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

    I really appreciate this post. We have been slaying the mortgage as well, but with 2 years left at the current clip, we also hear a lot of voices advocating investing the money instead. We love the idea of being 100% debt free, lowering our cost of living, and just having more flexibility. But that compounding interest is tempting. Either way we have saved a lot of interest payments already.

      1. Avatar

        That’s my point. I don’t know your exact situation but my bet is you got a waaaaay better bang for your buck by contributing to your 401 K and getting the employer match. Based on your responses to comments the title of this article should be:
        “Why I would pay off my mortgage after maxing out my 401 K and setting some money aside for emergencies every time”

  2. Avatar

    We paid off our mortgage years early in 2003, and in retrospect I think it was the best money choice we’ve ever made. Yes, rates were much higher then, so the question was more clear cut. But doesn’t every portfolio need a guaranteed, risk-free investment with an annual return equal to your mortgage rate? You’re making exactly that investment every time you make a mortgage payment, or pre-payment, and achieve an annual return equal to your mortgage rate every year until your mortgage is repaid. Think of your mortgage as another investment opportunity, not a debt!

  3. Avatar

    I’m not against paying off a mortgage quickly, however, your argument against investing is very misleading to novice investors. I would expect you to give more credence to the true beauty of compounding interest by not ignoring the dividend factor coming from the S&P 500 over the course of those 15 years. If you’re taking those dividends and reinvesting them over the course of that 15 years you would be seeing significantly higher returns than your poorly calculated price appreciation return of 2.3% per year. Shame on you for misleading people to support your argument and belief, this is just as egregious as your friends that give you grief and do no research. You need to show also what average annual total return would be assuming an investment in a low cost ETF that tracks the S&P 500 over that 15 year period, not price appreciation. Running rough calculations, true average yearly returns over the time would be closer to 6%… The numbers don’t lie, having debt at a rate of 3-4% over the course of 15 years while investing assets yielding 6% over the same time is going to be a significantly better way of building wealth over time. Adding the benefits of a deductible mortgage is icing on the cake…

    1. Avatar

      Hi Pete. While there may be additional dividend income, don’t forget about the fees of investing as well. If you go through a broker, you’ve got advisor fees and fund fees. These can eat into your earnings even further.

  4. Avatar

    Another note – I call BS on your checking account paying 3%, what bizarro world are you living in?? The 10 year treasury is paying 1.97%, no checking account would pay 3% or anything close to that, maybe .03% is what you meant to say??

  5. Avatar

    Love this post and the idea behind it! I agree with you that it’s cheaper to buy off your debt every time simply because of the money you will be saving on interest. Why would you take on more debt to potentially earn a small percent on return? Of course, you catch a break and make money back, but chances are, you will just lose money over time. I agree with your theory that it’s better to pay off the mortgage, and thank you for sharing your wisdom!

    1. Avatar

      You’re welcome Valerie! Paying off the mortgage is a nice, clear-cut goal, and it “earns” you money every time with the interest savings! It’s pretty hard to beat that no-risk investment.

  6. Avatar

    I am in the process of paying down our mortgage early. We are currently on track to pay a 30 year $350K mortgage off in 7 years.

    I designed a plan that I call the “Pay More Tomorrow”. So I assume that between the wife and I we will increase our income by $10K/year through employment, investments, and side hustles.

    So in year 1 (2015) we are paying an extra $800/month in principal. Then each year after we add an additional $800/month. So year two it’s $1,600/month extra. By year 7 it’s $5,600/month extra.

    The idea is that we pay the mortgage off early, but we never feel any pain, because we are doing with extra money we never got use to spending.

    We are still maxing out my 401K at $18K/year and my wife’s IRA at $5,500/year. And we are also still investing an additional $1,000/month in other after tax investments.

    Congrats!

    GYFG

    1. Avatar

      Thanks for the comment, GYFG! You will be so far ahead of the game once your mortgage is paid off, and think about all that cash flow you’ll have once the mortgage is paid off! At that point, you’ll probably be thinking about financial freedom. Best of luck to you and your plan!

  7. Avatar

    Great article and congratulations for being debt free including not having a mortgage!
    It’s true that you might be able to get a higher return in the stock market but that’s not certain at all. And while interest rates are low now, there’s nothing to say that rates might be significantly higher in 5 or 10 years down the road.
    And the best part of this is that you don’t have the mortgage payments which as the article alluded to, frees us so much cash flow. You can use those funds to work on your investment portfolio. Extremely motivating!

