’s simple why some people don’t pay off their mortgage sooner than they have too. They can get much better returns on investments than the 4% interest rate on their mortgage.

I am seeing over 24% cash on cash return on my rental properties. I don’t pay anything extra towards my mortgage because I would much rather make 24% than 4%!I use extra money to buy more properties.

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george June 9, 2013 at 1:40 am

I have $500k in stocks. 1 house with 12 yrs remaining on a 15yr 3.25% mortgage. The house is rented and I collect $1900 month on that. I will be retiring in 7 years, and my pension will be $6,000/mo. What would you all do in this case?

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george June 9, 2013 at 1:42 am

Forgot to mention I am renting a house right now as I am not in the country at the moment. Thanks for any advice!

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retirebyforty June 9, 2013 at 4:09 pm

I would just stay the course since it’s already rented. I don’t know why you need to pay it off early with 3.25%.

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jeff ehrlich June 11, 2013 at 5:50 am

From your comment above it looks like you are in real good financial shape. A few questions though. Are you debt free with the exception of the rental? What are your monthly expenses on the rental? How much do you own on the rental? How many houses do you have? Is the 500K in stocks in a retirement account? Do you have an Emergency Fund of 3-6 months of expenses? How much does it cost you to live each month? Are you single or have a wife that also works? Are you on a spend every penny budget? My wife and I could live on 6K a month very comfortably with no debt. I have friends who need 15-20K per month to maintain their lifestyle. If that is you then you would need to continue working past 7 years.

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Jennifer June 14, 2013 at 8:40 am

After reading this article I am very confused as to what we should do with some money we are going to be receiving for selling some land that we bought about 10 years ago. After all the capital gains and other expenses we should be walking away with about $35,000. I was wondering if you could give me a little advice on what you would do with it? My husband wants to put it towards the mortgage on the home we just recently purchased about 6 months ago. We have a 2.38% interest rate and a 30 FRM. I am still in nursing school (but will be graduating at the end of this year) and we do not have any credit card debt, school loans, or car payments. We are in our early 30s and I have barely invested into a retirement account, with only about $2,000. But my husband has a great retirement investment already. We both have Roth IRAs. Do you think paying down our home mortgage is a good option or should we put more towards retirement investments? I am really thinking twice about everything now and need a little more explanation as to which is better and why?

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Len June 27, 2013 at 12:03 pm

This is an neverending debate, and I lean toward paying off debt with excess cash. I do understand the argument that you plan to out earn the cost of the mortgage in your diversified investments, especially after taxes etc. But this comes from the perspective of someone who has never suffered massive losses. I personally know of several people who had this attitude and kept their mortgage debt, then lost the capital they could have used to pay it off. Stupid investments, businesses, stock scams, risky concentrations, financial planner “salespeople”, panics, etc. And so years later they sit paying the mortgage which could have been paid, a pile of tax losses they can deduct at $3000/year, and the money is gone. No one plans to lose. Everyone thinks long term they can manage their money to out earn a mortgage. Reality can be different.

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retirebyforty June 27, 2013 at 10:27 pm

I see your point too. We have suffered pretty crazy losses in the stock market, but always recovered so that’s one reason why I have confidence. Hopefully we won’t make too many stupid investments, but nothing ventured, nothing gained right?

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Len June 28, 2013 at 4:46 am

“Nothing ventured, nothing gained” and “hopefully” sound like he words of a gambler to me. Also the idea that losses always come back over time…they don’t. I personally know of people who went from 7-figure net worth to bankrupt. I personally bought 10 bonds in 10 different industries, all investment rated, and had 6 of 10 go bankrupt. Money gone, never again to return to this earth. How about companies where you paid $42 for a share of stock, highly rated, everyone talking about it, and then kept the faith (remember it always comes back). The company was Global Crossing, internet darling, cables crisscrossing the oceans to provide the world’s internet backbone. Guess what, it went to zero. Gone. The company did go thru BK, all the equity was zeroed, and the debtholders got new shares in the new company. How about trust deed loans on real estate? They pay 12% and since they only lend 50% loan-to-value the money has to be safe, right? Wrong. Appraisal $6MM, loan amount $3MM, land being developed to a subdivision. Developer walks away, lenders foreclose and try to sell the land. Listed less than 10c on the dollar, no offers. The land has no value. Can’t raise the money to pay property taxes, the land seized for unpaid taxes. All original loan principal GONE. Sue developer to get judgment, he’s bankrupt. Money vaporized. Pay more for legal bills.

