Financial Samurai
Slicing Through Money's Mysteries
Published: by 45 Comments
In 2022, my wife and I paid off our vacation property mortgage after 15 years of ownership. Now that it’s been a while since we paid off the mortgage, I realized there is a triple benefit to paying it off early.
I didn’t realize one of these benefits when we paid off another rental property mortgage early back in 2015. Sure it felt good to pay off our mortgage early. But back then, there was more hesitation since risk asset returns looked relatively more promising.
Instead of writing about the benefits of paying off your mortgage early, I wrote about mortgage payoff fees and procedures. This way, homeowners don’t get blindsided once they do pay off their mortgage and expect everything to automatically handle itself.
In addition, I wrote about the biggest downside to paying off a mortgage early. And that is a fade in motivation to make money.
The debate between paying off your mortgage and investing continues to rage on. But I’ve long ago found a logical solution with my FS Debt and Investment Ratio (FS DAIR) formula. If you follow FS DAIR, you will always be winning.
For those still wondering what to do, let’s now tilt the scale a little more toward paying off a mortgage early.
Since 2009, investors have been spoiled with strong gains in the stock market. Some folks even confused brains with a bull market by buying stocks on margin at all-time highs (and below themselves up).
However, after a hefty 27% return in the S&P 500 in 2021, it didn’t feel good to chase stocks. Valuations were high and 2020 already returned a surprising 16%. Therefore, I decided to allocate more capital to mortgage principal paydown.
Not only did it feel good to pay off a 4.25% 30-year fixed mortgage early, but it was also nice to not lose 19.5% in the S&P 500 in 2022. Paying off my mortgage early resulted in a 23.75% outperformance difference.
A 23.75% outperformance difference is mostly due to luck. If I was smarter, I would have sold all stocks and gone short at the beginning of 2022. However, at least 2022 was a great reminder we can and will lose money in risk assets.
The reason why paying off a rental property mortgage in 2015 didn’t feel as impactful then was because the S&P 500 closed down only 0.7%. It still felt good paying off my rental property mortgage for a guaranteed 3.375% return. However, it wasn’t like paying off my mortgage saved me from a bear market.
The value of a guaranteed return goes way up in a bear market. In fact, paying off my vacation rental mortgage is one of the few good financial moves I made in 2022.
If you ever start suffering from investor delusions, pay down your mortgage or any other debt. If you’re not paying down your mortgage when you’re unsure about risk asset returns, then look for low-risk alternatives. One-year Treasury bonds, for example, are paying a guaranteed 4.7% return.
Of course, I would have rather had another bull market in 2022 and not saved on mortgage interest expense. But a bear market makes paying off any debt that much better.
When you’re already exhausted, relatively speaking, it’s easier to boost cash flow by paying off debt than by working more.
The greater your cash flow, the greater your chances of surviving a downturn. If your cash flow is great enough, you might not have to alter your lifestyle at all.
When we paid off our Lake Tahoe vacation property mortgage, we immediately gained $2,500 a month in cash flow. That’s $30,000 a year freed up to pay for anything, including investing.
However, we actually boosted our cash flow by $3,500 a month or $42,000 a year. I had forgotten my wife was automatically tacking on an extra $1,000 to pay down principal on each mortgage payment for several years.
A freed-up $3,500 a month in cash flow is a significant amount of money for us. It can pay 100% for our family healthcare insurance and our daughter’s preschool tuition.
Having children is the main reason why our household expenses have gone up. Children are also the main reason why I’ve focused on increasing our passive income since 2017.
As a parent, your anxiety naturally increases because you have more responsibility. The helplessness of young children kicks your worry into overdrive. Hence, any type of financial relief feels more powerful.
Now that we’ve freed up another $42,000 a year in cash flow, my 2023 goal to earn $20,000 more in passive income is no longer necessary. I hadn’t realized this fact until now because I’ve always been focused on generating more passive income.
The mental stress relief thanks to a boost in cash flow has been greater than expected. The reasons are due to a bear market and mental fatigue. When we paid off our rental in 2015, we didn’t have kids either.