    1. Avatar

      That’s right! Everyone seems to forget about the risk factor involved with investing. Sure, chances are that you’ll earn more in the market over a long stretch of time, but that’s definitely not guaranteed! There are some huge risks involved! Our grandparents learned this the hard way during the Great Depression, but many of us have forgotten this by now. Paying down a house has exactly zero risk, and just made it all that much more appealing for me. 🙂

      1. Avatar

        Yes, there are so many fees and so much risk associated with investing, but buying rental properties in Michigan… This sounds absolutely fool proof!!

  8. Avatar

    Thanks for the article! It has been my dream to pay the mortgage off ASAP!

    What checking account pays you 3% interest?

  9. Avatar

    If you were paid $15 for this article it was $15 too much. Most of your points for paying off a mortgage are senseless. You cherry pick a 15 year period with poor returns using just the S&P 500 instead of using historical real market returns. Financially you are much better off investing the money rather than paying off the mortgage. Even at 7% per year with a 4% mortgage rate you are missing out big time during a 30 year period. At least you have $15 more to invest from this poorly written article. While you feel comfort paying off your mortgage it was a poor financial decision.

  10. Avatar

    With all due respect, reason #3 is intellectually dishonest. How many people are investing in an S&P 500 index fund without reinvesting their dividends? For the time period cited (one of the worst 15 year stretches in recent history), the S&P 500 with dividends reinvested was 4.3%.

    Paying off debts early is advisable, but some people, clearly not Derek, do so at the expense of investing towards retirement in their 20’s and 30’s, which is a big mistake. I’m 37, and far from paying off my mortgage. However, I have no other debts, and if for some reason I could not put another dollar towards my retirement funds, I have already enough saved in various tax advantaged retirement accounts that sitting on that money for 30 years and enjoying compounding returns would provide adequate income when I am ready to retire. Starting early on retirement planning is absolutely critical.

    1. Avatar

      Hi Lucas. A commenter before you shared the same concern. While there may be dividend earnings, there are likely expenses to your investing as well. Broker fees, fund fees, and potentially a myriad of others. I’m not trying to be misleading. I just want to show everyone that the market is no guarantee for high earnings. It seems that many of us are forgetting that these days.

      1. Avatar

        Fair enough about fees, but I will point out that their impact can be minimized by going with passive index funds. I’m not paying any load for any of my funds, pay no adviser, and the annual cost for the funds is in the neighborhood of .2%.

        The reality is that anything you do with your money that carries risk to its value. Just putting your money in a savings account will certainly cause it to lose value in real terms as inflation takes a bite. I have seen friends lose their shirts in real estate, both by getting involved investment properties and during the housing crisis where their personal properties ended up with upside down mortgages. Owning a home outright does not carry zero risk. To the commenter who suggests living in a mutual fund, I suggest trying to eat a house. Retirement funds are far more liquid than homes.

        While there are no guarantees, one of the greatest risks young people have is not leveraging time. If we want to pick a specific set of dates with the S&P 500 (dividends reinvested), I’d suggest starting January 1929, the worst time we could possible pick. However, lets pick a 30 year time horizon, not 15, to give a 20-30 year old investor the time they’d really have had to get their return towards retirement. Annualized return? 8.4% Guaranteed to happen over the next 30 years? No, but there are also no guarantees with rental incomes, side businesses, or even a paid off home etc (all of which are laudable goals, but not as easy for Joe Worker to get started with as a 401K or Roth IRA).

        By no means am I saying it is a bad idea to pay off your house early. This is a laudable goal, and one I plan to accomplish myself, as part of broad financial plan. However, I think there is a danger that people read articles like this and think that they should focus every available dollar of their 20’s and 30’s on paying off their mortgage early while not saving a penny for retirement. I have personally spoken to people like this, and they have a difficult reality check moment when it hits them how much they have to ramp up their savings in the latter half of their careers, just as they thought they were reaching financial freedom.

        1. Avatar

          Really well said Lucas. I hope everyone has a chance to read this comment because there are a lot of half-truths in this article.

  11. Avatar

    You can make the argument about the trade offs between paying down the mortgage vs investing elsewhere. However, have you ever tried living in a mutual fund? Owning your primary residence free and clear and being debt free is a feeling everyone should experience at least once.

    I remember when I first became debt free after college and it has stayed with me all these years. I’m looking forward to feeling that again in 7 years once my mortgage is paid off in full.

    1. Avatar

      I totally agree, Jack. Being mortgage free is amazing. Instead of worrying how I’m going to pay that huge bill each month, I’m now stressing about where I should put the extra money to get the best return for my future. Out of the two stresses, I’d rather have the latter. 🙂

  12. Avatar
    Petrish @ Debt Free Martini

    This is so awesome and I think its great that you paid off your mortgage. Most people will not be able to mentally understand why you would pay off your mortgage for in their minds its something that you just don’t do quickly, but over a span of 15 to 30 years. It has to be great to just be free and not have to worry about finding that large payment to pay the bank each month. Good on you!!