The list goes on and on. People like to be optimistic, they like to assume things always work out. They like to assume that investments may have low returns, high returns, or volatility, but hey after all they always make “some” money in time, they are investments right? Wrong. Often investments result in total loss to the investor. And by the way, another thing. The investor is the person with the least amount of information in the game. He knows nothing except he has money, doesn’t know what to do with it, and something is pitched at him. He’s the least skilled player in the game, like a poker player patsy whose money will be taken by the more skilled players and he’s too stupid to know he doesn’t stand a chance.

Real estate is safe, right? How about buying single family houses and watching them decline 75% in value? It just happened, in Las Vegas, Phoenix, Florida, etc. Can’t happen in California, right? Right? We still don’t know.

I can tell you for the past 18 years my personal return on all investments combined, including massive volatility and losses, has been 2.4% per year. It was positive, but not even the rate of inflation. I know others who have negative nominal returns over 20 year periods. Bad investments, bad timing, and outright fraud.

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jeff ehrlich June 28, 2013 at 6:04 am

Good points. To me the biggest issue is if we lose our job or have a huge pay cut. My wife and I have lost $80,000 in pay over the last few years. I had a huge decrease in pay and Robin lost her job at 60. If we were not completely debt free to include our mortgage we would be filing for bankruptcy today. We were able to weather the storm because before this big hit to our monthly income we were living on 50% of our net income. Not having a mortgage payment of $2000 really helps. My suggestion: If you can pay off the house or at least time it so it is paid off when you are ready to retire then pull the trigger. This conversation could keep going but nothing beats the PEACE of not be indebted to anyone.

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mayanqueen July 19, 2013 at 6:08 pm

Jeff,
I agree, I have been tremendously happy with my job. I am debt free but with the boss that I have at the moment I am so ready to pull that plug! I think that in many cases we put up with the abuse and the BS because many depend so much on that paycheck! Not too long ago I stood up, put my foot down and told my boss everything well deserved. I really thought I had lost my job! Instead boss acted as if nothing had happened. One co-worker said: “You are my hero, but you can do that because you don’t have a mortgage”. Yes, pay your debts because we can’t predict the future but we can change our present to improve our future. The day I sent my last mortgage payment I made sure I shared that experience at work to inspire others, that was about 5+ years ago. Dancing of joy with a little jig! My so needed vacations have been awesome ever since! NO DEBT. But I will soon be back to work/hell. So, help me God. Don’t get me wrong, I love what I do…just don’t like the boss breathing on my neck with an attitude! Thank you all for all your posts, I truly want to learn to invest and have “extra” freedom!

davidmichael June 30, 2013 at 11:43 am

Based on my experience of being retired for 20 years, I offer the following observations:
1) Don’t retire until you have paid off your house. Totally. Besides peace of mind, it offers a roof over your head for the rest of your life.
2) Live beneath your means…whatever your income is, spend less.
3) Pay off any debts and remain debt free for the rest of your life…whatever it takes.
4) Place a sizeable amount of your retirement stash in risk free investments like I-Bonds.
5) Don’t trust insurance companies (annuities, etc). They can go bankrupt losing your precious funds in the process, just any other company.
5) “There is never enough.” I have had the good fortune to live on $8,000 a month in retirement (first ten years), and also the good fortune in the past ten years of living on $3000 a month. When our cash bucket went dry I just went back to work overseas and filled the bucket up again. After we sold the house, extra cars, TV and all the stuff, we bought a comfy RV carrying two bicycles, two kayaks, and a tow car. For the past six years we have been exploring and photographing the American West, loving every minute of it. Our house on wheels is very small, cozy, completely paid off, and powered by solar for electric (computer, TV, and lights). It’s a crazy lifestyle, but we are free to follow the sun and experience the best of North America.

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Karen Annette September 19, 2013 at 3:18 pm

It is interesting to view the various perspectives on financing of a home.

My husband is 56 and I have 54, we were married in 94, and I can advise you we set financial goals to include a budget. W knew along the way we would have hiccups such as job loss, children’s college education, helping elderly parents, etc. We paid off our first home in 7 years, we always pay cash for our vehicles, we earmark our $$$, we fund our retirement to the max, with whatever the match is by our employer. We currently owe no one. After the first house was paid off, we saved knowing we would purchase another home. When we relocated in 2009, we were able to purchase another home (with a mortgage) I was unemployed, then underemployed, but managed to fund a Roth IRA during this time. We recently paid off our second home, our first property became a rental in 2009, this helped fund the new property purchased in 2009. We paid off this mortgage in 2012 (our second home). The monthly payment we made on the second home is currently accumulating so we can purchase our 3rd home. Our goal 2 rentals, and paid primary when we retire. By having our properties paid off, we are utilizing the rental funds from the free and clear properties to fund the next purchase. We work well because we agree on finances, and have at a minimum an annual discussion on our direction so we can modify or realign our budget. This really works for us and I like to sleep at night. Having parents who are now retired and unable to provide financially for themselves also reminds me I do not want to be a burden to my son. We have never made boat loads of $$$ 6 figures combined, but we manage well.