When times are good, cash flow is secondary because your asset values are rising. During bad times, your asset values are declining which makes your cash flow more important.
When you’re full of energy, you have no problem conquering loss with more effort. When you’re exhausted, like I am, it feels wonderful to no longer have to work as much.
I experienced the SAME type of relief once I was able to get a new 20-year life insurance policy during the pandemic. For years, I fretted about not being able to get an affordable new policy. I had made the mistake of getting only a 10-year term policy at age 35, two years before having my son.
The mental relief I felt, alone, after getting my new life insurance policy is worth way more than the monthly premiums. Check out PolicyGenius for free, real life insurance quotes instead of shopping around at each carrier one-by-one.
As a parent with debt, getting life insurance is a must.
With greater relief from paying off a mortgage comes more courage to retire earlier, relax more, or do your own thing. Taking a leap of faith is no longer as scary.
Ultimately, having a greater ability to do what you want is the biggest benefit of paying down debt.
Since our son was born in 2017, I’ve lacked the courage to take things easier. Probably due to evolution and the survival of our species, most parents feel a surge in responsibility once their baby is born.
As a result, in 2018, I pushed toward more entrepreneurship and less retirement. Making more money online to reinvest in passive income-generating assets became a priority.
Since the 2000 dotcom bubble burst, I’ve been scarred into believing funny money assets are ephemeral. Hence, it may be wise to regularly convert funny money into real assets to protect your wealth long term.
Starting in late 2017, I also became more active in recording podcasts, partially just in case I was no longer able to write. Even though I make no money from podcasting, it’s wise to build an archive of episodes in case I one day want to accept advertisers.
Further, I spent two years writing my WSJ bestseller, Buy This, Not That starting in 2020. If Financial Samurai disappeared, I could reinvent myself as a multi-book author and speaker. It’s not at the top of my list, but it’s a hedge against loss.
Paying off a mortgage will give you greater courage to live your ideal lifestyle. Your frayed nerves will heal with less debt.
If you’ve paid off a mortgage early, congratulations! Don’t let anybody make you feel bad for doing so.
Sure, you might have been able to make more money investing in stocks, private real estate, or alternative assets. However, the psychological benefits of paying off a mortgage are profound.
The lack of courage is why some people never change careers even though they hate their jobs. Fear of rejection is why we don’t ask someone out even though the upside to happiness is massive.
I shared in my latest weekly newsletter how I was feeling more optimistic about the future but wasn’t sure why. Now I know having one less mortgage to pay off is a contributing factor.
With every dollar of debt I pay off, I feel happier. How can we put a price on happiness?
Now I can’t wait to pay off my last rental property mortgage once inflation and mortgage rates return to their long-term trend (lower).
If inflation or mortgage rates miraculously don’t decline, then I’ll just have to wait until 12/01/2026, when my 2.625% 7/1 ARM adjusts, to start paying down more principal.
Because I sure as heck ain’t paying off a negative real interest rate mortgage when I can buy Treasury bonds yielding more! In 1H2022, when I paid off our vacation property mortgage, mortgage rates and Treasury bond yields were much lower.
It is surreal most homeowners can now live for free given we can earn a higher risk-free return compared to our mortgage interest rate. Alas, living for free won’t last forever.
The excitement of getting to pay off another mortgage by 2027 is hard to contain. If I succeed, then I’ll have at least $464,628 more rental property equity to boost my net worth.
With an extra $2,814.41 a month or $33,773 a year in cash flow, I’ll gain even more courage to kick back and do my own thing. Ah, perhaps paying off a mortgage is another reason why happiness increases after 50!
But for now, paying off my Lake Tahoe vacation property mortgage in 2022 is providing enough mental relief to feel better. Let’s see how long such relief lasts!
Readers, what are some unexpected benefits you have experienced from paying off a mortgage early? Anybody else recognize the psychological benefits of paying down or paying off debt?
If you want to invest in real estate more strategically, without leverage, check out Fundrise. Fundrise is my favorite real estate platform with over $3 billion in assets under management. The firm focuses on investing in heartland real estate, where valuations are lower and rental yields are higher.