  13. Avatar

    If you think you own your house outright you might consider that the mortgage is just a portion of the carry cost.

    You still get to enjoy:
    – property tax (try not paying this to figure out who really owns your house)
    – insurance
    – maintenance and repairs
    – furniture and decorations (more space = more spend)
    – lack of geographic flexibility in employment opportunities
    – high cost to liquidate

    I would personally have kept the debt and used the cash to buy rental properties. If I paid off my primary residence it would cut out about $1500/mo in mortgage payments vs $3300 in gross rent.

    1. Avatar

      Hi Taylor! I definitely considered buying those rental properties (I LOVE the idea), but carrying two debts just freaked me out a little too much. Instead, I decided to pay off the house mortgage and then eventually pay cash for my first investment property (and then pay cash for the next one and the next one…). This way I have very little risk and I can still get rich.

      1. Avatar

        Taylor’s point is that you never truly pay up your fixed commitment on a property. The mortgage is only a part of that commitment. If you could only trust your excel spreadsheet more than your emotions. Finance 101 teaches you are way better off holding some leverage and reinvesting your free cash flow.

        The feeling is good no doubt, but there are smarter ways to utilize your FCF than earning a 2.7 % return over 20 years.

        Rental property can easily net you 10% yoy. Not to mention the tax deductibility of your expenses inclusive of interest payments on your investment property. It’s a no-brainer!

        Your happy emotions are lying to you.

  14. Avatar

    I really appreciate article like this. It’s very informative and I learned something from here. Thanks for sharing and I will definitely share this to my friends.

  15. Avatar

    I never understand the deduction thing either. I can pay thousands in interest, but hey, I get a little more off my taxes! Um… no.

    And our mortgage is small enough that we don’t itemize. So we couldn’t take advantage of the mortgage interest deduction anyway.

    I’ll be thrilled when we can pay off the house. This year is about getting the money for my husband’s oral surgery ($25,000), next year is about pushing us to the point of maxing out retirement accounts. So 2017 is when I hope to really ramp up our mortgage payments.

  16. Avatar

    Great job Derek! My wife and I also slayed out mortgage quickly. We had a $289k mortgage when we bought our current home 8 years ago in our 30’s but took an open variable rate mortgage with no penalty for lump payments. We paid it off in under 5 years!

    We also have a seven figure investment portfolio but nothing lets me sleep better at night than knowing our home is 100% ours!

  17. Avatar

    You’ve incorrectly calculated the rate of return on the SP 500 for those 15 years. The actual return is 4.3% when you include dividends. I’m also curious why you picked that particular period. had you done 20 years, it would have been 9.6%, 10 years would have been 7.7% and 5 years would have been 14.8%. And historically equity market have returned around 10% on average, and that is the number you should look at when deciding to invest or pay down debt.

  18. Avatar

    It’s great that you’ve paid off your mortgage. It will repay you a certain rate for the rest of your life. That said your house is still a liability. Property taxes, insurance, utilities and maintenance will all cost money. Really the biggest thing you have done right is living as cheaply as possible. This is what has freed up the cash for you to invest. I don’t know the value of your house so I can’t comment on that. I can say that lots of people buy houses that are beyond there needs and that is a liability itself. The biggest thing in money is to spend less than you earn on liabilities. This requires a solid understanding of what is a liability and what is an asset.

    Getting to my situation. I am 34,a millionaire on the A+L=OE equation. I still owe 200k on my 700k house. The problem for me is to pay my house off would cost me 200k + 90k in taxes. That 90k in taxes makes this a bad investment. Taking that 200k and leaving it in the business means the company would pay pay 28k in taxes leaving me 60k extra of the top to invest in something that will generate a hopefully better than a 2.85 percent return.

    Either way we are both business men because we both invest. At your situation you are best to do what you do agreed 100 percent. You enjoy living off of little and having a humble home. You at least enjoy your side work. This is not for everyone. I wish to be a multi millionaire and I have some expensive tastes in some things. If I had paid down my house instead of growing my business to the point where I have it now I would not have the net worth I have now.

    By the way I am theoretically better than you with a mortgage as I have a rental suite in my basement. With my interest @ 600 per month it is being paid by the 1100 I collect in rent. So are my property taxes and hydro. I do pay my mortgage @ 3k per month therefore putting 28-29k per year away. If interest rates were to go up say to 6 percent then my basement suite investment might not be as good.

    Cheers,

  19. Avatar

    Obviously an American article as interest payments on residences, unless for investment purposes, are not tax deductible in Canada. One big reason to pay off your mortgage that I didn’t see in the article is that interest payments are front end loaded. In other words virtually all your early mortgage payments go to paying interest and the principal isn’t really reduced until later in the amortization period. Paying lump sum payments, or increasing your payments above the minimum agreed payment, will reduce the principal on your mortgage and save interest payable to the mortgage holder.

