Why I Would Pay Off My Mortgage Over Investing in the Market Every Time

By: Jeremy Biberdorf

April 28, 2015

Why I Would Pay Off My Mortgage over Investing in the Market Every Time

This post has been written by Derek Sall, the owner and head writer of Life And My Finances.

I am completely debt free. I have no credit card payments, no car payments, no student loans, and as of December 11th, 2014, I have no mortgage payments. That’s right, I own my house free and clear.

After paying off a large debt in record time back in 2013, I decided that it was time to set the huge, audacious goal of paying off the remainder of my $54,500 mortgage in 2014. With an income of less than $70,000 a year, I definitely needed to get creative. I started out by reducing every bill I could think of by:

  • Calling Verizon and getting my plan reduced from $85/month to $60/month
  • Shopping around on my insurance and saving over $400 a year by combining my auto and house insurance with a different company
  • Shopping at a discount grocery store and spending less than $150 a month on food
  • Riding my bicycle everywhere I could to save on gas
  • Cancelling my escrow to stop overpaying into the bank’s account

After I reduced my spending to a minimum, I knew that I also needed to work at increasing my income. I did this by:

  • Working with my accountant to get the most money back from my taxes (this was HUGE)
  • Filing for educational reimbursement from my work for the MBA classes I had taken
  • Writing articles for other bloggers for just $10-15. I literally wrote over 150 articles over the span of just a couple of months.
  • Buying and selling two cars for a profit
  • Mowing my nephew’s and my sister’s lawns for some extra money each month

None of these income generating ventures produced that much money on their own, but all together it made all the difference in slaying my home mortgage!

But Why On Earth Would You Pay Off Your Mortgage?

I got sassed by my friends time and time again throughout the year. “Derek, why are you paying off your mortgage when interest rates are at an all-time low?” was the common pointed question. Everyone looked at me like I was an idiot because obviously it would be smarter to hold onto your mortgage and put your money toward something that’s more productive. But what research do you suppose they did to come up with this conclusion? Absolutely none. Their opinions were based on the knowledge of their friends and television advertisements. In my experience on this earth, neither of those sources are very reliable.

For those that thought they had airtight reasoning against paying off a mortgage, they often voiced the following opinions:

1. You should keep your mortgage because of the tax deduction

To be completely honest, this reason still gets my blood boiling because it makes absolutely no sense. Homeowners that have a mortgage make their payments each month. Of this monthly payment, some of it goes toward the principle and the other portion goes into interest payments (which just goes straight to the bank and doesn’t benefit you at all). The tax deduction essentially gives you about 25% of your interest payment back. There are people out there that keep their mortgage to pay the bank $400 in order to get $100 back from the government. According to my math, that’s a $300 loss.

2. Inflation will essentially make my mortgage cheaper in the future, so I should wait

Yes, inflation raises the price of goods and services from year to year, and my income will probably rise accordingly as well, which will essentially make my house payment cheaper since this amount remains constant. But, do you think the bank hasn’t already considered this?

When you first buy a house and start making your payments, have you noticed where most of your payment goes? Toward interest, not the principle. So, your full-price dollars today are going straight to the bank, while your reduced-valued dollar goes toward your house equity in the future. In my opinion, the bank is winning from your long-term mortgage payment plan, no you.

3. You should invest your extra money instead

Compound interest is an amazing thing and should be taken advantage of, so this argument holds a little bit of weight, but an investment does not always increase at a high rate of return. For example, the S&P 500 was worth $1,441.47 on January 7th, 2000. Fifteen years later, the S&P 500 has risen to $2,025.90. It sounds like a pretty impressive increase doesn’t it? But, when factoring in the 15 year time-span, we soon understand that the average growth during this period was only 2.3% per year. That’s pretty crappy. I think many of us would have rather paid off our home mortgage rather than becoming an investor and investing in something that gives you a not-so satisfactory return.