With mortgage rates finally coming down from their 2H 2022 peak, you may want to shop around again with Credible. Credible has a network of lenders that compete for your business.
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Financial Samurai began in 2009 and is one of the largest independently-owned personal finance sites with over 1 million readers a month. Everything is written based off firsthand experience because money is too important to be left up to pontification.
Filed Under: Mortgages
Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.
I spent 13 years working at Goldman Sachs and Credit Suisse. In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.
In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.
Order a hardcopy of my new WSJ bestselling book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. Not only will you build more wealth by reading my book, you’ll also make better choices when faced with some of life’s biggest decisions.
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Everyone also said to pay off those student loans first as well, since they can’t be discharged in bankruptcy. Now those who prioritized paying off their student loans look like suckers. I personally had a hunch the student loan system was unsustainable.. and that some generous forgiveness plans were in the pipeline. Low and behold… I’m so glad we kicked the can on student loan paybacks and prioritized our retirement investments.
I think in general.. carrying low interest debt. and even higher interest debt with very generous forbearance terms like federally backed student loans it makes financial sense to delay as long as you can.
It’s actually insurance against job loss. Moving forward… basically any family making less than $50-75K (depending on family size) won’t have to ever pay back their student loans based on new income repayment limits. They are set at ultra-low 5% of your income. And interest won’t accrue. If you work for the government and are on PSLF.. even better.. in 10 years it’s all forgiven.
Biden has quietly forgiven almost all student loans while the courts fight over $10K-$20k in one time forgiveness. He also is making new loan payback very simple and affordable to drag it out over your lifetime and probably never payback the amount you actually took out in loans.
The long term effects of this should be interesting…. I will definitely tell my kids to take out as much loan money as the government will give them with the current payback terms. 5% payback of your take home is a great bargain.
If you really dig into the new loan repayment plans you realize that all new students basically get a free college education. If you go to college, fail at college and don’t make much money… you basically don’t have to pay back your loans based on the new repayment plans.
If you go to college and make a ton of money… you still only have to payback a tiny portion of your income to paying back the loans … 5-10%… and you can find many ways to lower your AGI to pay the bare minimum.
College loans don’t look that scary of a proposition for students moving forward.. not sure how this will play out in the grand scheme of things.
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Great article, Sam. We will be going into retirement soon, and having a paid off house is a great feeling.
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It certainly is. I definitely recommend people pay off their house by the time they retire. Do you want to feel lighter and more free once you no longer desire or have the ability to earn active income.
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Funny that I’m 1 of the rare ones from the opposite camp, ie NOT to pay off your mortgage fully. A mortgage with home equity built up is 1 of the most powerful and useful lifelines throughout one’s lifetime. For peace of mind, perhaps pay off 80%-90% of mortgage near retirement but keep the residual debt because:
– Paying off is irreversible
– It’s almost impossible to get a mortgage once retired, without a stable fixed income
– A great tool against inflation (esp when it’s expected to remain high)
– Mortgages offers 1 of the lowest interest rates compared to other types of credit
– Many ways to make use of home equity (line of credit, reverse mortgage etc)
– Enjoy mortgage subsidy or tax benefits in some countries
– Enjoy negative interest rates should inflation > mortgage rates
– Good to keep some cash buffer for emergencies or other investment options
– Opportunity costs for other investments with high returns
– Keep line of communication open with lender bank…one never knows.
Contrarian thinking,
Savvy Maverick
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I am totally with you on this . I currently have mortgage with rate of 2.75 . The effective rate is actually much lower (~2.4) than that when you factor in mortage deduction. Being that i am a single person with no kids it’s one of the few deductions/credits I get. I have sigficant amount of cash to put towards the mortgage but I have them in CDs and TBills which are paying me anywhere between 4.6% to to 4.9% . Also when things become incredibly cheap because of irrational fear as they did two months, it allows me to swoop in pick somethings.
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Smart moves you’re making, Steve! I would do the same, cheers 🙂
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Sounds good to me Savvy. One question I have for you, though is this: have you ever paid off a mortgage before? If you haven’t, then you might not fully be aware of its benefits.
