Paying off the mortgage early is a hot topic when it comes to money management. There seems to be a good amount of quality logic for keeping it and equally valid logic for paying it off early. So what’s a homeowner to do?
After we bought our first house, I began to study this idea. I read all the opinions and ended up agreeing with the major arguments for not paying off the mortgage early. These points seemed solid to me:
“You have such a low interest rate.”
“You could invest and get a better rate of return on your money.”
“You have money tied up in your house and can’t get to it for a big emergency.”
“You are getting tax breaks.”
“You are hedging against inflation, especially with a fixed rate mortgage.”
Then during 2010, some things started to change in our lives and we began to rethink our strategy. After much debate, we decided to pay off the mortgage early. The reasons may surprise you because only one of them was based on a mathematical concept/equation.
Let me preface what I’m about to share by saying that we could not have paid off the mortgage early unless we had the extra money to do so. That’s seems obvious, but I think it’s an important point to make. We reached that point in our lives where all other debts were paid and the other aspects of financial planning – emergency fund, kid’s college, retirement – were being covered.
So that freed us up to throw extra money at the mortgage. We moved money to the mortgage balance from our excess monthly income, from our rental property income, from tax refunds, from investments and from any other money we could get our hands on. All in all, it was a four year journey to complete once we finally became serious about it.
Here’s why we did it.
Reasons to Be Paying Off the Mortgage Early
Reason #1: A Personal Conviction
Sometimes a person takes a stand or makes a decision based on a personal conviction. In those instances, nothing else really matters, not even a mathematical equation that shows you might get a better return on your money elsewhere.
I know some in the personal finance world think I’m talking blasphemy here and giving bad advice…that I let my emotions get the best of me instead of thinking logically. I understand all that. I also realize the peace I feel over this decision makes me not question its legitimacy in the least.
The conviction for us to be paying off our mortgage early came from what many would consider an unlikely source – my faith. In 2010, I embarked on a personal journey to read through the Bible and catalog all the verses about money I could find. What I found astonished me…over 400 passages (many with multiple verses about money) in all.
It was on that journey that I felt God convicting me about being in debt. This wasn’t anyone’s program, the advice of a friend or the nudging of a spouse prompting me to get rid of debt. It was a spiritually experience and highly personal.
I really can’t explain how God works in the hearts of people. I just know He did in mine on this issue and I couldn’t ignore it.
Lest you think this was a one-sided affair, when I shared this with my wife Kim, she got on board quickly. For me, that served as confirmation I was hearing and thinking the right things. I probably would not have moved forward if we hadn’t agreed. Turns out, God was working on her as well.
Reason #2: Putting Aside the Servant Label
One of the verses that really jumped out to me from the Bible was Proverbs 22:7. It’s a very familiar passage that even non-religious people are aware of because it has worked its way into contemporary culture…“…The borrower is servant to the lender.”
Modern day translation – “Those who owe money have to abide by the rules and jump through the hoops of those who loaned it. If the rules change, tough.”
I mentioned in my Monday post about our mortgage payoff that Bank of America purchased our loan from Countrywide. That happens all the time as banks and investors sell and buy them for various reasons. For the consumer, it’s a little annoying but we mostly adjust and move on.
Because BOA had our loan, we opened a checking account at a local branch. This way we could electronically transfer money from our main account at PNC (or an investment account) into our BOA checking account. We could then make another transfer from the BOA checking account to the mortgage account to pay that down. Easy enough, right?
I found out after the fact that I couldn’t transfer in from my PNC account more than $1,000 without using BOA’s SafePass system. This system sends a secure, one-time use code to your mobile device as a text message every time you try to make a transaction BOA codes as sensitive. In order to finish the transaction, you need to enter the security code. It’s free for mobile phones, unless you are paying for text messages, which I was when we started.
Either way, this “free” service would cost me money every time I made a transfer (unless I broke the larger amounts up into multiple transfers each under $1,000…which I of course did.) It’s simply an example of a hoop a borrower has to jump through that causes frustration.
I’m not going to elaborate on the other big issues I dealt with like the poor customer service I received, the impersonal nature of BOA and the rude clientele at our local branch. All the big and little issues simply add up after awhile.
Those issues caused us to become fed up with dealing with our lender and become all the more motivated to paying off the mortgage early.
Reason #3: Those Pesky Interest Payments
I don’t think this issue needs much explanation. Everyone understands the issue of paying interest over the life of a loan. When I took the time to do the calculations and really processed what it meant for my financial future, it made me sick. I couldn’t bear paying that much extra in interest and it really helped motivate me to be paying off the mortgage early.
In case you need a visual for my sickness, here’s how much interest you’d pay on a $150,000 loan at 4.5% interest over 30 years:
As you can see, the blue line represents the principal of the mortgage paid. The yellow line shows how much will be paid in interest over the same time frame. In this example, the interest paid is almost as much as the original loan amount.
Reason #4: Flexibility, Freedom and Choices
About the same time I was getting frisky about paying our loan off, my wife was embarking on a different journey of her own. She had decided to make a career change from math teacher to CPA. It would require her heading back to school to get an accounting degree and then passing all the necessary tests to acquire her CPA license.
When she began, we really didn’t know what would be in store for her. The prospects for work in that field are good but there is always a level of uncertainty in how the future plays out. At the minimum we hoped she would be at a new job in three years, a job that might have significant impact on our financial lives.
Not knowing how the future would unfold, we decided to save money and reduce risk as much as possible. We kept our budget tight, bolstered our emergency fund, and purchased additional life insurance coverage. In our minds, we wanted to have the flexibility and freedom to make choices along the way. It’s tougher to have flexibility and freedom when tied down by a big mortgage bill.
Having the freedom to make financial and lifestyle choices is one of the biggest reasons for paying off the mortgage early. Without that burden weighing the budget down, a person’s options for use of their money really opens up. After just a few short months of being debt free, I’m already seeing how more can be thrown at investing for retirement…more can be given…more can be spent on family activities…more can be used for really anything you want.
Your Mortgage, Your Choice
I can’t say whether my reasons will be right for you. Paying off the mortgage early, is a highly personal decision. You will have to assess your situation to determine what’s best.
All I can tell you is that the air smells a lot cleaner from where I’m now sitting. I’m really looking forward to the debt free journey ahead.
Questions: Have you ever made a financial decision based on a personal conviction? Does it make you sick to see how much interest accrues on a mortgage? What hoops have you had to leap through as you’ve paid off debt? Do you feel like your mortgage has you financially stuck? Have you ever considered paying off the mortgage early?