S&P500                                  Source: Google Finance

Additional Reasons Why I Would Pay My House Off Every Time

There are so many benefits to paying off a mortgage; I’m not sure why more people don’t do it. Maybe they don’t want to be thought of as weird, or maybe they want the extra cash each month to buy other items on credit (meaning that they can’t really afford them). In general, I think it has just become normal to have a mortgage, so many people don’t think twice about having one. For me though, there were definitely more pros than cons. Here’s a taste of the pros:

1. Interest Savings

By paying off my entire mortgage in just over three years, I was forced to pay only $6,000 in interest payments instead of the $70,000 that I would have incurred by carrying my mortgage the full 30 years.

2. An Expedited Goal

Goals are incredibly powerful because they transform your mind from “I can’t” to “How can I?” If I would have kept my mortgage and put my additional money toward investments like the general population was telling me to do, I would not have gone to the trouble of decreasing my expenses or increasing my income. I would have simply put a portion of my earnings into the market and gone about my life as usual. But, with a goal of paying down $54,500 of debt in one year, changing my current lifestyle became serious business! This mortgage payoff goal drove me to new heights, and accomplishing this goal was simply fantastic!

3. There’s no longer a risk of the bank taking my home

I have heard of it happening before. A couple pays down their home mortgage for many years and only has $50,000 more to pay on their $200,000 home, but suddenly, they both lose their jobs and cannot pay the mortgage. At this point, the bank legally has the right to take the house from them completely because the note is not fully paid for. I never wanted to find myself in this situation. The peace of mind that came from paying my mortgage off early was priceless.

Beyond this, I would love to invest in real estate, but I have seen the peril of taking out multiple loans at the same time. There were many successful real estate tycoons that had 10+ mortgages taken out for rental properties. They were cash flow positive on their investments and everything was going great, but then the market turned and the bank needed their money back. The bank called in their notes and these “wise” real estate investors couldn’t sell their properties for the amount they owed the bank. Just days earlier they were on top of the world, but in just a moment’s time they were flat on their faces – bankrupt.

I definitely don’t want to repeat the mistakes of these men that have over-leveraged their investments. Instead, I have paid off my mortgage so that I can invest in real estate with cash.

4. An Amazing Cash Flow

With no mortgage and a reduced yearly expense (due to my work to lower costs last year), I can live quite comfortably on just $10,000 a year. This gives me a TON of extra cash each month. Initially, I’ll load up my checking account as it pays out 3% interest, and then I’ll invest in other small ventures, like investing in the stock market, until I have enough to purchase a rental home for approximately $60,000. With the additional cash flow from the rental, I can save up the next $60,000 even faster to buy the next one (and so on and so-forth). Within just ten years, I could easily have a million dollars’ worth of real estate.

I Would Pay Off the Mortgage Every Time

I absolutely love being debt free and would highly recommend it to anyone that is seriously considering it. Living is cheap, stress is low, and the income just keeps accumulating! For all the people that recommended putting the money in the market, I wonder if any of them have even started yet?

Would you pay off your mortgage early?

Photo Source

About the Author:

Jeremy Biberdorf is the founder of Modest Money. After working many years in the website marketing industry, he decided to take on blogging full time and also get his finances headed in the right direction. Also check out his contributions to Equities.com and Benzinga.

119 thoughts on “Why I Would Pay Off My Mortgage Over Investing in the Market Every Time”

  1. Avatar

    You say ” I’ll load up my checking account as it pays out 3% interest.”
    Where are you getting 3% interest on a checking account?

  2. Avatar

    Thanks for the article, and thanks to everyone who responded! I am going to have to do some quick study! I’ve recently become co-trustee with two other family members for my mother’s trust. She is 83. My son and I live with my mom. The market value of her modest home is at least $500,000. There has never been a mortgage on it. She and my father have paid cash for all their residences since the mid-70’s. With the value of homes expected to drop as early as early 2017, and the dollar expected to lose value also (it’s hard for me to grasp that there is any value left for it to lose….), I’m wondering if it’s time to lock in an interest rate and mortgage part of the home for some investments. I would like for us to do what we can, to prevent loss of the estate’s value. There are other investments besides stocks. We are looking at international commercial properties via an REIT. I appreciate any comments! Thank you.