I try to bring a balanced viewpoint to the equation so people can make the most optimal decision for themselves. It is the velocity are using my bestselling book, Buy This,Not That.
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Yes, I paid off a mortgage ~12years ago and have regretted ever since, especially the years when interest rates were so low. Could have tapped into the equity to accelerate my wealth.
I too thought that paying off the mortgage would give peace of mind, but it clipped my wings instead. Personal experience has taught me that the right debt helps one to soar, and mortgage is definitely one.
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Gotcha. Sorry your wings were clipped and couldn’t get to financial independence sooner.
Where are you now on your FI journey? And do you have a family to take care of? Having less stress to take care of family really made a big difference for me.
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I paid off our mortgage when I turned 43 and never looked back. We have four rentals that I paid off at 45. This is the best decision.
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Congrats! All that cash flow must feel amazing!
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It might be interesting to comment on how a 3% mortgage rate is essentially equivalent to a 5% pre tax risk free rate as someone in a 40% tax bracket would have to earn 5% before tax to achieve the same investment result as paying off the 3% mortgage rate.
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Paid off 2007 mortgage in 2014 at 49. I calculated it saved around 150K in interest if we stuck the 30 year course. We have been saving the payment and now have 250K savings in addition to 401K savings. It gives you peace of mind knowing you can tell the boss see you later and not worry about your mortgage. I’d never go back to paying the bank interest. Do it before you retire. You will not regret it.
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Congrats Steven! I might have to write a best age to pay off your mortgage post. Because age 49 sounds pretty good!
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Spot on article! For us it was about, to use an appropriate metaphor, building a foundation. Paying down debt, especially for a durable item like a house, raises your financial floor. This is just as important as raising your ceiling, but gets less press because it isn’t as sexy. However it is deeply satisfying to know that you don’t have to worry about paying your mortgage if times go bad. With a high floor established, you’re free to take more risks that ultimately raise your ceiling. Sure you can always run the numbers and see times when it would have been a lot better to just invest, but this isn’t a game you want to screw up. It’s way easier to build a foundation and then, to continue the metaphor, go crazy with the backsplash tiles later.
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“ this isn’t a game, you want to screw up” Yes indeed! Don’t be like my softball acquaintance who lost 17 years of progress buying Tesla on margin. There is no rewind button in life.
If you screw up, not only do you have to spend years in the future to make up for your losses, you also lose years of your past efforts as well.
“ Paying down debt, especially for a durable item like a house, raises your financial floor.” very smart. Raising the floor, especially as you get wealthier, is a win.
says
Sam, long time follower, it’s been a while since I’ve commented on an article. This one is so timely for me. 48 years old, 2 of my 3 rental homes completely paid off, I owe 75k on my third rental home interest rate of 3.25%. I am also the owner of a small office building that I utilize for my insurance business. The balance on that property is at $41,200 interest rate of 5.65% (commercial prop). I am supercharging my payoff of both of these properties over the next two years with an end goal of all 4 mortgages satisfied by age 50.
After having utilized all of your wisdom, our family purchased our dream home (we wrote the buyer love letter) in October of 2020, securing a 30 year fixed rate at 2.5%. I think I’ll hold this mortgage to term!
I know conventional wisdom often says pay off your principal residence first, but for me, knocking out these rentals and office building equates to cash flow covering my monthly expenses and then some. My tenant cash flow covers the house payment and expenses on my 2.5% 30 year fixed. Plus, it’s kind of a rush to receive the bank letter declaring the mortgage satisfied! Thanks for the post. It’s such an energizer to follow Financial Samurai!
says
Great timing on your October 2020 purchase! I wouldn’t pay off the primary residence mortgage until you pay off the remaining smaller balances of your rental property mortgage either.
2.5% is a steal right now. Once you pay off the rental property mortgage, your cash flow goes way up.
If you haven’t picked up a copy of my book, I think you’ll enjoy Buy This, Not That as well.
