Why I Won’t Pay Off My Mortgage Until I Retire

Having a mortgage is a wonderful thing.  In fact, I owe much of my work longevity to my mortgage. When I was 24, I came across a lot of cash due to a couple good stock picks.  I was just lucky, because goodness knows I can’t pick stocks for doodoo.  I never really told anybody how much I had, but it was enough to put 25% down on a median priced home in San Francisco and still have several years of mortgage payments left over.

By my mid 20s I began questioning the meaning of work. Perhaps I was simply suffering the lesser known “quarter life crisis.”  Because I had arrived at what I considered to be too much money too quickly, working to make more money lost its appeal.  It didn’t matter if I added another thousand or ten thousand to my savings, making money was so uninspiring.  I was demotivated because of a couple chance trades that required very little skill, just a lot of balls.  The great irony is that I don’t need much of anything to live a comfortable life.  Give me some clean clothes and a place overlooking the beach with a hot tub off the bedroom balcony and everything will be OK!

RENTING JUST FEELS WRONG AFTER A CERTAIN POINT

I had already lived in a nice one bedroom with parking for $1,600 for a couple years and I was sick of throwing my money away.  The next logical move up was to a two bedroom, two bathroom apartment, but those places regularly rent for $2,500-$3,500 a month in San Francisco.  It was unbearable to pay more than $2,000 in rent to someone else even if I was getting shelter in return.  $2,000 a month is $3,000 in pre-tax income one has to earn!  Forget that.

Admittedly, there was also an irrational fear that I would be a 40 year old renter if I kept at my pace.  There’s nothing wrong per say in being a 40 year old renter, just like there’s nothing wrong with being a 40 year old virgin.  But, regardless, I didn’t feel like shelling out month after month of hard earned cash to help someone else pay off their mortgage.  If you’re in the 25% Federal tax bracket or below, by all means rent.  Renting is cheaper in the beginning for the most part and provides a lot of flexibility.

I soon found a cozy little two bedroom place, which after putting 25% down cost 20% less than what it would have cost to rent.  I wasn’t hesitant to put that much money down at all.  In fact, I was absolutely ecstatic to deploy my savings into something useful.  Suddenly, I had much less savings, and a nice multiple six figure mortgage to keep me honest and motivated again.  With the mortgage, I gained a renewed sense of purpose! Funny how things work.

I couldn’t just be a bum and not give it my best at work because if I got fired, I’d be at risk of eventually going broke.  Yes, I still had savings left over, but everything is relative because I had an even heftier amount before the down payment!  I developed a game plan to get to know people in my organization better.  I worked harder at everything that was asked of me.  It was do or die time, and boy did I do do!

LIQUIDITY IS STILL KING

Despite having a nice home to call my own, liquidity is still king.  It’s been a decade since I purchased my condo, and now the payments seem incredibly low.  It’s funny how time makes everything cheaper, especially if you have a fixed payment.  The condo is now a rental, generating positive free cash flow because rents have crept up about 40% since while payments have actually gone down 25% due to a refinance.  Inflation is a wonderful thing!

I have the cash to pay off the entire loan, but I don’t plan to simply because it’s important to stay liquid.  You can dump all your cash into your property, but what if the house burns down?  Sure, insurance will hopefully take care of at least 80% of the rebuilding cost, but for that instant when your house burns, you are going to be shitting bricks wondering whether you’ve lost all that money.

If you so happen to be in a higher federal tax bracket (33% / 35%), it behooves you to keep your mortgage as long as you work.  The government is robbing you of your hard earned money and having that shield helps much more than if you are in the 25% or lower bracket.  Yes, I understand that it’s not the greatest to pay interest to save on taxes.  That said, it’s all about cash flow and tax minimization when you’re making money that Obama doesn’t approve of you to make.  Focus on cash flow.

Mortgage rates are so low now.  As I mentioned in “Should I Refinance Now?  Does A Bear Poop In The Woods?“, you can borrow at 3.625% for a 5/1 ARM nowadays.  That’s essentially how much money you can make in a 7-yr CD at USAA (3.88%) back in 2010.  Hence, the smart move is to stay liquid and not make extra payments on such a low rate.  Remember, you can deduct interest on up to a $1,100,000 mortgage!

Cash is always king, and you want to have as much cash as possible to ensure your financial well being, as well as take advantage of investment opportunities when they arise.  Please read more tips for mortgage refinancing in an article I wrote earlier this year.

CONCLUSION

When you can see yourself retiring in 5-10 years, start formalizing a payoff plan so that when you finally do retire, you will be mortgage free.  The interest deductions all those years are just side benefits.  It’s your ability to live in your home rent free for the rest of your life, which is your biggest benefit!

