Financial Tip Friday: Paying Our Mortgage Off vs. Savings

Financial Tip Friday: Paying Our Mortgage Off vs. Savings

On the weekends I often make it a habit to do some kind of bingeing. Perhaps, my bingeing will consist of watching a couple of episodes of a television program I haven’t kept up with. Sometimes that bingeing will consist of reading articles that I think are important for the upcoming week of research. Sometimes, I will binge on blogs or other writings on the internet. And other times I will binge on archives of radio programs that I like to listen too.

Yesterday, while I had some quiet time after I had taken our dog for his early morning jaunt I was listening to an archive taping of the Ric Edelman show. Ric Edelman is a financial planner who has written a number of books about savings and investing and I admit I have bought a book or two of his, along with others. I actually learn a lot from listening to his show. However, one of the things he brought up and others in the personal finance blogosphere have also said this is that you shouldn’t pay off your house anytime soon.

In fact, if you can, you should refinance your home to a 30 year fixed mortgage, get a great low-interest rate and take whatever equity you have in the home and whatever money you save and invest it for the long-term.

Now I have heard this advice before. And logically it makes sense to me. The idea is that with interest rates so low you should be able to get a mortgage, if you have decent credit and a good history of paying your mortgage, at a very low interest rate (perhaps around 3-4% if not lower).  You then take that money and if the market just performs on average (which it is most likely to do over the course of your loan) your rate of return will be double or even triple (depending on your investments) what you would get by putting that money to your mortgage.

Intellectually, that makes total sense to me. I get it and I think when it comes to investing I tend to be a very rational person. The question for me was when we were buying a home why did we decide to go with a 15 year fixed rate mortgage at a really low interest rate?

Maybe I should’ve taken Ric’s advice and went with a lower payment and used that money to invest and/or pay off the debt.  Intellectually, again, it makes sense.

But there are some factors here, for me at least, that I think Ric and others who advocate a similar strategy don’t take into account.

  • I hate debt. I absolutely hate the debt that I have. I am firmly convinced that debt is a burden not a blessing. Yes, there are some out there who can leverage themselves and buy multiple properties or handle having debt with very low-interest rates. Maybe it is because I have had my student loans around so much or have made bad decisions with other debt in the past, but I LOATHE debt, which is the reason I want to pay off my mortgage really early anyway (another post for another time).
  • Discipline, discipline, discipline. In order for Ric’s strategy to work you need to consistently take those extra monies and invest them in some kind of retirement account or put them toward other debts. Again, I think I have pretty good discipline when it comes to retirement savings. I put in about 20% of my income (I would like to get to 50-60% sometime soon, but extra dinero goes toward paying off debt and emergency fund) into retirement savings. Now I know that it isn’t great compared with others who put a lot more in, but it isn’t bad for now. However, I could also see myself taking part of those extra monies and not using it for savings, but for travel, gifts, etc. Living life high on the hog. And while I want to do all of those things what is more important for me at the moment is reducing debt and not letting it become more of a burden.
  • By having a shorter-term for my mortgage, making extra payments, and paying off my debt faster, I will have less risk that my house would be in danger if I were to lose my job or lose some of my income. I totally grant that my cash flow is much less with this strategy and it would be much easier to tap savings in times of an emergency. I also totally grant that a home is an illiquid asset and cannot be truly converted to quick cash for emergencies or something of that nature. But for me, at least, paying off my home first and saving at the same time, instead of just savings totally has become more important.

I mean I get that by paying off this debt I am getting a lower rate of return than I could have in the marketplace, but the security of homeownership, getting rid of debt, and possibly even using this as income by renting out my house still makes me want to pay off my house quicker instead of extending the mortgage.

  • True financial independence. Like many in the personal finance blogosphere I strive for financial independence. What that means to me is accumulating enough assets so that I can live on my own terms. If I want to reduce the classes I teach, change professions, start a business, or quit that particular job then that is something I can do. For me, true financial independence is being totally debt free and having enough assets for you to continue in the lifestyle you want. The first part of that is the most important at the moment because I HATE debt. To me there is no such thing as good debt. DEBT is DEBT. As long as I owe money I am beholden to somebody else and I just don’t like that.

