Should I Pay Off My Home Early or Keep the Mortgage?

by | Jul 14, 2021 | Opulence

While journeying to the Opulence stage of life (the last letter of my H.O.M.O. lifestyle), many people will find themselves lucky enough to have this best of decisions to make. And after losing everything in the 2008 crash, that was a question I was considering too, amazingly enough. Over the last ten years, I landed a stable government job, bootstrapped my way out of $10,000 in debt, created some financial momentum with a savings rate of at least 50%, and had carefully purchased two different 1-bedroom condos in my home city of San Diego.

And earlier this year, I had $100,000 burning a hole in my pocket, which I’d scraped together through years of leveraging various types of Hustle. Quick disclaimer though: six figures may sound like a lot, but it doesn’t go far where I live, with the post-COVID buying frenzy pushing the median home price in San Diego up to $850,000.

Beachfront homes in San Diego

With that “little bit of extra cash” (by San Diego standards), I was faced with the same decision as many Moneymakers when they reach Opulence: “Do I pay off my starter home early or let the mortgage ride and invest the money elsewhere?”

My options didn’t seem very promising. High interest savings accounts were only paying out 1% interest, essentially losing money to inflation. Not very appealing.

On the other hand, the U.S. market is at an all-time high, and I hear a number of people interviewed in podcasts from both the millionaire and FIRE communities saying they’re keeping a small percentage of their portfolio in cash reserves, so it they can be ready to buy low when there’s eventually a correction.

I’ll give you the pros and cons of paying off a house early, and then I’ll share with you what I decided to do with my $100,000. 

Like a street fight standoff in West Side Story, there are two camps aggressively taking sides on this debate.

The “Pay It Off Early” Camp

Security is everything with this crew. Dave Ramsey is their prophet, debt is the devil, and a 15-year-fixed mortgage is the Holy Grail.

Beyond getting a 15-year mortgage, Dave would also recommend going a step further and paying extra on the mortgage if possible to become debt-free even sooner. A couple ways to do this: set up bi-weekly payments (which pays a mortgage off about 20% quicker) or by just putting extra cash toward the principal any month you have the cash available.

Dave Ramsey

This is the route to go if financial peace of mind is your top priority. I’ll admit that I do find it enticing to know that when I’m retired, a fully paid-off home will mean lower monthly expenses so I have more cash available each month to enjoy my golden years.

The “Keep the Mortgage” Camp

A kingpin of this gang is Warren Buffet. His philosophy: leverage the bank’s money at the low interest rate of a 30-year mortgage loan and invest your money somewhere else. That way, it’s bound to make a better return. He did this himself and told CNBC that not only did his Laguna Beach home go up from $150,000 to $11M, but also, the additional money he was able to invest in the market grew to $750M. This option assumes you have a higher risk tolerance, make good investment decisions, and have the financial discipline to actually invest the difference so the money is working for you.

Where I Chose Sides in This Financial Street Fight

For my first condo, I chose the Ramsey route, opting for a 15-year fixed mortgage and set it up right away with bi-weekly payments so it would be paid off in about 12 years. However, I did that with Buffet mindset, because that first condo is a business asset. See, Ramsey usually advocates paying off a primary residence early, because that’s his target audience: people without the complications of businesses, rental properties, etc. And I doubt that Ramsey would lead a devotee of this down the path of real estate investing. He lost everything in the real estate market and so he usually directs people away from anything he deems risky.

My first condo is being rented on Airbnb and was close to being break-even in the cash flow, thanks to lots of sweat equity, investments in the initial upgrades, and dialed-in marketing. Even though the mortgage was only 3.5%, I remember a quote from Dave Ramsey: “Paying off a debt is kind of like making that same amount in interest.” So, by no longer paying 3.5% on that first mortgage, it’s like I was essentially “earning” 3.5%. This was a much better return than the 1% that any of the FDIC-insured high yield savings accounts were offering.

But wait, there’s more… 

But wait, there's more

Using some rough math, I added to that the new cash flow I would be getting from the condo, which is around $12,000/year (or 12% on the $100,000 that I had liquid). All in all, I figure the 3.5% and the additional 12% is essentially like earning 15% on my money. That’s a heck of a lot better than 1% from a high yield savings account!

But wait… won’t you miss out by not having the cash available to invest when there’s deals on the market?
You

Good question. When the time comes to buy another investment property, it won’t matter that I don’t have the money liquid anymore. I’ll always have the option of taking out a HELOC (home equity line of credit) on my paid-off starter property, so I can be sittin’ pretty and ride out whatever twists and turns the market takes, knowing that I now have the security of less debt and a paid-off asset to borrow against, if needed.

And with my new condo that’s now my primary residence, I’m taking more of a Buffet route with that one, opting for a 30-year fixed mortgage at 2.75%. But the Ramsey follower in me is still paying an extra 5-10% toward principal every month and investing the difference that would’ve gone into a 15-year mortgage and using it to max out a Roth IRA in VTSAX. Then, once I turn 59 1/2, I’ll decide if I want to withdraw some of the money from my Roth IRA to pay off the remainder of the loan on my primary residence or let the Roth IRA continue with it’s exponential growth. My decision at that point of my life will all depend on whether I’d like to reduce my monthly expenses and have more “hand money” at 59 1/2. I may be living large in Thailand at that point, not needing much extra spending money. That would allow me to keep all of my Roth IRA in the market, and let it continue to grow while I live off of my other assets.

Bottom line: gaining 15% on my $100,000, living a good life today, and setting myself up for an even better life in retirement with the choice between two very nice options at 59 1/2… that’s opulence, baby!

Opulent Monopoly man in fancy car

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