  3. Avatar

    What you didn’t factor in on the inflation topic was that inflation reduces both your principal ant interest ( at an avg of 3% annually). It doesn’t matter that the bank takes its interest first in the amortization schedule – inflation works against both so you get the benefit regardless of how they stack the deck.

  4. Avatar

    This is a bullshit article. No checking account pays 3% interest. It’s unlikely the jackass in the article is able to live off $10000 annually in the United States; that’s even lower than those living below the poverty line. If you’re going to lie, do a better job.

  5. Avatar

    Horrible financial knowledge is being espoused. You didn’t pay off your house in one shot so why would the rate of return you show reflect as such. By your logic, a contribution into the s&p in March of 2009 at 683 would have more than tripled in 6 years. Did your house triple in value since purchase? Way fuzzy math on your part. Google “dollar cost averaging” please. This article should immediately be deleted as harmful.

    For what its worth, I’ve never received an inheritance or been gifted a sum of money. I make good money but never have had a six figure salary. I have 3 kids and a wife who spent most of the past 15 years as a stay at home mom but went back to work a few years ago, earning about 2/3 of my salary, Why do I bring all of this up? I took the investment path since my very first paycheck about 20 years ago and reached millionaire status prior to my 45th birthday. Still owe about 1/3 of the initial loan value on our house but like you, I feel no risk of the bank taking my home. To get to where I’m at, I freely accepted any tax free or tax deferred growth that the government wanted to offer…maxed out 401Ks, maxed out IRAs, maxed out HSA. I used flexible spending accounts and dependent care accounts when applicable and pretty much stuck/stuck with exchange traded funds or mutual funds with low fees and no loads. My wife used to read articles such as this and would nag about making paying off the house a priority. I’m glad I used all of the research that you claim as not existing to pick my course. You owe your friends an apology.

    1. Avatar

      Millionaire status? – I suppose that’s why your wife felt the need to go back to work after 15 years?

      There is nothing “harmful” about this article – only a suggestive approach on how to manage your finances/debts. I have always learned that “debt free is the way to be”, so the fact that this guy is even willing to pay off ANY form of debt as fast as they can is always a step in the right direction in my “OPINION” as with the writer of this article. It just comes down to what’s more important to people. Carrying the burden of debt just to make a few extra bucks on the side or paying off debt asap to free your mind of owing anyone anything and taking the rest of your money and living mortgage free.

      For what it’s worth – you are in a great position and doing things right FOR YOU, so I definitely applaud you for your path and due diligence with research – if you can handle the stress & unknown, more power to ya. But there are still plenty of successful people out there that have chosen a different direction than you. Life bro… life.

  6. Avatar

    Paying off the mortgage is the way to go.
    Looks like several angry mortgage debt holders / market investors are in the house (no pun intended) ha

  7. Avatar
    GuyThatKnowsInvesting

    The S&P also paid an insane amount of dividends during this time … the real return of the market on average is 8% per year.

  8. Avatar
    DifferentStrokes

    It all depends on individual circumstances. Putting together a spreadsheet with valid numbers shows the reality. If I were to have an IRA investment of $150K (the current remainder on my mortgage), pulling it out at a conservative 4% gives $428/month income after a 10% tax. Problem is, my existing mortgage payment is $1300 per month. I would have to invest $400K (virtually impossible to do in 2 years) to get the same monthly draw during the same time-frame. When I retire soon, I won’t have any taxes since my income is so low, so any housing write-off at this point in my life is meaningless. Anybody that tries to convince me that continuing to invest vs paying off a mortgage is brain-dead.