    1. Avatar

      If you have a home office/business, a part of your home mortgage interest could be claimed in Canada.
      You might need to think of setting up one.

      1. Avatar
        Gino - FMP Mortgage Investments Inc.

        True Dan, however as you probably already know, you can only claim your home office/business if your are making enough money to do so. In other words, you need to have taxable income before you even start looking at claiming you home office.

      2. Avatar

        If you work for a wage for an employer the CRA won’t allow that deduction. If you have a home based business you need to be prepared to show CRA the office and prove that it is being used for a home based business. So if you have a 2000 ft2 home and your office is 100 ft2 (big office) you can indeed deduct 5% of your mortgage INTEREST payments not your principal payment.

  20. Avatar

    So let me see if I understand this, I have a mortgage for $300,000.00 paying 2.85% which means that for very dollar I owe I pay 2.85 cents in interest. If I had $300,00.00 to invest I would make $8550.00 a year.

    If I invest that $300,000.00 averaging 7% then I would be grossing $21,000.00 add 45% tax into the mix and I am netting $11,550.00 PY. By adding all the calls and all the discounts paying off your mortgage still does not make a mortgage holder better off.

    Having no mortgage might hold some psychological fulfillment but its a financially bad choice over investing.

  21. Avatar

    Great post. I thought my husband and I were the only ones with this kind of reasoning. I often wonder if people are just brainwashed or just math-illiterate, cause calculations show something completely different than what the common misconceptions state. For example, how come people don’t realise that throwing extra money in your mortgage reduces the amount of interest you pay during quite a few years – which is thousands of dollars! What investment can bring you that amount of money? You’ve already saved.

    Thanks again, Derek, you gave me home that there are still smart people around. :))

    1. Avatar

      Honestly, the math can go either way, but risk is difficult to calculate. Having said that though, I am now completely debt free at 29 years old and have a discretionary income of at least $2,500 every month that can go straight toward my investments. I’m pretty sure this math is working in my favor. 🙂

      Congrats to you Maya for thinking of doing the same. There are a handful of people that think the same way as us, and we’ll all come out just fine in the end!

  22. Avatar

    I struggle a bit with articles such as these, as well as those that suggest the opposite as a better choice. Each has merits and flaws, rarely does one makes sense for everyone. Often times the case study, as presented, is very specific to the authors preferences and situation, resulting in guidance that is not broadly applicable to the reading population.

    In your example you are discussing a modest loan balance for a 30 year note, but circumstances for a 15 year note or a larger principle balance (100-200k) may be much different. The opportunity cost of diverting that much monthly income may not be reasonable for an individual or family. At the least it may require even more drastic accommodation than were used by yourself and your very good salary. Such a singleminded focus may leave a family in a situation where they are house rich and cash poor and this concern of illiquidity is not explored in your piece.

    Credit Unions and also smaller regional banks do have better interest but come with limitations. Balance limits for interest purposes and substantial activity requirements limit the benefit of these opportunities. What happens if I have deposits that are much higher than the interest threshold of the account?
    I would also echo the comments of previous posters that you are grossly overstating investing costs. Vanguard funds, ETF’s and online brokerage provide low cost access to investing without costly loads and fees. This is not to say that this is the right path for all as there is risk, as you mentioned. However this has been presented in a manner that supports your position without objectivity.

    I think much of what you say is sound advice. The mortgage interest deduction just doesn’t matter for most people as few reap a real benefit. Find a way to shrink the bills and make a little on the side. Outright home ownership is great as it does protect you by flipping a large monthly payment into a valuable increase in cash flow and ensures that your home is in fact your home. I just think the position is somewhat lacking in objectivity and may lead individuals to behave in a manner that lacks balance due to their belief that someone elses’ experience may be a proper template for the management of their potentially much different financial situation. In such a situation, it seems more appropriate to advocate a more moderate, sustainable approach of paying down a mortgage while investing elsewhere. This hedge locks in some mortgage savings, some investment exposure and some measure of liquidity.

    Again, I think there are some really good things here, though I think there was more that needed to be presented to arm the reader with the knowledge to objectively evaluate their circumstances.

    1. Avatar

      Hi Joe. The idea is to set a goal to pay it off quickly, and then invest heavily. I paid off $54,500 last year, which made me completely debt free. Would I have ever worked so hard to put $54,500 into my investments? Never. At best, I would have invested $10,000 maybe $15,000 because I wouldn’t have had the same drive.

  23. Avatar

    Hey Lucas: you say: “The reality is that anything you do with your money that carries risk to its value.” What eluded you is the fact that paying off your mortgage produces a guaranteed return: your debt and interest payments go down. You could say you forfeit other choices but that is true for every financial decision.

