December 2017. Congress passed a new tax law. The expanded standard deduction meant I wouldn’t get any tax benefit from carrying the mortgage starting in 2018. I decided to pay off my mortgage in 2018. At the end of 2017, I owed $253k.
April 2018. I left my full-time job. After making extra payments with cash from vested stock awards and unused PTO, plus a few months of regular payments, my mortgage balance was down to $197k.
October 2018, after making many additional principal payments, plus the regular monthly payments, my mortgage was finally paid off. I had to do it $10,000 at a time because Chase limited additional principal payments scheduled on its website to $10,000 per day.
Maybe it’s time for me to write “How I Paid Off $250k Debt In 10 Months” or “How I Paid Off $197k Debt In 6 Months With No Paychecks” but let’s not go there. Although I’m glad I met my goal, it’s remarkable to me what paying off the mortgage didn’t do.
Not Debt Free
Paying off the mortgage didn’t make me debt free. I still have a loan on the new car I bought late last year. The loan is at 0%, but it’s still debt. Even without the car loan, I still owe up to several thousand dollars on my credit cards on any given day. It’s called revolving debt. By the time a payment hits and it pays off the balance in the previous cycle, I already owe money charged in the current cycle. No payment is due yet but it’s debt nonetheless. Because of this, I don’t expect to be debt free, ever.
Debt free or not debt free doesn’t make much difference to me. I can have debt and have more assets, or I can have no debt and less assets. Either way works. It’s all about the rates, what I’m paying and what I’m receiving. Trying to be debt free purely for the sake of it is only psychological, not necessarily financially beneficial.
No Increase In Net Worth
Not all cash outlays are expenses. Knowing the difference between cash flow and income/expense is very important in personal finance. From the previous post Savings Rate and Mortgage Loan Payments, we already know that the principal part of the mortgage payment isn’t an expense. It’s savings if you pay from your income, or it’s merely a transfer from your left pocket to your right pocket if you pay from existing assets.
I used proceeds from matured CDs to make the extra payments on my mortgage in the last six months. Money went from my left pocket to my right pocket: CDs down, home equity up. My net worth didn’t increase just by moving money around.
Housing Cost Didn’t Plummet
After I paid off my mortgage, although I stopped paying interest to the bank, my total housing cost isn’t going down. In some ways my total housing cost will increase.
The interest portion of the mortgage payments was indeed an expense. It did stop, but I also increased another cost: the opportunity cost. I used to earn interest every month on those CDs. Now I don’t. The drop in the interest earned is quite visible. My mortgage rate was 2.5% fixed. I would earn 3%+ on new CDs if I didn’t pay off my mortgage. It’s about a wash after paying taxes on the interest income. If interest rates go up, with all taxes factored in, eventually I will forego more interest income than I eliminated my interest expense.
Just like the largest cost of early retirement is the opportunity cost, the largest cost of owning a home free-and-clear is the opportunity cost of the money tied down to the home. The foregone income the money could earn is just as real as the interest you would otherwise pay to a bank. Whether to pay off a mortgage only depends on the difference between the interest rate you pay and the interest rate you earn, and your preference for liquidity. Not having a mortgage doesn’t change your total housing cost that much when you include the opportunity cost in the full picture of your housing cost.
We sometimes read someone only spends $X a year. When that low number is based on owning a home free-and-clear, it doesn’t include the full cost of housing. It’s not directly comparable to someone else who pays rent or has a mortgage. The lifestyle afforded by spending $X with a paid-off home is much higher. If I start telling you I only spend $60k/year, the true total cost is more like over $100k/year.
Property Tax and Insurance
The bank will return the escrow account balance to me. The escrow account never bothered me because the account paid 2% interest, which was higher than the interest rate in my own savings account. The bank used to take care of paying the property tax and homeowner’s insurance bills. Now I’m responsible for paying those bills.
Paying for homeowner’s insurance is easy because the insurance company offers autopay. The county doesn’t offer autopay for property tax bills. They have to be paid manually. It’s going to be a problem if I happen to be on an extended international trip when they send out the bill. I set a calendar reminder to check and pay the property tax bill.
Not The Best Financial Decision In My Life
Some say paying off their mortgage was the best financial decision in their life. I didn’t experience that kind of joy at all. Paying off the mortgage was very low on my priority list. I waited until now to do it. I don’t regret doing it but I don’t see it as something to celebrate either. I won’t hold a party to burn my mortgage note.
Loss aversion says we feel twice as much pain from paying interest to the bank as the joy we get from earning interest. This behavior bias motivates people to pay off the mortgage.
Paying off the mortgage was mostly a wash to me, maybe a slight net negative over the remaining life of the mortgage, because my 2.5% mortgage rate was very low. The calculation would be different if my mortgage rate was 3.5%, 4%, or higher. I did it because now that I don’t have paychecks, I’d like to lower my overhead. It makes my cash flow a little easier to manage. I don’t need the leverage to earn more on this amount. I don’t need the liquidity. I don’t mind increasing my opportunity cost.
Many other financial decisions in my life were far better than paying off the mortgage. I don’t see owning a home free-and-clear as a status symbol. Increasing your net worth is important. Only changing the structure of your net worth — more investments or less debt — is not as important.
When you hear someone paid off their mortgage, congratulate them on their act of saving the money (versus spending), not on the specific act of paying off their mortgage. What exactly they do with the money saved isn’t that important compared to saving it in the first place. People just usually don’t announce they bought more shares in a bond mutual fund.
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