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Ryan December 11, 2013 at 9:05 am

Excellent article! My wife and I have gone back and forth between paying off the mortgage and saving via our 401(k) and Roth IRAs. Since we only owe a piddly amount (for a mortgage), we have decided to keep it, take the write off, and sell the house in a couple of years. We could sell the house and have about 40k after paying off the mortgage, so we will be using that money to purchase our next home outright. I know you said you probably wouldn’t do that, which I respect and understand. But we both abhor debt in any shape or form, and like the comfort being debt free will provide. Plus, I don’t expect returns in equity to be that great over the next few years.

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visitor April 8, 2014 at 12:28 am

Yes. People tend to think the minute they secure a loan and fill out the documents they are now a home owner. This is a fallacy statement. You are a homeowner when the debt is fully paid and no more payments are needed. Just because I have a loan for my car doesn’t mean I’m a car owner the lender is the owner until it’s paid. All your doing is essentially renting to own.

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Allen April 9, 2014 at 7:00 am

All of you seem to have a fair amount of experience. It seems to come down to personal preference. Our goal has been to pay off our primary residence because we plan on staying here for the rest of our lives. Interested in your opinions of my best financial move going forward.

I am 50 yrs old with two small children (6 and 5). Wife does not work outside of home.
Primary: We owe 230k on our primary worth 460k. 15yr fixed at 2.99%
Rental 1: We owe 197k on a rental worth 285k. 30yr fixed at 5.65% cash flow = even
Rental 2: We owe 114k on a rental worth 115k. 30yr fixed at 6% – cash flow = even

Retirement 50k – mutual funds
Savings 400k – non interest bearing
Income 150k
Zero consumer debt

Primary: Interested in paying this off completely asap
Rental 1: Tempted to re-fi because of lower available interest rates that would increase my cash flow
Rental 2: No bank would accept a re-fi – stuck with this one.

I know I am behind the eight-ball in terms of saving for retirement – I would rather refer to that as “Money When I am Physically Unable to Work.” I need at least another million dollars.

Should I be saving money for retirement or paying off the primary mortgage?

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retirebyforty April 9, 2014 at 9:25 am

It’s up to you, but 2.99% is really low. You might want to invest some of that saving to increase your cash flow. Maybe REIT or dividend stocks? They have dividend and it will help your cash flow.
Might be good to refinance rental 1 if you can do it.
I’d save more for retirement so you can get some tax break. Hopefully, you’ll get some input from other readers.

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G June 22, 2014 at 6:05 am

I’ve started trying to create a retirement plan even though it is several years away, and have read many articles on things to consider. These are all really good points you make related to paying off the mortgage early. Only one that isn’t clear to me is the diversification one. I guess theoretically it seems to make sense that you would have multiple sources of investments in case of a real estate crash, but your real exposure is the balance of the mortgage not just your equity, right? So if you have a $300k valued house and a $200k mortgage, you have $100k in equity. And let’s say that you have $500k in net worth including the equity. If the housing market crashes, and the value of the home is worth now $150k, you still owe $200k so you have $-50k in equity and your net worth is $350k including the negative equity. It doesn’t matter where your other investments are since you still owe the $200k. Wouldn’t this be like saying I am diversified in my stock portfolio because I borrowed funds in my margin account so that I could buy multiple stocks? I’m just not understanding how this is diversifying risk. What am I missing? Thanks.

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Jez June 26, 2014 at 6:58 pm

Nice article. Let me start by saying, I’m 33, have 4x mortgages and have also published an investment book. I USED to think similarly to the publisher here and he has good points for long term growth investment BUT.. I still work full time to fund all this debt.. I also have half a mil or so equity which sounds good on paper and will rise into the future but my goal is to be financially free. How am I free when I’m chained to my job to fund my large mortgage and three other investments? The answer is: I’m not..

But I’ve now chosen another alley. All three investments are currently on the market which will provide around $350,000 toward my mortgage. Thus freeing me from work right now, not 10 years into the future. I will borrow to fund another 100% LVR loan with no outgoings for a pos geared property next year for a retirement fund later on down the track but for now I have very low outgoings and don’t have to go to work if I don’t want. THAT is what I’ve been looking for. Our debt and outgoings have been slashed by 65% thus freeing us from the chains of a job. To give you a real picture, our weekly mortgage cost was $790, which is now $220 and an average Aussie salary is around $1000 per week.

