Saturday, April 5, 2008

Paying off a Mortgage is not for everyone

Sometimes we don’t realize the potential impact of our own words. A casual conversation or blog post ;) about personal finance can have unintended consequences. It’s important to understand that everyone’s situation is different. One financial strategy does not fit all. I came face to face with that reality recently when discussing accelerated mortgage payments with a couple of co-workers.

One colleague feels the hand cuffs of being in debt. He is working to pay down endless debt and is eager to break out of the cycle. He mentions that because of his obligations, he is overly dependent on his employer. He would love to have more freedom, to just know that he could walk away, if he really wanted to. If you have ever had a bad boss, you will understand this desire to be free from the shackles of a job.

The other co-worker is not comfortable with investing in the stock market and sees paying off a mortgage as a guaranteed 6% return. I nod and agree with both of them and add to the conversation that I have paid off my mortgage. They are impressed and inquire - What is it like to have all that extra cash each month? I reply that it's great, but not like they think. I explain that once I paid off the house, I re-routed the mortgage payment money straight to my investments in Vanguard. My standard of living has not budged an inch.

The idea of being mortgage free was appealing to both of them and I could see the wheels turning in their heads. I didn’t give it much thought, a lot of people want to pay off a mortgage early, but very few actually carry it through.

To my surprise, one of the co-workers came to work a few days later and stated that he had paid off the balance of his mortgage! The other mentioned that he was paying extra towards his mortgage, a lot extra. Yikes!

I would have never advised either one of these guys to do what they did. I firmly believe in the maxim that - it takes money to make money. And a mortgage is a great way to leverage money, that is, to use someone else’ s money to make money. That is a proven way to get ahead and reach financial independence. I paid off my mortgage only because I had a high percentage of assets invested in equities (way too high). I wanted to diversify and real estate was a good choice for my portfolio.

Because neither of these guys was comfortable with selecting investments and didn’t want to do the due diligence, they took the easier road and paid down their debt. That's not all bad, but someday they should take the time to learn to invest or hire a financial advisor and do more with their discretionary income than just put it in savings.

This week I participated in the Carnival of Money, Growth and Happiness #39. My article, How much money does it take for you to FEEL rich? was included.


  1. in this low return environment i'm shovelling money at my mortgage. but i'm also considering a refi from 6% to 5% 15-year. i'm a little concerned about the middle phase, where principle is a larger part of the payment, but the payment's big as ever. gonna change my tax situation but i can figure it out. i took a roth contribution of $5k and put it toward the mortgage. in 3 years i'll have $11k from a roth conversion. and next weekend i'm moving out, moving into a cheaper place, renting out the house. give me a few more years and i'll put a big hole in the debt.

  2. I see your good saving habits are starting to get the attention of your coworkers. =)
    While I do pay a little extra each month on my mortgage out of force of habit, I decided I'd rather divert my current income into investments rather than paying off the home since I'm confident my investment rate of return will easily exceed my mortgage rate.
    I'm a firm believer in utilizing borrowed money to make more money. Sometimes credit card companies have offered me ultra low rates circa 2-3% for the life of the loan thinking I would take the loan and continue to use the card at their higher rates. What I did was get my card credit limit raised, took out a loan for the full value of the card and stuck it in a high yielding CD account with rates higher than what I'm paying for the loan. I see it as being paid to save money.
    Have you considered investment properties in addition to your home?

  3. @mcfnord: sounds like you are working diligently to pay down your loan. Even if it's a small amount, I highly recommend investing in other assets, as well.

    @soullfire: I did the same with my home loan - added a little extra each month. Then the dot-com craze took off and I funneled everything to the market. It seemed crazy to pay off a 6% loan, but after the crash - it seemed even more crazy to not pay it off. It would have been very wise to have taken some bubble profits and paid off the debt.

    That's a good idea. Now is probably one of the best times in years to evaluate additional investment properties.

  4. i'm investing in debt elimination. why invest in other assets?