  24. Avatar

    Where on earth can you buy a home for $200K and a rental property for $60K? It’s all well and good to pay off a mortgage, but with average house prices in many cities getting close to $1M it’s a pipe dream for many.

  25. Avatar

    For me, it is an issue of job stability. I work in the tech sector, which is notorious for boom and bust cycles (not unlike the energy sector). While remuneration is typically higher than normal, I always thought it irresponsible to assume that the good times would roll forever. That’s why I hit my mortgage hard after my last term and managed to pay it off in 12 years. Since then I’ve used the extra cash to ramp up my investments! And if I ever get downsized, I’ll sleep better knowing that I have substantially less monthly commitments.

    1. Avatar

      There are mortgages that offer job loss insurance add-on.. You don’t have to lose your home, when you lose your job!

      Premiums are pretty affordable for mid-sized mortgages.

  26. Avatar

    Derek,

    Do what makes you feel good. Of course basic math says a dividend portfolio with a 4% yield vs a mortgage with a 3% rate you get 1% free for investing. And yes dividends can be cut and yes if you use a broker and… I can come up with negative stories about bank foreclosures as well. The reality is with some basic math the answer is pretty clear investing makes more sense than paying off the mortgage BUT you should do what you like. That is if paying it off makes you happy then do so. Just be aware that there is not enough room in this comment section to disect your article and it’s issues. That while paying it off seems to make sense, from a pure numbers position that is just not the case. Thanks for the read but I will be keeping my mortgage yours truly a certified financial planner

    1. Avatar

      Brian, you are the brain here. I’m sorry but Derek has been doing too much of navel-gazing.
      He will make such a bad CFO!

      I will fire him if he worked for me.

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        CFOs need to do more than calculate ROI, they need to have head knowledge as well. I believe I would be an excellent CFO since I can very clearly do both.

        Honestly Dan, I used to be just like you and Brian. I graduated with my Finance degree back in 2008 and was a Dave Ramsey hater. But, after having a few setbacks and frustrations with the financing world, I can now see the many benefits of debt-freedom and won’t ever step foot in a bank and ask for a loan again.

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            There!

            Derek, how many companies do you know that don’t have debt in their books?

            how do you fund growth and expansion?
            Are you really sure you studied finance? I’m tempted to call you a scam.

            This is Finance 101. You are misleading people!!
            There is good debt and bad debt.

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              Laurie @thefrugalfarmer

              “There is good debt and bad debt.” Yeah, until the SHTF and you lose your job, can’t find another one and can no longer pay your mortgage. Then that mortgage becomes bad debt and you risk having no place to live. Derek, you made a smart decision. Great job!

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      How soon we forget 2008 – 2009! Stocks go up and stocks go down, but if you pay off your mortgage you don’t have to worry cause it’s money in the bank and you are debt free. And believe me, that’s a wonderful place to be.

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    Canadian here, so maybe not the best to comment but even though I share your passion for living debt free I’ve just taken out a rather large mortgage at 2.49% (in a place where houses sell at replacement cost NOT Toronto). Why? I can contribute to my RRSP which gets me a tax refund at my marginal tax rate (30% ish). So even if I don’t invest right away I am borrowing money at 2.49%, investing it to get an immediate 30% return and then getting years of tax free compounding on that. Ok so you guys have higher rates than 2.49% down there but you also get a tax deduction and we don’t so the math is probably pretty comparable. I actually have the means to mostly pay off my mortgage (I’m 28) I’m just choosing not to because a 2.49% rate of return just isn’t that enticing. With bond rates and prospective returns on stocks so low (sub 3% prospective 10 year returns on the S&P 500) I’m finding a major source of return is through minimizing my taxes.

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        Kevin, you are absolutely on the right track. If you can afford it, always max out your RRSP. You get full tax deductibility until those years your employment income will be lower and you withdraw your cash at a much lower tax rate, plus the gains you would have made in investing those funds overtime. I do just that. Plus I have rental properties that do more than 10% yoy Total Return. For the life of me, I don’t get why anyone will pass up a 10% return or even a 25% (in the case of tax deductions) for a 2.4% return just to feel warm and fuzzy. Stupid!

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        It’s not really risky at all actually. What’s risky about getting a 30% tax refund from the government? It’s only risky if you then speculatively invest the money in biotech stocks or something, but I have a super conservative portfolio right now (prospective returns on most stocks are very low right now, I expect they’ll go up at some point). Here’s how I think about it:

        Scenario 1 Everything is fine: Then I’ve borrowed money at 2.5%, used it to get a 30% risk free boost from big brother plus a (tiny) bit of tax free compounding on top of that. I probably keep my job.