All the best!
says
Congratulations! What an incredible feeling that must be to own a piece of property outright and to not have any mortgage left on it. I have about $50k left on mine and boy is it nice to see the light at the end of the tunnel. Thanks for sharing your insights as always!
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Thank you!
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Great article. My partner is against paying off the mortgage early due to our low 3.375 interest rate, and he believes we will make more money by continuing to invest and keeping money in the market. I think the feeling of a paid off property would be worth it, even if we lost some financial flexibility. Your book has some excellent factors to consider regarding paying the mortgage off early or not.
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If it’s your only mortgage, I say do both! This way, you’re always winning. Thanks for picking up a copy of BTNT!
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Finance is largely psychological, which is why arguments over paying down debt via the snowball/avalanche are a thing. I suspect it also allows your risk tolerance to move up, maybe even enough to take on new projects or businesses. Either way, it’s not a trivial factor in financial well-being.
So I have to ask: Sam, any plans on paying off the house you just bought early? Because having no mortgages > having less mortgages.
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No plans at the moment with the mortgage rate at 2.125%. My focus is on paying off my remaining rental property mortgage which is smaller and has a slightly higher rate.
I’ve got until 2027 until my 7/1 ARM property unlocks. But I think there is a 75% chance that will be buying another house by then. I was so tempted in March 2020 to buy another forever home. But I’m glad I didn’t. I love my home and how affordable it is.
How about you?
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Great read! Would you rather pay off your primary residence mortgage with a 2.75% interest rate or a rental property mortgage with a 3.38% rate?
At face value it seems obvious to pay off the 3.38%, but I’m curious if there are tax and write-off implications involving the rental? Ie if I can no longer write off mortgage interest.
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Worth doing the math on a post tax basis for sure. My default answer is to focus on the higher mortgage rate from rental properties. The boost in cash flow after paying off the rental property is huge and we should have more of a business mind when managing rental properties.
As of now, I just use my rental property income to pay my primary residence mortgage payment each month. It more than covers it.
I also like knocking off the smallest balances first. Feels very rewarding! And it is a joy to deal with one less lender and one less tax document each month.
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Make sure your primary house is paid off before paying off mortgage on rental property. There are benefits of carrying mortgage on rental on taxes as opposed to primary residence.
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Depends on the mortgage rate, the mortgage, balance size, and the mortgage interest rate.
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“Because I sure as heck ain’t paying off a negative real interest rate mortgage when I can buy Treasury bonds yielding more!”
But isn’t this what you just did by paying off the vacation property at 3.375%?
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Funny, isn’t it?
Yes, I paid off the mortgage in the first half of 2022 before interest rates and mortgage rates rose.
Now that they are elevated, it’s time to be patient and wait to pay extra principal until the rates revert back to its long-term trend, which is much lower.
Earning 4.7% interest rate on treasury as is too attractive to ignore.
The time to pay off the mortgage again is coming. Just be patient.
says
We have a 15 year mortgage that is under 3% so it is really hard to think about paying it off early. We have baked the monthly payment into our yearly budgets for the next 5 years so it is not too stressful for us even with the down market this year.
I can totally see the benefit mentally to have a paid off mortgage even if financially the money could be spend better in interest earning assets. When your fixed expenses is low, you are more free in down markets. For us, if we get rid of our mortgage, our fixed cost will be around just $2000 a month. I do feel happier just seeing that number.
By most people’s standards, you and your family are fairly well off. You have built up a very steady stream of passive income. You are where so many FIRE people want to be, yet you always seem vaguely worried all the time. Will you always wonder if you have enough no matter how much money you accumulate?
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A 15 year fixed rate mortgage is wonderful. So is the rate at 3% or less. For you, there is less of an urgency to pay off the mortgage because it is already amortizing at twice the pace of a conventional 30 year fixed rate mortgage.
“ You are where so many FIRE people want to be, yet you always seem vaguely worried all the time. Will you always wonder if you have enough no matter how much money you accumulate?”
I might just be more honest than the average personal finance, writer out there, sharing my worries, fears, and anxieties. I don’t want to sugarcoat life is always gumdrops and roses.
