Paying off my mortgage

Roth IRA Challenge: Mustard Seed Money Mortgage

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.

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25 Comments

  1. Ultimately it comes down to your risk tolerance more then the return. A mortgage acts as a sort of bond to most people with a guaranteed return vs a risky stock. If the market drops 50 percent you still have something for your money that can keep you from panicking. I pay ahead but necessarily off for that reason.

    • MaggieBanks

      It’s all about comfort level, as you say. For some people (myself included) having a mortgage is stressful. But if you’re able to just see it as a conservative investment, there’s a good argument for not paying it off early.

  2. Huge congrats on being mortgage free! We are choosing mortgage payoff as opposed to investing too. We just want to say that we don’t owe anyone a dime. 🙂

  3. We payed cash for our first house (and still live here) and I absolutely love it. I have never once wished that we had to make a huge payment each month. Not having that payment has given us so much flexibility.

    • MaggieBanks

      After we pay off this home, I plan to never have a mortgage again… even if we move. I’m excited to have that flexibility!

  4. I love this MSM! One of the things I always hear is how you shouldn’t pay off low interest debt, and instead invest it all. I chose to go the opposite way and just crush my debt.

    Your point about being able to take risks is exactly why I prefer paying off debt. Getting rid of that debt means one less big bill to worry about. I know that I could figure out a way to live with just my regular day-to-day expenses, if needed. But if I have to pay a big mortgage, student loans,etc too, it makes it much harder. When you get rid of debt, it means you don’t have to earn as much money, which means that you get more freedom! (or in your case, you have less fear at work).

    • MaggieBanks

      YES! Freedom earlier when paying off a mortgage… I’m excited to be in a place where I can feel comfortable taking those risks.

  5. Awesome story – thanks for sharing and providing some motivation. Our long term plans for semi-retirement are dependent on being able to pay off our mortgages (home and rental property). I can’t wait to experience for myself the wonderful liberation that comes with a paid off home.

  6. Nice work MSM! I bought my studio with cash having lost my other 3 properties during the housing market crash. My credit score dropped and the banks wouldn’t touch me. Knowing I own my home has helped to rebuild the confidence I lost during that period. And you’re right, it did take a few months to sink in that there wasn’t no more rent/mortgage payments to be made! It’s the best feeling in the world. 🙂

    Now, with a low cost of living, it is easier to find all other accounts and not have to worry about the housing aspect which is usually the highest hit to a normal monthly budget. Thanks for a great read!

    • MaggieBanks

      I’m sorry about the bad timing, but I’m glad not having a mortgage helped you move past it. I am excited to experience that “best feeling in the world”!

  7. Found your blog via a link on the blog of Mustard Seed Money. Really great to check it out!

    And it’s a real big achievement to paying off a mortgage early. I’m especially surprised that the return on paying off, is almost leveled with when the money was invested.
    We started investing over paying off because of the long term higher returns. (and everybody says it’s the best thing to do)

    We still have a mortgage for 28 years, and hopefully we will be able to retire before that. It would be amazing to have same feeling about freedom and taking risk by then. Having enough passive income to cover expenses is good, but would be even better if the expenses were so much lower by having paid off the mortgage.

    I’m going to check out if we should do it anyway.

    • MaggieBanks

      Isn’t it great how Mustard Seed Money paid off his mortgage early? We’re definitely hoping to do the same!

  8. This is our ultimate question right now as we look for a house. My head says invest but it does sound nice to not have a mortgage! We’ll see how much Kool-aid I drink. Thankfully, we’ve got some time.

    • MaggieBanks

      I can’t claim to know what’s best here. I don’t regret buying at all. But I also hate the mortgage. The answer is different for everyone.

  9. This has been one of my favorite articles to write. Thank you Maggie for the opportunity to share!!!

  10. Carrie

    We paid off our mortgage just a few months ago The major advantage of a paid-off mortgage is the peace of mind! Now my house is all mine. I don’t have to worry about interest rates rising. I don’t have that huge monthly payment anymore. I can increase my saving/investing rate. I’m sure I sleep better at night 🙂

    • MaggieBanks

      Oooo! I’m so excited for that! We’re at least 2 years off from paying ours off completely, but I’m throwing what I can at it!

  11. Debbie M

    I have also paid off my mortgage. It took me 17 years. I started with a 30-year mortgage, paid extra each month, refinanced to a 15-year mortgage after a couple of years, and started putting my extra money in the stock market after that. Unfortunately, that was the period when the stock market was flat! Still, it was nice to be able to max out my Roth IRA.

    Because the mortgage was paid off, I could afford to retire early. However, property taxes in my state are high, so it’s not as exciting for me as for y’all. [My fixed mortgage was $505/month for the principal and interest. Now property taxes alone are $650/month (values have gone up) and of course I also still pay for insurance and maintenance.] Early retirement is super exciting, though! And if taxes get too high, that means I’d get a lot of money if I sold. Of course, then I would have to live somewhere else, and I’m still in one of the cheaper parts of my city.

  12. Roadrunner

    What’s more beneficial (paying off your mortgage or invest) depends on a lot of factors and one of these is the emotional factor. I personally believe that if you have a mortgage, that’s not necessarily the evil itself. Look at some of the most successful companies and see whether they have any debts or not. But I can absolutely understand that emotionally it can be a huge success that you wake up by knowing that you don’t owe a single penny to the bank. And this is irrespective from the fact that you might be better off if you rather invested.

    • MaggieBanks

      I agree the answer is different for everyone. There’s definitely emotion tied up in having a mortgage for me. So I’d like to get rid of it, PRONTO. 🙂

  13. Love this! We have it in our plan to pay off our mortgage early. I bet it’s a wonderful feeling. And so awesome that it gave you a little more freedom at work. Inspiring. 🙂

    • MaggieBanks

      Super inspiring! Go away my mortgage! I’m ready to take more risks! 🙂

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