  9. Avatar
    Personal preference yes, but flawed information also...

    As someone who has worked in the financial services industry for more than two decades I can tell you that I have gone through these scenarios time and time again with people. Using varying mortgage rates and varying potential rates of return on investments taking in to consideration market forecasts, MERs etc.

    In the end the answer is always the same. It’s personal preference. For some it’s as simple as “when it’s all said and done what will put more money in my pocket?” For others it’s as simple as “I hate owing money, I hate having debt payments, I just want to be free and clear.”

    Over a long-term time frame (10+ years), in MOST CASES you’ll end up with a higher net worth by investing additional funds vs. paying off your mortgage. A moderate performing, moderately aggressive, long-term investment should make between 5-8%/year on average over that 10+ year time frame. Whereas mortgage interest rates for a 5 year fixed term over the last 10 years have been in the mid 2% to low 5% range.

    Your example of the S&P is a very uneducated way of calculating the return on investment over a 15 year time frame. For one, most investors diversify over a number of investments to hedge against potential loses and take advantage of potential gains in a number of different sectors. Secondly, a very large part of return on investments comes from dividend payment that you seemingly overlooked.

    However, no amount of information, calculations or “more bang for your buck” conversations will ever convince some folks to invest vs. paying off their mortgage. If they have their heart set on hammering down the mortgage than that’s what they’re going to do.

    In the end, you do what works best for you, your family and your own peace of mind. Money isn’t everything. For some, knowing they are debt-free is invaluable and would happily forego the extra money. We are an “immediate gratification” society in many ways. Seeing that mortgage go down by large chunks every months is often more gratifying than saying “in 15 years I’ll have more money than I would if….”

    Even I, having seen all the math and crunching all the numbers time and time again still struggle with which I prefer. I would say before you make your own decision, make sure you do your homework and take articles like this with a grain of salt.

  10. Avatar
    just a guy, drinking some beer. reading some words.

    The “personal preference yes” comment is the most accurate response I have seen. This article is flawed in many ways. In the majority of scenarios, the opportunity cost of investments will outperform your mortgage interest rate. Investing is most likely the best answer if you’ve got a decent mortgage interest rate (sub 5%) and NET WORTH is what you are after. However some people do like the psychological impact of being debt free… although they should also realize they may be paying an opportunity cost for his psychological benefit given that investments will, in most cases, outperform.

    Also the concept of ‘safety’ by paying down mortgage debt is grossly overestimated in this article. For one, if all your cash flow is going into reducing mortgage debt, a much larger percentage of your total assets will be in one thing: your home. (versus a combination of a home, domestic stocks, us stocks, bonds, etc.) Thus asset diversification is much better when investing rather than just paying down your mortgage debt.

  11. Avatar

    This article is garbage. I could attack eight different points that have already been attacked, but the main one some people have not touched, is that the sp500 pays dividends. Annual compound interest with dividends gives the sp500 a great return.

  12. Avatar

    Totally idiotic article by someone who cannot make more than $10,000 a year and seems to want o live like a pauper.
    I have a $1.2 million dollar house with a mortgage balance of $325,000.I can refinance at 3.875% for 30 years FIXED.
    I can remortgage for $825,000. I can take the extra $500,000 and can reinvest in solid private senior debt at 10%, thus pocketing an extra $50,000 a year and use some of the money to pay all of the mortgage debt.

  13. Avatar

    DO NOT FOLLOW THIS ARTICLE!!! this is very simple, what did the writer do once he had extra cash flow? okay, so obviously he was strapped for cash for many years as he was paying off his mortgage. So he missed the entire benefit of having a mortgage. If your ultimate plan is to use your cash flow to create wealth, then why would you want to wait so long. Keep the tax deductible loan, and instead of paying it down quickly just simply invest the extra cash right away. If done properly you will benefit from the tax deductions and grow your wealth at the same time. I find it funny how he doesn’t understand this point and still writes an article advising others.

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