This short article at ESI Money inspired me to write about mortgages. Is it better to pay it off completely or keep it (assuming the interest rate is locked in at a low rate) and invest the difference? I’m not a financial planner and I cannot advise readers on what to do. Having said that I’ll share with my readers what I am doing and what my future plans are. Many will see the merits for what I am doing and others will vociferously disagree with my logic. Either way I believe this blog posting will generate a great deal of interest in the FIRE community.
It was about a little over a month ago when I was sitting in my CPA’s office (I use one and recommend using a CPA in lieu of TurboTax. If you have K-1’s then a CPA is a must!) and I informed her that I was considering paying off my mortgage entirely. She jotted down my information in order to provide me advice (in matters such as this one, I feel it’s far better to receive advice from a tax professional than from a financial advisor). My home is valued at $420k, my mortgage is currently $167k and my locked-in interest rate is 2.80% (an 7-year ARM with 5 years remaining) and my interest only mortgage payment is only $394/mo! I do not escrow, I pay my taxes and insurance separately once per year in full. With a smile on her face she asked me,
“I have some wealthy clients. Do you want to know what the high-net worth wealthy folks do?” I leaned forward in my seat, took a deep breath and said, “I sure do!”
“My wealthy and ultra-wealthy clients fiance as much as they can and invest the rest.”
She recommended that I do not pay if off, that I keep the mortgage and low interest rate, take advantage of the mortgage tax deduction while I still can, and invest the difference. This way I do not give up any liquidity from paying the mortgage off early. I expressed my interest in being completely debt-free. She appreciated this but still advised me to keep the mortgage.
What am I doing? Did I follow her advice? Do you feel she provided me sound advice?
Here’s what I’m doing and what I have been doing….. In an effort to pay down my mortgage and save myself interest charges, I’ve been making a fixed payment of $1,250/mo. towards my mortgage. Each and every month for the past year I have $1,250 automatically transferred from my checking account to my mortgage account. Considering that my payment is only $394, I am making a substantial payment toward my principal. I found an online savings account that pays 1.90% interest and I’ve invested an amount equal to my mortgage payoff (I invested $170k into this account). This difference of 0.90% is the effective rate I am paying on my mortgage. Who wouldn’t jump at the chance of only paying less than 1% for their primary residence?
A part of me really wants to have zero debt. To wake up each morning knowing I owe no one a dime! That would be a good feeling. Having substantial liquidity and paying sub-1% interest on a mortgage is also a good feeling. Here’s an even better feeling: I’m invested in the Semper Funds MBS Total Return fund. My monthly income from this investment is equal to what I am paying toward my mortgage each month. I have a fixed income mutual fund investment that is passively paying my mortgage payment (includes the extra principal payment) each month! How swell is that?
My plans are to keep this investment/mortgage philosophy in place for the time being and prior to my early retirement (in 2022 or 2023) I’ll pay it completely off. Alternately (and optimally) we sell the place and relocate to a rural area and pay cash for the new place. I will carry zero debt and plenty of liquidity into my retirement. That’s what I call peace of mind!