Why I Didn't Pay My Mortgage Off In Full

By Joel Ohman on 5 February 2010 (Updated 23 June 2011) 26 comments

Getting out of credit card debt, paying off all student loans, and paying off their mortgage in full ASAP is the #1 goal of almost every personal finance blogger on the Wise Bread Top Personal Finance Blogs List, but what if they have it all wrong?

OK, as the owner of Credit Card Chaser, I will be the first one to admit that going into credit card debt = bad. Why? As you can tell from the true cost of credit cards calculator, if you buy something with your credit card and don’t pay off the balance in full the first month, then that $50 tank of gas can start to balloon to close to $60 (and you’ll make payments on your 20% interest credit card for a year and a half). If you fill up your tank every week, before you know it, you are essentially tacking on an “I like to carry a balance” surcharge onto every tank of gas you buy.

If carrying credit card debt is so bad, then why did I pass on the opportunity to pay off the $270,000 that was (and still is) remaining on my home mortgage last year? Isn’t the Holy Grail of all personal finance bloggers to get to the place where they can say that they are “100% debt free” and then put up all kinds of fancy progress bars and charts and graphs on the sidebar of their blog boasting about their “freedom from debt” and their ever increasing net worth?

For many people, it’s a noble and wise goal to pay down their mortgage as quickly as possible. For many others, however, paying off their mortgage in full earlier than they have to could be a huge mistake.

“LOAN” — The 4 letter word that shouldn’t be a 4 letter word

When you read the word “loan” on many personal finance blogs, the word is treated as either a necessary evil at best (i.e. “I was approved for my home loan, but I am going to make extra payments so I can pay it off as quickly as possibly”) or the spawn of “you-know-who” from “you-know-where.”

I would submit that getting a loan can be a great tool for building wealth, if and only if, the loan is used in the right way and for the right things.

What is the right way and what are the right things? I am glad you asked.

Arbitrage, ROI, NPV, WACC, & other fun stuff to bore a date with

Just in case you have never bothered to read the Wall Street Journal, perused Yahoo Finance, or spent a quiet relaxing night at home curled up on the couch reading the latest SEC filings (or if you have never taken a basic business class, for that matter) then you will not know that almost every company whether public or private, large or small, usually uses some sort of debt in order to increase its profit and build long term wealth.

For everyone else that has done any of the above things, you will admit that debt can be a powerful tool for many companies to use in accelerating their profit potential. For anyone that has taken a finance course, then you have likely heard more than you care to know about calculating the ROI, NPV, WACC, and other measures commonly used to help make business decisions that often include debt financing.

If many financial experts, analysts, and personal finance bloggers alike are quick to applaud the numerous ultra profitable and ultra successful companies that use debt as a means to build wealth, then why on the micro level is debt viewed in an entirely different way?

The Business of “YOU”

I own 4 different businesses that generate a very healthy ROI, so when one of my businesses was fortunate enough to sell a business asset in the high 6 figure range this past year, I was confronted with the fun situation of deciding how I should best put that large (for me) amount of cash to work.

I could take the advice of most personal finance bloggers and pay off the approximately $270,000 that was left on my mortgage and costing me somewhere in the neighborhood of 5% or a little less (after factoring in the tax savings of the home mortgage interest deduction) with one fell swoop and still have almost 2/3 of the lump sum of cash to use for other purposes. OR I could invest that money back into my business that was currently generating an ROI of much higher than the 5% my home mortgage was costing me and make that home loan accelerate the creation of wealth.

As you can already guess from the title of this article, I chose not to pay off my mortgage. I used the majority of the money to re-invest back into my business, because yes, I could essentially “make” 5% by paying off my mortgage in full early but if the ROI of my business was 20% (not the exact number, but just chosen for illustration’s sake) then even after factoring in the cost of the debt, I would still roughly net 15%.

Yes, there are many different things to consider before making a decision like this because risk tolerance, the certainty of future cash flows, the confidence that one has in their ability or their businesses’ ability to maintain a certain level of performance, and even the availability of investment/business opportunities yielding a comparatively high ROI are all a factor — among many others.

The Challenge

My challenge to you is two-fold.

First, understand that personal finance is, in fact, very personal. Just because 9 out of 10 of your favorite personal finance bloggers or “experts” tell you to do something because generally it is the best advice for most people, that does not mean that that is the best thing for you to do.