The second part of that equation regarding having enough assets to continue your lifestyle is a question I haven’t figured out yet because I am still trying to figure out what my yearly expenses are and what specific number I would need to potentially retire. A work in progress, but it is fun for me to figure it out.

Maybe sometime in the future I will change my mind. I mean we have enough equity in our home, even though we only bought it two months ago, that I could refinance to a longer fixed rate mortgage. I am certainly open to it. But the idea of having my house paid off before the end of this decade and being totally debt free to live on my own terms, at the moment, is more compelling than using Ric Edelman’s strategy. Not that it is a bad one, but it just doesn’t feel right for me at the moment.

8 thoughts on “Financial Tip Friday: Paying Our Mortgage Off vs. Savings

  1. The missing puzzle piece on this one is Risk, it’s tough to sit their and watch the roller coaster of the stock market while you are making the same mortgage payment each month. In Rick’s scenario people see the 4% rate on their mortgage and say the stock market can beat that easy, let’s say the stock market returns 8%, well then I just take my money I have been saving(most Americans don’t save, so that’s a strike as well) and I’ll sell my stock(still have to pay capital gains tax on this unless it’s a retirement acct, another strike) and pay off the mortgage whenever I want. I actually think there is a happy medium, not one way is right or wrong, I can see issues with each one. In the end in the FIRE world we are all trying to get our cash flow to exceed our expenses and both suggestions are doing just that, different strokes for different folks, isn’t that what they say.

    1. I totally agree about the idea of risk. Now I have a pretty stable job and doubt that I will lose it anytime soon, but I just want that house paid off and then take the money I was using for debt and the mortgage and really crank of the savings. I do think you are right regarding a happy medium and I think i will eventually get there, but getting that cash flow to be more than expenses is enhanced without that mortgage. Then I can really see living life fully on my terms.

  2. I think it’s fantastic that you’re focusing on what’s important to you, and what you think will work best for you – not just following someone else’s advice. There’s always a psychological aspect to whatever financial path you take, not just the simple numbers. If you hate debt that much, and see yourself being super happy and fist-pumping the air when you’ve paid it off, then that sounds like an awesome plan! For me, I’m probably a little the opposite – I can’t stand letting an opportunity to achieve greater returns go by, even if there is more risk involved. Great to keep testing and sharing ideas and tweaking your own plan to figure out what works best to get you where you want to do!

    1. I think what you are doing is also great. This is why I blog because there is such a disparate point of view with regard to personal finance. I still struggle with the logic of getting great returns and paying off debt. Even today I was waffling about paying down debt earlier (I could pay a big chunk right now or invest it). My big thing is going with a plan and sticking with it. I just need to be a bit more disciplined instead of bopping from one idea to the next. But that is why I read blogs like yours because I get inspiration and ideas.

  3. I assume that you have a fixed rate mortgage, right? If not, better refinance soon to get a fixed rate, as it looks like Yellen will be raising the fed rates before the end of the year. I think that some people were surprised that she didn’t tick up the rates a little bit at the last fed meeting.

    Investing vs. paying down mortgage is a classic conundrum. I do what I feel in the moment, so I don’t have a strategy (I keep changing my mind). However, I wouldn’t call investing the same as “saving.” Saving seems like a waste of time/money (until rates go up again–a lot). Savings rates are so low that I’d rather put that money into the market. Yes, there’s a lot of volatility in the market, but a savings account doesn’t seem to be a good choice at the moment.

    1. We do have a fixed rate at 3.75%. I would actually like to get it to 2.875% through a specific program at a local bank. Problem is that I don’t have 80% Loan to Value. My other quandary is do I want to pay off sooner or do I continue to plow into investments. This is something I go back and forth on all the time.

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