Today we have a FABULOUS guest post about paying off your mortgage. If you haven’t noticed, I am SO SICK of my mortgage. On my September plan update post, I expressed my disdain of my mortgage balance and Mustard Seed Money wrote the greatest comment about paying off his mortgage. I basically begged him to write this post. By way of introduction, Mustard Seed Money works for the federal government as an accountant and is on the way to financial independence in just a few years! When he’s not inspiring my comment section, he shares amazing wisdom over at Mustard Seed Money. And now, his thoughts:
Paying off my mortgage was the best thing that I ever did in my financial life. In the beginning, I thought of my mortgage as a necessary evil. I was pretty grateful to get a 15-year mortgage with an incredibly low 3.5% interest rate, when I purchased my home in 2004.
All of the financial pundits at the time were encouraging people to take advantage of the low interest rates and to use any excess money towards the stock market. Meanwhile, I was considering whether I should pay off my mortgage or invest any leftover money.
I knew in my head that putting the money in the stock market was probably the smartest move, but my heart wouldn’t let me do it. Every month though, it was gut-wrenching for me to see half my paycheck go towards the house.
My Quest to Pay Off My Mortgage
At work, I felt incredibly uptight at the thought of my huge monthly mortgage payment. I knew I wouldn’t be able to make these payments if I was out of the job, so I worked my butt off at work to ensure that I wouldn’t get fired. I didn’t want my company to have any excuse to lay me off. Even though I was working hard, I probably would have worked that much harder without the stress of the mortgage on my mind.
When I first started to make an additional payments towards the mortgage, the concept of totally paying off my mortgage was surreal to me. It felt like an unachievable goal. Slowly but surely though, I started to make a dent in the mortgage and finally paid it off completely in 2012, nearly 7.5 years after I first acquired the mortgage. Along the way, I had friends and co-workers tell me I was crazy and brag about everything they were doing with their extra money, like traveling or purchasing fancy cars.
Investing Money vs Paying Off the Mortgage
Shortly after I paid off the mortgage, I decided to calculate the difference between paying off the mortgage versus investing the money, as the financial pundits had advised.
Using Morningstar, if I run the numbers assuming that I had purchased the S&P 500 (which I talk about in Why I Love the S&P 500), from 2004 to 2012, the total return would have been 47.19% with dividends. On face value, that would have been a return of 4.65%, which obviously is higher than the 3.5% mortgage rate I was getting a guarantee return on.
However, since I didn’t make a lump sum payment to pay off the mortgage in the beginning, the figures above aren’t an accurate measurement. In fact, a dollar-cost average would portray my true return. If I use the additional $900 average monthly payment I was putting towards the house, I would have a cost basis in the S&P 500 of $92,700, with a total return including dividends during this period of $119,421. This comes out to a return of closer to 3.6% per year, which is similar to the 3.3% return on paying off my mortgage earlier, or a difference of $2,781 over the 7.5 years. As you can see, there wouldn’t have been much of a difference between investing the money or putting it towards my mortgage.
My New Reality
When I finally paid off my mortgage, it took a couple of months to sink in. My emotions ranged from disbelief to elation. I didn’t throw a celebratory party or even tell anyone initially. I guess I didn’t know how everyone would take the news, and I didn’t want to come off as bragging. In due time however, I started to relax about the subject and when the topic of a mortgage came up, I began to share with my coworkers and friends what I had done.
Most of my colleagues and friends were amazed, and some didn’t believe me. They asked how it was possible, as many of them also believed a mortgage to be a necessary evil. Paying off my mortgage opened up a wide variety of conversations pertaining to my peers’ financial situations. In turn, I was able to help people realize their financial potentials and convince them that financial freedom really is possible.
A Better Employee
Now that I don’t have a mortgage, I am more open to taking risks at work. While I enjoy receiving a steady paycheck, without the weight of a mortgage on my shoulders, I am able to focus more on creativity and ingenuity instead of just climbing the corporate ladder to obtain a bigger paycheck. This has worked to my benefit since my risk aversion has greatly diminished, and I am more comfortable speaking my mind at work. Funny enough, I have gotten two promotions in four years since I’ve gotten rid of my mortgage. So in my opinion, it’s worked out even better than I imagined.
I know in my head the smart thing was to invest the money into the stock market, but I’m glad that I followed my heart. As a result of paying off my mortgage early, my productivity has increased at work, and overall, I’m a better employee now than before when I was stressed out about each monthly mortgage bill. I truly believe as Mr. 1500 puts it, “Money gives us the security to let our real selves shine through.”
Have you paid off your mortgage? What are the benefits to paying off your mortgage vs. investing? Share your thoughts below.