        Scenario 2 Economy sucks: If I lose my job then I have a 6 figure RRSP cushion that I can start drawing down to pay my mortgage until I find something else. That’s alooooot of mortage payments. But here’s the best part, since my income would be way lower I’d be withdrawing at pretty much 0% tax rate. So I get 30% tax refund today upon contribution and pay no tax upon withdrawal a year or two later (in a worst case scenario). It’s a no brainer.

        Now let’s look at scenario 2 if I had put everything into my mortgage, but not quite paid it off. I think the bank would still expect their payment every month, even if I’m way ahead of where I’m supposed to be. So I’d argue that paying down the max mortgage and not having a buffer (RRSPs) is actually a higher risk strategy than what I’m doing. And with the government currently prepaying me a decade of returns to hold that buffer…

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    The other Derek

    The thing that’s missing for me is how did you manage risk while you were aggressively paying down your mortgage? Do you have a secure job, do you have cash set away in case of injury or job loss to cover expenses while you’re not working. For me, investing in a variety of ways to create that cushion lets me sleep better than putting every dollar to my mortgage. If I lose my job, I have that money to fall back on to keep paying on my house while looking for a new job. If I put every dollar to the mortgage, living month to month with no safety net, I would certainly suffer more stress, YMMV. Thus I would say I’m on a modified pay down program, I both pay down the mortgage while also investing in my safety net.

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      It was pretty simple. I had $15,000 stashed in the bank, which would have allowed me to survive for a solid year had I lost my job. It’s amazing what a little cash can do. 🙂

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        The other Derek

        Then I would suggest you be upfront about things like this when you write. As joe says above, this is your experience, but your situation is not my situation, or joe’s situation and it’s good to put your experience in context for the reader, since what worked for you may not necessarily work for everyone.

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          Agreed. Also, if you could invest your buffer (risk free) at a rate that is higher than your mortgage rate, then why wouldn’t you put as much money towards your buffer as possible? Why stop at $15 K?

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    We paid off our mortgage years ago and are completely debt free. Please tell me where you can buy an income property for $60,000.00. Here in Toronto, that wouldn’t buy a broken down garage.

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    Fees and taxes. Well, .12% a year on SPY and commission of $7 per trade. Not really crushing. And you’ll only pay taxes when you actually sell. It’s really very simple, if the return historically is higher than your funding cost you are better off investing. They are all sorts of benefits to not having a mortgage, but in terms of maximizing wealth it’s not the smartest way.

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    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.

    Hang On. In this scenario you are anticipating a 32% a year return on real estate investments, with no leverage, for a decade. That is fantastically unrealistic.

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      Particularly impressive as it would be 32% after tax. Major pension funds are struggling to get 8% and I think they won’t even manage that over the coming decade with bond yields at crazy lows. Obviously they need to hire Derek. That’s if Warren Buffet doesn’t get him first.

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    Your assessment of investment returns is brutal. This is complete garbage…it’s shocking that you consider yourself a financial blogger

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    Very interesting article Derek. I do not think paying your mortgage before investing is a terrible idea, it is just not something that I would do. I am a Canadian and my current mortgage rate is only 1.95% (variable). I have refinanced my mortgage to pull equity out of my home to invest into a syndicate mortgage. My money is not tied to the markets, it is invested directly into Canadian Real Estate and I am earning 8%-14% annualized for every 2 to 5 year term in which I choose to invest into. Because this investment is not tied to the markets, my investment will not plummet when/if the market crashes. Instead, it will grow steadily with strong Canadian real estate market. Also, the beauty of this investment is that there is one fixed yearly fee, so no matter large of an investment I am making, I only pay my $300/year!

    Derek, if you were in my situation would you still pay off your mortgage first?

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    I ask how all the time. I tend to ask it of people who I think might know the answer. And based on the couple of flaws in this article I’m not sure you’d be one of them. But I’m always happy to be proven wrong, so lay it out for me. How will you turn 60k to 1mio in 10 years, with no leverage investing in rental properties. The more details the better.

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    I ask how all the time. I tend to ask it of people who I think might know the answer. And based on the couple of flaws in this article I’m not sure you’d be one of them. But I’m always happy to be proven wrong, so lay it out for me. How will you turn 60k to 1mio in 10 years, with no leverage investing in rental properties. The more details the better.

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    I can see where you are coming from in terms of the prospect of being debt free as a strong motivator and agree with that rationale.

    The scenario I was looking for you to explore was how do you advise someone to approach their financial planning when they can’t pay off a mortage by paying an extra $1,500/month for a few years as you were able to do? Would you have approached your mortgage the same way if the balance were 175k instead of 55k? Or if you were part of a family earning 100k instead of an individual earning 70k? What happens if that mortgage would take 10 years of extra payments instead of 3? Is it prudent to put off other investments anyway? It is these type of questions that I feel better represent what a homeowner may be contending with and allow for a more balanced discourse on how to approach mortgage retirement and personal investment.