Maybe it’s because I grew up in emerging countries with a lot of poverty. And because I saw so much poverty, it worries me that I could easily be one of them if I don’t pay attention and take care of my family and finances.
But if I really worried greatly whether I had enough money, I wouldn’t have left my day job in 2012, and I would have returned to work long long ago, especially with two young children. So maybe I’m not as worried as you think.
I try to infuse in my articles, the reality of life and the psychology of money.
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I saved up and paid cash for my home in 2017 and it is the BEST thing I ever did in my whole life!!! Such a peaceful feeling you just can’t imagine until you realize this goal. If I become seriously ill or someone hits my car and I am injured, there is no worry that I will become homeless. All I have to pay for is food, utilities, property insurance, and a fairly low annual property tax, which would all be covered by either SS or disability payments should the need arise. I have no regrets, and no envy at all for the folks who are scrambling trying to play the interest rate game with debt strapped to their backs!
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Agree. And that peaceful feeling goes up as we age bc we are less capable to work as hard or have less desire.
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I love reading articles about this. I am 26 and have only had a mortgage for 3 years and i can’t wait to pay it off. However, at a 3.5% rate i am not paying extra off currently. I could only imagine though the excitement to be debt free on a property.
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The feeling will be even greater the older you get, when you do pay it off. Because it is more gratifying to pay it off after a longer period of time, then after a short period of time.
Imagine 20 years from now, when you’re 46 in sick and tired of the grind and your job. The relief of paying off your mortgage will feel amazing! Much more so that if you paid it off in a couple of years. Funny how that is!
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Hello Sam, Love the post. Right now our goal is to pay off one of our rentals as it has the highest rate and we’ve always believed it is best to do mostly for the psychological benefits. Yes there are financials to it but its hard to price feeling more comfortable and confident. My dad asked me two years ago what he should do financially as he has always done well but he values others opinions. I told him to pay off his house. He did so and after two years he would have enjoyed gains in the other investment options he was considering but even he admits that paying his home off was truly the best return he could’ve imagined. Posts like this Sam help people go beyond the financials as sometimes it feels like there are blinders on and that’s all we rationalize decisions with.
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Excellent goal Jason. It’s really fun to have a specific financial goal to reach. Once it is achieved, you’ll feel great. And then it’s up onto the next one with added security.
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Great key-in on cash flow including the principal you no longer have to pay as well.
Do you also look at the tax benefits of paying down mortgage debt? Treasury Bills are great but the capital gains takes that down a bit and paying off the debt is like 2.5k/month tax free.
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I do. But it becomes secondary after a while. Because you are optimizing more for the cash flow and psychological benefits of being dead free, then every single potential squeeze out of the dollar.
There are many ways to shield your rental income from taxes. And if you still have a lot of non-cash, amortization expense, that helps a lot.
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We paid off our mortgage when I was fifty-one. We have always been savers. No car payments etc. I used an ARM for our mortgage. We also had fifty percent equity when we built our house. We poured earnings for additional mortgage payments. It took eight years, but it felt great. Our CPA discouraged what we did.
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Thanks Sam. Paying off the note on our primary and rental was the best thing we’ve ever done. It immediately increased our cash flow and created some real financial stability. Being that I’m getting close to retirement, I’ll take the guarantee of not having to pay a 4% note rate versus the option to use the same cash flow to invest in riskier assets. If I were younger I probably wouldn’t have made the same decision. While not having the debt does mean paying more in taxes -it at least does come with a guarantee of sorts
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I think it’s great that you did so, and it’s great that you did so inspired of your CPAs recommendation. Because that means you considered both sides, and you made a conscious decision to proceed with one.
No regrets!
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Great article! I started to pay some of mine of, just watch out for those taxes when account for cashflow on a paid off property!!!
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For sure. One of the funny things that happened in 2016 when I was doing my 2015 taxes I was looking for my mortgage interest expense on the paid off property. I forgot I had paid it off and I was like man, no more mortgage, interest, deduction expense! But it was fine because I had imitation expenses to shield my rental income.
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