Second, calculate how much your money is worth to you. What is the opportunity cost of “doing the safe thing” and paying off your mortgage early? What is the ROI of investing into your business or investing into yourself (via education, training, etc.)? Are there arbitrage opportunities or even simply good uses of debt where you can earn a positive ROI by using debt to your advantage?

What do YOU think?

BONUS: If you are one of those people that are just looking for an excuse to think that it’s OK to go into debt so that you can buy a big screen TV or a Jet Ski then stop, do not pass go, do not collect $200, and immediately re-read this entire article and then write on the chalk board 100 times: “I will only use debt to buy appreciating and/or income producing assets. I will only use debt to buy appr-”

Well, you get the picture.

This is a guest post by Joel Ohman, a Certified Financial Planner™ and the owner of a credit card website with some really cool (or so he likes to think at least) credit card calculators and other tools for finding the best credit card. Read more articles by Joel:

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Guest's picture
csdx

For me it makes sense to pay down my mortgage at least until I hit the 20% equity mark so I'm not throwing money at PMI. The sooner I jump that hurdle, the better the ROI of those extra payments is over the next several years. After clearing that magic number, I'll likely need to reassess where it makes sense to put the extra money (most likely retirement accounts). As an employee, I don't have a growing 20% business to invest my money into. I suppose I could lend it out, but venture capital seems outside my current risk tolerance.

Guest's picture

I used to be a strong advocate of paying down the mortgage early. In fact, for a dozen years I have dutifully paid down my mortgage with extra principal payments. I've now got just over $100k to go before it is all paid off.

That being said, starting in 2009, I began taking the money I was applying towards the extra principal and "holding it" in a "high-interest" savings account because I firmly believe high inflation is coming thanks to our government's reckless money printing and deficit spending.

In such a high inflation environment, it would make little sense to pay down the mortgage early. Why pay down a 4% 30-year loan with today's more valuable dollars if high inflation is going to utterly destroy the value of them later?

For now, I'll continue to hold that money until I am convinced the gov't has returned to a path of fiscal restraint and sound fiscal management that will maintain some semblance of integrity to our currency. When/if they do, I'll take all the money I've been collecting and apply it to the mortgage.

Otherwise, it will eventually be committed to other places.

Best,

Len
Len Penzo dot Com

Guest's picture
csdx

Actually, holding your money in liquid form is a bad idea with inflation. True, inflation does work the opposite way with debt in that it makes it worth less later. However, the money in your bank account is also losing it's value at the same rate. To truly protect against inflation you'll want to convert the money into either other currencies or into physical commodities.

Guest's picture

@ Len

Thanks for bringing up the inflation issue because that is something that I should have touched on as well. I am of the opinion that high inflation could be on the horizon so that was another element that was in favor of me making the choice I did. Thanks!

Guest's picture
Billy

For about a year I made an extra principle payment on my mortgage. Then I took a step back to think about why.

First of all, the last time my home was appraised, it came in about 30k higher than when I bought it about 3 years ago (I live in an urban area).

Second of all, I'll probably only live in this house for 5 more years.

Third, the interest is tax-deductable.

Fourth, if I'm going to put money into my house, i'd rather put it towards home improvements (which my home desperately needs) to not only bolster it's value, but also leads to my own greater enjoyment of the home.

Why lock up that money that I'm just going to end up getting back when I sell the house? Doesn't make much sense to me.

Guest's picture
Anthony

The decision is easy for me. Get rid of all of my debt. Emotionally, I would feel better off if I truly owned my home.

I am not fortunate enough to have side business in which to invest. Even if I did, the business may not always be there. The mortgage will be.

Guest's picture

@Anthony

You make a great point in that for many people they simply sleep better at night if they have X amount of debt or are taking X amount of risk in the market. If that is the case for you then by all means don't overextend yourself to the point where you always feel uneasy. Granted that kind of thinking may also be a mental block to holding you back from embarking on certain ventures that you think are too risky but its important to remember that there is risk in everything we do - even working at a safe cushy office job where we think that we could never get laid off... Just something to think about. Thanks!

Guest's picture

Joel you present some great arguments for not pre paying. Ultimately, the choice is very personal and differs for each individual.

As for me, I still choose to prepay my mortgage. My goal is to be mortgage free by 30. This will allow my wife to be a stay once we're ready to have kids.

Also, I currently don't have anything (working on a side business though) that gives me a guaranteed or almost guaranteed rate of return above our 5% mortgage rate.