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    I disagree with this article to pay off the mortgage first. Mortgage Borrowing costs in Canada have been low, currently at 2.25% for variable. The extra money I have in retirement has been growing 10% since 2001. If paid my mortgage first, I would have much less net value. But if the mortgage rate goes up considerably then I would consider selling some of the investments and pay the mortgage. There is no point in paying your mortgage if the rate is 2.25% and if I am hitting 10% Rate of Return (balanced of CDN, US and international equities (80%) and 20% bonds). Paying off your mortgage at this rate is for conservative investors.

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    Steve Economides

    Awesome Post. Love your drive to live the Debt-Free life! We did it too!!!!!

    We paid our 1st mortgage $53,000 off in 9 years on an average income of 35k. Save $70k in interest. Had we invested the money and made an average of 6% return – we would have come out about the same. But the peace of mind and security it brought don’t compare. We sold the first home and bought a much larger second home. Rolled all of the money from home #1 into the new house and were on track to pay it off in 9 years when we decided to start our own business. We hit the pay-off mark in 15, and still saved more than $200k in interest. Meanwhile the stock market tanked and our IRAs took a beating. We rode out the crash with a paid off mortgage and money in the bank.

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    We currently pay an extra $1000 per month down on out mortgage and I can’t wait until the day that it completely paid off. Great job Derek!

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    Derek: I won’t go into repeating the comment that has been already raised by other commenters regarding the misleading nature with which you portray investment returns. I would only add that to pick a particular period of recent history to make a case against investing is just as disingenuous as it would be for me to make an argument in favour of investing by showing you my return over a couple of days where the market spiked. If we’re talking about long-term savings, it is appropriate to take a long term view with respect to investment returns and such long term view shows that stock market returns (looking at the major indices) historically outperform the interest rates that are readily available in today’s markets (in the U.S. and Canada).

    The other point I would raise relates to the mortgage deductibility which you enjoy down South (and we in Canada do not). In isolation, it doesn’t make sense to carry a mortgage solely for the purpose of getting the corresponding deductibility. But that’s not the way to look at this. Rather you need to appreciate that the deductibility lowers the overall cost of you mortgage, thus enhancing the attractiveness of doing something else with your money (such as investing in the equity markets or buying other properties to generate additional income). On that last point, the power of compounding that you mentioned earlier in this blog is, as you acknowledge, impressive as a wealth creator; so is the power of leveraging your equity to buy additional property (if you can afford it, which is made that much easier in this low rate environment). When you (in the U.S.) can borrow at 3.5% or less for 30 year terms, you pass up a great opportunity with an obsession to repay you mortgage as quickly as you did. Yours was a very conservative strategy and there are indeed some benefits to doing so (mainly to do with the sense of security you get from owning your home). It is, however, a limiting strategy and on balance and as proven out in the longer term historical record, one with significant opportunity cost.

    Last point and in the U.S. I am sure that you are well aware of this point – just as the equity markets can suffer precipitous declines, so can the value of that house you just paid off.

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      To be fair, Derek was including the entire 21st century, not just a few days. And if you take the position that investing is always better than paying off the mortgage, then you should logically extract as much equity out of your house and invest it. Yet, most people don’t do that. That indicates that they are not as sure about the superiority of stock market investing as they say.

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    I Think this post is fantastic. It shows how important money really is and to respect each dollar earned.
    I congratulate you not only on the loss of your mortgage, but, your perception of life which I’m sure you find quite rewarding at the moment.

    I myself enjoy two houses mortgage free at the expense of many entertainments of life and I don’t miss spending the money. I spend quality time with kids at the park.

    until people realize that debt is servitude and consumption is servitude, they won’t understand.

    go to the nicest mall in town on a nice sunny day, park…. enjoy a walk on the exterior while peaking into the mall once in while to see which boxes people like to shuffle into to burn holes in their pockets to enjoy life…when the sun basically throws it at us for free.

    Cheers, all the best!

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    O.K. Canadian Investors: How many of you Canadians would take out a huge mortgage on your property today and go invest it in the current markets?
    ..a market ( house of cards) apparently driven by FED money printing and stock buybacks

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    I’m sorry but some arguments in this article have many glaring flaws.

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

    Sure, valid point. There is no reason to keep a mortgage just for a tax deduction.

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

    This is true. Why wouldn’t I let inflation eat away at my house. Why is it bad that my future, inflation-adjusted dollars go to principle whereas my current ones go to interest? Your argument here makes no sense. Plus, historically I can expect the value of my house to rise with inflation whereas the cost of the mortgage does not.

