I just paid off the mortgage on my house this week.
My wife and I now own our home free-and-clear.
This is one of those huge life goals I've had since long before I even owned real estate, and now that we've finally checked this item off our list, it feels pretty great!
Back when we bought our first house – we got locked into a 30-year, fixed-rate mortgage at 4.72% with a local credit union.
At that time… I was well-aware of Dave Ramsey's advice about how it's better to get a 15-year fixed mortgage, but we opted for the 30-year plan anyway, to give ourselves a little extra financial breathing room each month.
I was convinced I could easily pay it off in 15 years if I just put a little extra money towards the principal each month?
To nobody's surprise, I was wrong. I never ended up making ANY of those extra payments. Not once.
Life always got in the way, and there were always other things that seemed more important than throwing hundreds of extra dollars into a seemingly bottomless hole of DEBT each month.
So the years passed, and we found ourselves with very little progress made towards paying off our house.
For a while, I thought we'd end up riding this thing out for the whole 30-year term, paying the smallest possible monthly installment (and the highest amount of interest along the way).
Luckily, our financial lives took several opportune turns in the right direction, with a lot of intentional decisions about how we would use our money.
We've been able to create several sources of income that gave us the ability to invest more and pay off debt.
We had the cash, and we had the goal and the timing was right, so we finally decided to pull the trigger to knock this thing out.
Is It Smart to Pay Off Your House?
For the longest time, I would've told you this is a stupid question.
OF COURSE, it's smart to pay off personal debt – right?
If you have the money to eliminate your personal debt and the monthly costs that come with it, why wouldn't you do that??
Well… this is partially true – but it's not quite that simple.
When you start looking at your financial life through the lens of a real estate investor, you'll realize there's actually a massive opportunity cost at stake here.
Keith Weinhold illustrates this pretty well in his book, 7 Money Myths That Are Killing Your Wealth Potential, where he says,
One example of how I do this is by minimizing the amount of equity in our family home (primary residence). That way, those equity dollars can instead be invested in more income-producing rental properties.
In fact, I have the ability to pay off our home right now, but I won't. That would be one of the more reckless financial decisions that I could make!
Instead, I keep the maximum debt on our primary home. This way, I have more dollars available for down payments on income properties, and then I actually take out even more debt to get loans on those income properties.
In the book, he goes on to explain the math behind these statements (and it actually does make sense), but I won't get into that here.
The point is… if your goal is to create more wealth and financial freedom, you'll forfeit a lot of earning potential if you choose to plow your dollars in a free-and-clear home, rather than investing those dollars in more income-producing real estate.
On paper, it makes perfect sense – but this idea of “don't pay off your mortgage, even if you can” has been a difficult idea for me to embrace. It TOTALLY goes against the advice I was given by the personal finance experts and wealthy family members in my life. The conventional wisdom on “bad debt” (i.e. – the kind that doesn't pay for itself) has always been to get rid of it ASAP.
Why I Paid It Off Anyway
The idea of leveraging every available penny to rack up more “good debt” (i.e. – the kind that pays for itself AND makes me an income) instead of paying off my house seemed to check out… so what did I do?
I paid off my house anyway.
Why would you do that Seth?! You know better than that!
After talking over the issue with several important people in my life, I came to the conclusion that even though investment decisions may seem black and white – there are a lot of decisions in life that have nothing to do with making more money.
Every person needs to look at their personal values and definition of success and make decisions based on what ACTUALLY matters (hint: ‘making money' isn't at the top of everyone's list).
When you dig deep and understand what your real priorities are in life… you'll probably realize the same thing I did – not all decisions are financial.
I've always had the personal goal of owning my home, free-and-clear. It's a huge point of pride for me – and something I've dreamt about for years. For all the obvious reasons (e.g. – no mortgage payment and the peace of mind from knowing a bank cannot take my home under any circumstance) I've decided that this little piece of security is a goal worth achieving and maintaining. It's one of the many checkboxes in my personal success formula.
Even if everything else in my financial life turns upside down (say, if there's an unexpected disability, loss of income, or I just want to take my foot off the gas for a bit), my family will still own the roof over our heads.
As I look around at other wealthy, financially literate people I know, I realize I'm not the only person who values certain things more than making more money.
- Some people send their kids to expensive private schools when a public school would've done just fine.
- Some people buy houses that are WAY bigger than they need. Why? Because they want a nice house.
- Some people own an expensive car, even though an economy car will get them from A to B just the same.
- Some people go on expensive trips and eat out at expensive restaurants when they could use that money to invest in something.
To me, the value of having ZERO personal debt is something that's worth the opportunity cost – however much that is.
The value is hard to quantify… because it's not just about dollars and cash flow, it's about increased certainty, lowered risk, peace of mind and added happiness.
There's something about getting this mortgage monkey off our back and having one less thing to worry about each month that goes a long way.