The Wife & I are kicking this off later in the year with a few months exploring the globe because we could die tomorrow (or even today!) a harsh reality for all of us.

10 years ago I began on a path toward financial freedom, today, I’m almost here, for which I cannot quite tell you how good it makes me feel. We could all go on forever working toward a goal of more and more money. But we will all die without living if we did. My advice is to work hard and be dedicated, never lose sight of the bigger picture and you’ll certainly make it. But you have to find a balance too.

In answer to the Q: Should you pay off your mortgage? it depends where you are in life. If you did then you can always borrow from it for investment so it’s always a very good option and hard to lose.

Jez

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retirebyforty June 27, 2014 at 9:47 am

Great job! Have fun on your trip. Life is short so we need to enjoy it.
We just sold 2 of our rentals too, but we’ll put that into another rental that we can move to in the future. With this plan, we’ll reduce our monthly housing cost by quite a bit. Enjoy your financial freedom journey.

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Nightvid Cole July 14, 2014 at 1:46 pm

I feel a need to correct a major mis-conception here. Paying off or down a mortgage does not increase your exposure to real estate, since you get 100% of the property’s gain or loss and 100% of the implicit monthly rental value whether you have a mortgage or not.

Having cash/bonds and a mortgaged property with the payoff equal to the cash/bond values is *not* having some in real estate and some in fixed securities. It is in fact 100% real estate because the mortgage is a negative bond or negative cash which cancels the positive bonds and/or positive cash. So there is *no* asset diversification benefit whatsoever to holding both a mortgage and fixed securities simultaneously!

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Karen July 24, 2014 at 12:48 pm

And now a post from the real world. My husband and I married in the 80’s. We earned advanced degrees (MBA, Ph.D.) worked hard and saved moderately when we could. We never made a lot of money, because my husband’s Ph.D. is in psychology. I ended up going back to school in my late forties and becoming a teacher. We had a child, sent her to college and now at 56 and 57 have a paid off house, a modest retirement fund and a potential for some income from two small pensions. We got a 15 year mortgage and paid it off on time. We did not have any extra money to put toward the mortgage because of unexpected medical expenses, and expenses related to our child. We will sell our house next summer for what the realtors say will be around 500k. We paid 178K. That is the biggest amount of money we’ve ever had. We do not anticipate ever being rich. We will have to work until our mid 60’s and I may go to 70 in order to get my pension amount up to a living wage. Our plan is to purchase a small home and a rental property to provide us with supplemental income. This is considered really good by most people. The majority of Americans don’t make nearly what we did, and even being frugal they don’t have the wherewithal to save. There are people in my extended family who have never made more than minimum wage. These are hard working people who just never got ahead. So much depends on luck. I have finally decided to stop worrying about money so much. You can’t change the past nor predict the future, but you can miss out on your present while worrying about both.

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Seth Christensen July 27, 2014 at 7:11 pm

I noticed your link for Quicken loans. I recognize that you need sponsors to make more money, but my two cents is that Quicken is one of the sleaziest companies I’ve ever dealt with. They make you pay a $400 fee just to talk to them about refinancing which is non-refundable if the loan doesn’t go through. After promising no cost refi, they tacked the closing cost onto the end of my loan and still had a higher interest rate than market. I ended up having to rescind with them so I would not have to worry about owing them $400. Stay away from Quicken.

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Raul November 25, 2014 at 11:38 am

This was a wonderful post. Until now, I was under the impression that I should try to get rid of all my debts as quickly as possible, but with such low rates and your comparison to the inflation rates, it makes sense not to pay it off quickly. Thanks for the insight

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Jose December 13, 2014 at 5:39 am

I just turned 27 yr old. At the moment we are trying to pay the mortgage as soon as possible, sending in about 4k a month . Have about 114k left on the mortgage,which should be paid off within 2 years since I probably raise it even more. I been trying to buy a rental property for the last two years but work and business decision have made it impossible.
By 40 we should retire if we wanted to but I don’t think I will since I like business and work. I look retired sometimes since there are times I don’t work for weeks that much and then I work 80 hr in a week.. So, at the moment is our decision what days we do or not work. I am thinking of having 10 rentals paid off by 40, which I have enough time to do…
Let’s just say we make 200k or more and growing each year, and we live on less than 1500 a month not including mortgage. Most people with our income would have nice cars and even more expensive home.
Oh, no kids yet.

Btw great blog, I read all the comments.

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