    3. You should invest your extra money instead

    Yes! If you can get an ROI elsewhere that’s higher than your mortgage payment you should definitely invest elsewhere. Your Jan 2000 – Present range is heavily biased, your starting point is right before a crash! Historically the S&P rises 12% on average. Maybe not every year or every 10 year period, but overall you can expect this. Is your mortgage interest 12%?

    1. Interest Savings

    You may have saved money in interest, but you lost much more money in opportunity cost. Those extra mortgage payments, if invested, would have given you a much higher net return.

    2. An Expedited Goal

    Sure, having a goal is important and this definitely provides one. Not that there aren’t other, more profitable, financial goals.

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

    Probably the most sound argument. A paid off house very rarely gets taken from you. You’d have to be delinquent on your taxes for several years before the government would foreclose on it.

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    This article and the responses were very interesting. Clearly I am much older than the majority of you and all I can say is congrats to those of you who made the decision to pay off your mortgages.

    We are just about 5 years from retirement but with the most likely scenario of being out of work come this next spring. For those of you saying that you have to pay taxes and insurance on your home, sure you do. But that is way easier to do than pay a mortgage and you are going to have to live SOMEWHERE. Unless you are going to move home with mom and dad, you will pay way more in rent than you will in taxes and insurance on your house. And hey, electric bills etc are just part of life. They are not the same as being in debt.

    We are actually withdrawing money from our investments, taking a tax hit and probably a small loss on our current home in order to buy another home with 100% cash. Why? Because at least we will have a roof over our heads. What a comfort that is. And what if the market does crash or just goes down a lot over this next 5 years? Then we will be out of the money in our account and STILL owe the danged mortgage. And probably end up losing the house too. Then what a pickle we will be in. And once we retire, there is no way we can afford the mortgage payment, even if the market stays stable. And even more important, we would end up paying way more in interest fees than it will take to buy a house mortgage free.

    If we are lucky and still have a job this spring, we will take what would have been mortgage payments and invest them. And we will do the same once a new job is found, if that is the direction this goes. But if neither of those things happen, at least we have a house to live in. We no longer have moms and dads we can go live with (as though I would even want to).

    So I say a big yes to paying off your mortgage and the sooner you do it the better. After you pay it off you can invest what would have been your mortgage payment for years to come and never have to worry about being without a home. If house values drop, you do not need to worry that you can’t sell your house because you owe more than it is worth. We bought this house in 2004 and we are just now coming back to where it is close to worth what we owe on it.

    And what if you need a new roof or something but you don’t have any cash on hand because it is all going to your mortgage? We had a maintenance problem and ended up having to get a loan to fix it. OMG, I would have loved it if we could have been saving our payment all those years and just reached in the bank for the money to fix it.

    Everyone has different circumstances and if you have a high paying job and already have a hefty savings account to fall back on and you decide you would prefer a mortgage, then fine. But to say that others are wrong because they want their home paid for, well, you might put yourself in their shoes for a moment and rethink that.

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    PS….. as mentioned above, the argument about the tax deduction for your mortgage interest does not hold any water at all. There is no way what you get for that equates to what you are paying each month. Besides that it keeps dwindling each year and eventually just goes away.

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    Interesting reading all of your pros and cons about paying for a home rather than investing the money. We are a couple with one person still working and one retired. We are buying a new home and have the means to pay for it in cash and still have a good amount in a portfolio of investments. We already own one property and rent it for additional income.
    IS it better to invest at our age (61 and 72) or pay cash for this new home? Interested in your opinions…

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    Derek, for my wife and I, paying off our mortgage was the right choice. We all know that you should invest a portion of your income in a 401K or an IRA if your in a financial position to do so. In my opinion paying extra on your mortgage is just as important if not more so. I found great satisfaction in watching the mortgage balance go down. If you focus on what portion goes towards principal and what goes towards interest it can be very motivating.
    I would advise to anyone that has a hard time putting money in a retirement account, or giving it to a financial advisor, try paying down your mortgage. You’ll get hooked!

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    Another Canadian here. This was a good read and I agree with the points you made except for getting too aggressive on paying down your mortgage and the spelling of “principal”. Before paying down debt, one should have at least $1K in emergency funds and live within your means. Then, never borrow again and pay down all consumer debt. Then build your emergency funds to equal 3 to 6 months of expenses. Then put 15% of your income towards mutual funds and the rest towards the mortgage.

    If one has a large enough income, you can still reduce mortgage interest costs by a lot using this method. I think putting it all on the mortgage for a long time exposes you to the same risk of the S&P investment you described because of the lack of diversification. I am happy that your method worked out for you. To me, it’s all about balance with a Dave Ramse-esque hate towards debt minus religion. Thanks for the article that should be worth more than $15.

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