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If you’re part of any personal finance community group, it won’t take long before somebody asks, “Is it better to pay off my mortgage or invest?” Often the banter will go back and forth for hundreds of comments before the original poster’s head is swirling with opinions–enough so to close comments and decide for herself.
I’ve noticed that the financial independence/retiring early (FIRE) community tends to lean toward investing over sinking cash into a home. The reason is often because the interest earned over investing in the long-term out paces what paying off the mortgage could do. Fair enough.
Pay off my mortgage or invest: Which is better?
Most people in the FI community recognize that personal finance is NOT a one-size-fits-all proposition. Sure, there’s concrete tenets that building wealth involves living below your means and investing the difference. How you do that can vary depending on your personality, how you earn income, what your life goals are and the list goes on.
For now, we’ve decided to pay off the mortgage.
Several writers in the FI community talk about the benefits of paying off debt like a mortgage including:
- JL Collins, author of Simple Path to Wealth, argues that it’s good to pay off debt that’s over 3.5%. Our mortgage is 3.75%.
- Our Next Life paid off their mortgage on their route to FI.
- Ellie Mondelli paid off her mortgage and invested minimum amounts in 401(K)s to reach her short goal.
A few personal reasons make it compelling for us to pay off our mortgage early (as in within 3-5 years):
We want more flexibility over our income now. Our mortgage is much less than 25% of our income. Buying based on 25% of one spouse’s income has given us the freedom for me to work part time and mom full time. If one of us lost our jobs, we would have less stress affording a higher mortgage. I want to pursue business opportunities where I can control 100% of my time. If we don’t have a mortgage, I can be more creative with what type of work I do because the risk is lower.
We are not comfortable with debt. My parents urged me to get an auto loan in college to teach me a lesson. It was stressful earning income to pay it off. I did not take out student loans of any kind and instead worked through college. Our mortgage is the largest debt we’ve ever had (and likely ever will). Knowing that what I’ve bought demands my money for many months in the future steals my joy. I consider it a huge responsibility to pay back those who’ve loaned me money. Rather than carry that weight, I’d rather not borrow. It gives me peace and the freedom to stop doing what no longer fits in my life.
Plus, in thinking about a FI number, paying our mortgage minimums means we’d have to pay $86,000* in interest. Using Mr. Money Mustache’s retirement math, paying off our mortgage and saving the interest means saving $3,120 per year. That could pay for a pretty nice vacation each year or shorten our timeline to FI.
I consider this journey a personal walk with God. My mother told once that I was terrible at managing money as if that was who I was. I knew that it wasn’t true, but I had to prove to myself that I could achieve something great like paying off the mortgage. This walk has been as much a financial one as a spiritual one. Paying off the mortgage has helped me figure out what centers me and fills me up.
Surprisingly, buying expensive fru-fru most of the time doesn’t bring me joy like being outdoors playing with my daughter does. Paying off our mortgage is an opportunity for me to set a goal, achieve it, raise my self esteem, and figure out what my lower-limits are on spending. I’m learning what the minimum cost is for me to be 100% happy. Once I figure that out, I’ll know I have it made. 😉
Related: 15 minutes to feeling more empowered
We want less stress and more peace. Something that rarely gets considered in the “pay off my mortgage or invest” debate is the risk involved with investing. If investing really earns more than the financial benefits of a paid for mortgage, then why aren’t people in the FI community taking out million-dollar loans and investing that? Risk matters. I hope for the people who opt to invest see the payoffs of taking on that risk. I have no family that would back us up if we make a major error with our money. Having zero debt of any kind makes me feel at ease more than what the stock market can provide over the long-term.
We haven’t experienced ’08 like more seasoned investors. JL Collins talks about the gut-wrenching roller coaster moments within the stock market. We’re currently investing around 15% of our gross income and have much less than six figures invested just yet. When we do, I’m not sure if we’d pull out if our assets lose 30%+ of their value. I think we’re in it for the long term but won’t really know until doomsday comes. We have hopefully over 60 years of investing to come. In the event that either Nick or my personality doesn’t fit well when doomsday comes, I want a paid for mortgage to support the risk we’ve taken on. If the markets swing 40%, we’ll still have a roof over our head. Investments can go haywire, but the most basic necessities are covered.
At the end of the day, so many factors go into deciding the right path. The beauty within the FI community is that there’s multiple ways to reach FI. Pull some levers and see what works. You’ll amaze yourself at your progress by just being intentional and enjoying the journey.
What’s your opinion in the “Pay off my mortgage or invest” debate? Share your thoughts/opinions/comments below.
*assuming we pay $8,000 interest with an early pay off