Guest's picture

Thanks RJ, I agree that it all boils down to any one individual's opportunity cost. If you are currently working on starting your own side business then I would consider using some of that money that you would otherwise use to pay off your mortgage early and instead plow it into your company (if you truly believe in yourself). Of course, it all depends on how much you believe in what you are doing but I know that from the perspective of an outside investor if they came to you to invest in your company and you didn't believe enough in it to invest your own money then they would see a problem. Good luck!

Guest's picture
Sean

Depends on your goals, of course.

If your goal is maximizing your pot, well obviously taking advantage of an investment that you have an inside track as to the level of risk, such as in your situation, makes a ton of sense. If your goal is having your enough (whatever that may be), well, that might make for a different decision altogether.

Personally, if I found myself in your situation, I would cut a check today and be done with it. Especially with a windfall of that order. Sure, I would be foregoing a portion of potential future earnings, but with another $500k to play with, really, who cares? Both potential future earnings are beyond my enough, so I may as well get rid of that mortgage around my neck and enjoy the peace. :)

Guest's picture
Q

Great article, but what types of appreciating and/or income producing assets would you suggest to those who don't have a side business? As far as I'm concerned, the mortgage is getting enough of my income already. My initially high-interest savings gradually dwindled to about 2%. As mentioned above, our current strategy is investing in the house itself.

Guest's picture

Thanks Q, it really all boils down to the "personal" part that I mentioned in the article because each and every person has different goals, risk tolerances, opportunities, etc.

That being said I am a firm believer in building wealth via the accumulation of appreciating/income producing assets especially given that I believe that those who hoard cash (even in a high yield savings account) could get punished if we get hit with high inflation in the near future (a strong possibility).

A few ideas to consider:

1. Businesses
2. Real Estate
3. Gold
4. Domain Names
5. Websites/Online Businesses

There are many different types of "alternative asset classes" that could be considered but it all really depends on the individual. Hope that this helps!

Guest's picture

I think people who want to get it paid off are just too rushed. It's a long term loan for a reason. Just pay off all your other debts and relax. It's tough to follow but makes sense.

Guest's picture
CB

I like the fact that any extra payment on my mortgage is worth 3x what I'm paying.
The house over 30 years cost triple at 6%.

Guest's picture
PK

Mort = death; gage = grip! Peace of mind! Now that's a tuff one to put a dollar value on! I 'decided' to pay my mortgage OFF and since 2007, I have built a comfortable emergency fund; are maxing out on my IRA & wife's 401(k) account; have no 'debt'; opened a business that is also 'debt free' & business is slow and given the financial situation our nation is under . . . . . I'm sure we all saw it coming - ha! ha! Peace of mind . . . . . no need to put a dollar value on it! It's priceless!

Guest's picture
Finance

You guys are giving great points and tips. I am actually applying what you guys are saying since I did not knew this kind of things.

Guest's picture
Stacey07

Yes, the tax deduction. Congratulations, you've just paid $1 in interest to earn at most $.35 back on your taxes. Great strategy! :-)

All joking aside, there's a reason that personal finance is "personal." If you've got a business or solid investment vehicle to plow your money into, great. But for most paying ahead might be a smart idea. The mortgage is a HUGE part of most people's budgets, and you have so many more options once that debt is removed. We hope to have our house paid off by 35 so that we can cut back on work and enjoy our family.

Guest's picture

@Stacey07

"Yes, the tax deduction. Congratulations, you've just paid $1 in interest to earn at most $.35 back on your taxes. Great strategy! :-)"

Of course one shouldn't choose to pay mortgage interest JUST for the tax deduction as you mention BUT it is necessary to highlight the true cost of home loan debt by including the tax benefits because in this article the comparison I am making is comparing the ROI of the business (or other alternative investment) to the cost of the mortgage debt. So in this case it is a great strategy! :)

Guest's picture

The myth is that you need a mortgage for the tax advantages. What a crock. A paid for home is always a better bet. Frees up more money in the budget, and 100% of the time can't be foreclosed on.

Guest's picture

@FinancialBondage

I don't think I have ever heard of the myth that you NEED a home for the tax advantages but when you are comparing two different types of debt and one type of debt has tax benefits and the other doesn't then obviously the tax consequences should be mentioned.

Additionally, as illustrated above in the article and in various comments a paid for home is NOT "always a better bet" - maybe for some this is the case and in fact maybe for the majority of people this is the case but be careful about extrapolating numbers from your personal circumstances and projecting them as a "one size fits all" approach to anyone and everyone because it simply doesn't work.

