Recently, I wrote a short story about why I didn’t buy my dream house. Since it is being published sometime this week as a reader story on Get Rich Slowly, I started reflecting on that choice. The truth is, I still love that house. I wish I didn’t live so close to it and that it wasn’t so easily within my reach. It is still for sale, and it practically begs me to buy it each time I drive by.
According to my mortgage broker, I can afford to buy my dream house. The numbers add up, and it would be feasible for us to upgrade our housing at this time. However, it’s not that simple. Even though we can technically afford it, we are choosing to stay put and focus our attention on paying off our mortgage ASAP. Why, you ask? Simply put, I want to be debt free.
Our Financial SituationRetirement planners and finance geeks look at me like some sort of circus freak when I say that I am prepaying my mortgage. Since it is locked in at a rate of 3.25%, I am paying a minimal amount of interest on it. Why would I prepay my mortgage instead of investing my excess income for a higher return? Why would I reduce my liquidity by pumping most of my extra cash into an illiquid asset? Why prepay when there are a plethora of investment opportunities that will likely bring me a return of way more than 3.25%? Why do I not realize that mortgage interest is tax-deductible and that I am giving up that shiny gold nugget for chump change? It seems to be a hot button issue that sends homeowners on both sides of the fence into a tizzy. I assure you that I do find opposing viewpoints intriguing. However, we have different plans.
First of all, I want to emphasize the fact that I think my personal saving and retirement saving should take precedence over mortgage prepayment. For that reason, we put 20% of our pre-tax income (including our company match) away in our work sponsored 401K. Additionally, we have about a year’s worth of living expenses in cash savings and have already maxed out our Roth IRAs for 2012. Even after paying over on our mortgage, we are also saving a decent amount of cash each month (to save or invest), and we actively fund our kid’s college funds. We are free of all consumer debts (car loans, student loans, personal debt), and our only bill - aside from living expenses - is our mortgage. If we had any kind of other debt, I would be paying it off before I ever considered prepaying our mortgage. However, since all of those pieces are in place, what now?
We recently decided it would be best for us to pay off our mortgage as soon as our income allows. You may be wondering what brought us to this conclusion. The short answer is that I hate debt. I abhor bills. I don’t like the feeling of owing anything to anyone. I despise debt so much that we completely altered our lifestyle over the past few years in order to get rid of our credit cards, car loans, and student loans. Now that we are debt free aside from our mortgage, I have found that I really like our simple, frugal lifestyle. I don’t miss cable tv. I like eating at home. I am finding that a simple lifestyle is very fulfilling and less stressful – at least for us. With that being said, here are the reasons that we chose to pay off our mortgage.
Reasons We Are Prepaying our Mortgage
Timeframe – I am aware that the stock market has yielded gains of over 10% on average during recent decades. However, since we are paying off our house over such a short period of time (42 months), investments would be more volatile. It’s true that over 3.5 years, we could possibly see impressive gains depending on what investment we chose. We could also see crushing losses. Since we are dealing with such a short window of time, I feel more comfortable spending our disposable income on our housing. After our house is paid off, we will have to reassess our situation.
Debt is a Burden - I realize that debt can be used as a tool to reach great wealth. Afterall, we couldn’t have bought our primary residence and two rental properties without using debt. With that being said, I truly do not like the crushing feeling that being in debt adds to my life. We plan our lives around our debt and have to take it into consideration with each step. What if we want to start our own business? What if one spouse wants to stay home with the kids? While we are in mortgage debt, our $1,400 minimum payment must be taken into account. When we are debt free, we answer to no one – except, unfortunately, the tax man.
When we started on our debt free journey, we took no prisoners. We attacked each loan with fervor until we smote its ruin upon the mountainside. As each bill was conquered, we felt like we had won Olympic Gold Medals. Now those bills are a distant memory. I don’t miss them and am determined to make my mortgage payment disappear as well.
Health Problems - This is, unfortunately, the most depressing reason for prepaying my mortgage. I had two spinal fusions in my early twenties and was completely pain-free until having my first daughter in 2009. Since then, I had another daughter and have experienced debilitating back pain off and on for the past few years. Right now, I am recovering from a bout of back pain that started in April. My optimistic side believes that I am getting better and that my pain will one day be a ghost of the past. However, common sense is telling me to prepare for the worst. If my back pain continues – or gets worse – there is a very good chance that I will be unable to work in the future. Having only living expenses would be invaluable to my hardworking husband if he were to become the sole breadwinner. Hopefully, this won’t be the case…but my philosophy is that I should hope for the best and prepare for the worst.
Even after listing all of those reasons for paying off my mortgage, I realize that the numbers may not end up in my favor. I know that it is more than likely that I would make more money by investing. On the other hand, no one has a crystal ball. No one knows with 100% certainty what will happen in the next 42 months. And as everyone knows, past results do not guarantee future performance. So….I’m going with my gut. For now, we have decided to prepay our mortgage. Will I succeed and pay it off within 3-4 years? Will I fail miserably and be a slave to mortgage debt for eternity? Will I do a “cash out refinance” and spend it on hookers and beer? Life is so unpredictable and almost anything can happen. Stay tuned to find out!