Thanks for the comment!

Guest's picture
thomas adair

Real traders are taught that the Holy Grail to Investing doesn't exist. Real people were taught that all the planet's move about the earth, don't go to far out into the ocean(you'll fall off the earth), on and on..........

When one looks outside the box(inventor), goes against the group(thinks for self), said they found(developed) something that is supposed to be impossible(airplanes), they were once killed. Now these people are called bad names and delegated to be unheard, and ignored group.

I developed multiple arbitrages that enable me to trade(not invest) in the finacial markets, without risk(The Holy Grail to Investing), or arbitrage that anyone can do. Over 30% a year.

Thomas Adair
thomasadair@live.com

Guest's picture

The Bible says that debtors are slaves to the lender. Getting out of debt as fast as possible has always been the right thing to do.

Guest's picture

@ Wise Finish

The Bible has many verses that caution those who take out debt and especially for what reasons one takes out debt for. Borrowing money to purchase assets (also used as collateral) that appreciate and earn a rate of return is not the kind of borrowing that the Bible is warning about.

If someone can borrow and create more wealth with the borrowed money, he is being a better steward of Gods money (i.e. Education, Business Assets, Home, etc.) Borrowing to purchase a big screen TV = not a good idea.

The Bible does not prohibit debt. However, everywhere that debt is mentioned, it is discussed with some very clear warnings. If you do borrow, you must pay back all of the debt. It is a sin to borrow and not repay. If you do borrow, you should do so only if you have a guaranteed way to pay it back.

Practically speaking it works like this: if you take out a loan with collateral (i.e. a home loan) and you put down a big enough down payment then even if the market turns against you then historically (real estate price wise) you should still be able to repay everything you owe even if you never made another penny for the rest of your life because of the large down payment and the house that can be sold to repay the loan. This is why debt to purchase assets (and especially income producing and appreciating assets where the underlying asset can be used as collateral to repay the debt even if things go horribly wrong) is not the kind of debt that the Bible is talking about.

This is especially true when you consider the fact that in the parable of the talents mentioned in the Bible the steward who puts his money out to earn interest is considered wise which if you take the inverse of your interpretation of Prov 22:7 would seem to imply that the steward was being a slavemaster (i.e. a bad thing) of the person that he was lending money to which is obviously not the case as he is praised for the wise business transaction and being a good steward of the resources his Master had entrusted him with.

Hope that this makes sense and thanks for the comment!

Guest's picture
Matt

I paid off my mortgage yesterday. Being 35 and owning an asset worth $300,000 feels pretty darn good. Did this myself, no inheritance, no spouse, no gifted monies. How did I do it?---living below my means. Do I care about all the arguments for "good debt," mortgage interest deductions, etc.? No way - imagine how I feel knowing I have a good 30 years of enormous cash flow in front of me. No banks, no debt, no financial crises-EVER-for me.

Guest's picture

@Matt Congratulations on paying off your mortgage! That being said, your house does not kick off cash flow unless you are renting it out so I am not sure about your statement: "imagine how I feel knowing I have a good 30 years of enormous cash flow in front of me" - I can imagine you do feel pretty good and you should because that is a great accomplishment but personally I would feel much better having an asset that was income producing to my name as opposed to a house that even when paid off still only costs you money and doesn't make you money.

If I take your statement to mean that you are counting on your future earnings as significant cash flow then that very well could be true but it could also just as easily not be true if you lost your job, became disabled, etc.

All this to say that paying off your house early does not create cash flow for you necessarily (although it does free up your earnings from other areas to divert into other things besides making mortgage payments) and I would much rather make my money work for me by buying appreciating and/or income producing assets rather than paying off a possibly stagnating or even depreciating asset that does not generate income (a house).

Guest's picture

The way I see it, you either can or can't pay off your debts with the amount of income you have. It puzzles me why people even purchase things before analyzing whether they can pay it off or not. But when you get to that point when you are going into debt, you gotta get the right help. With millions of websites all over the internet, it's hard to determine which ones are fraud. Trust me, like everyone else I've been in that situation before and have gotten scammed one to many times. I couldn't keep up with even my credit card payments, until I joined Loansafe.org. They get the real info out there and there professionals are such a big help to me. Getting the right info, i haven't missed a mortgage payment in the 2 years since I've joined the site.