Use accounting to your advantage, not to the lender’s advantage. It’s all about matching cash flow so that you are always in a very healthy state.  If you can match your mortgage pay down with when you will no longer have a steady income, that is likely the best scenario.  Paying off your mortgage early is a very personal decision.  You just have to make sure you know yourself!

Recommendations For Homebuyers Or Homeowners:

* Check Your Credit Score: Take a moment to check your free TransUnion credit score through GoFreeCredit.com, a company I trust. 30% of credit reports have errors, which could put a serious hamper on your refinancing or new loan borrowing abilities. I had a $8 late payment I didn’t even know I owed crush my score by 100 points come up during my last refinance! The average credit score for rejected mortgage borrowers has risen to 729 due to more stringent lending requirements. Do you know what your score is?

* Refinance Your Mortgage. LendingTree Mortgage Refinance offers some of the lowest refinance rates because they have a huge network of lenders to provide mortgage loans, home equity loans, and home equity lines of credit. If you’re looking to buy a new home, consider using LendingTree to get multiple offer comparisons in a matter of minutes. When banks compete, you win.

Updated: 5/1/2014

Regards,

Sam

 

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. First Gen American says

    I became very motivated to pay off my mortgage after the 2008 downturn. I realized how lucky I was to have kept my job and not be impacted by massive layoffs so I made every dollar count after that. Since the stock market was plummeting in early 2009, I just poured everything into my sure thing investment, my home. I don’t regret it.

    Even though the market had made great returns since the very bottom, had I invested in the market back then, I would have been losing money every month for quite a few months before ever seeing any kind of rebound after that 5000 low. It wouldn’t have been very motivating to lose money every month and it probably would have taken a good chunk of the year before I broke even on my investments. I chose the safe route and that worked for me.

    I’ll say having children is motivating too…knowing that you have little people who rely on you.

    • Financial Samurai says

      Yeah, children/dependents definitely are a motivating factor for someone to do well and beef up their finances.

      The thing for me is that I refinanced my current home to 3.625% and my rental to 4% and there is mortgage interest and operating expenses as well. Hence, it’s just very difficult for me to pay it all off right now since the price of money is so cheap.

  2. Mike Hunt says

    If you owe a mortgage and an earthquake takes your house, you may choose to give the property back to the bank (not sure if you can do this actually) but the equity you had in the place is gone.

    Also the income tax break for mortgage interest payment is a bit overstated- you can’t deduct all the interest and it is a bit like spending $100 to get a $10 rebate- in this case why pay interest at all?

    • Financial Samurai says

      Bc earthquake insurance is the most expensive type there is with oftentimes $20,000 deductibles too.

      It’s definitely not $10 for $100. There are phaseouts, but it is definitely closer to 30-40$ if you are in thetop tax bracket.

  3. david M says

    I bought a house 3 years ago with a 15 year $320,000 mortgage. I refinanced 2 years later into a 10 year mortgage at about $210,000.

    I will probably pay this morgage off in about 5 years.

    I could pay it off today BUT as you said – its better to stay liquid.

    Mike – you bought the house, not the bank. The bank does not want to land from you they want $. Can someone do this – probably. However, personally, I think it is unethical. What happens to the value of something I purchase should have no baring on whether I make the payments. If it did, I would get a 7 year car loan – make the payments for 12 months or so and then return the car!

  4. Justin says

    Interesting read! I really dont put extra on my mortgage, at 5% you can get rates much lower on any other debt. Even my sudent loans are 6.8%, and my income exceeds the threshold for writing that interest off. I agree with just about everything you said!

    http://www.moneyistheroot.com

  5. DoNotWait says

    We want to pay the mortgage in about 15 years instead of the 25 we have. Even though that means we put extra money on mortgage to save a LOT on interest, we still have some liquid. Not as much as we would like, but we’re trying to plan something for this while keeping extra money on mortgage. Why not trying to do a bit of both at the same time?

  6. krantcents says

    There are two issues in your story. Rental property is different than a personal residence. If you have a profit in your rental property, it will be taxed at your personal rate and possibly subject to AMT tax. This is a good reason to maintain a mortgage. Having a mortgage on a personal residence is just an expense! Can you make more money than the interest rate on your mortgage? It may be more important for peace of mind to own your house free and clear.
    Liquidity is important, if you expect to act on some future opportunity. Liquidity has a downside, you will not make as high a return. I think this may be a personal choice.
    Debt in itself does not motivate me, certain events beyond my control will affect me much more. I think it is because I do a lot of analysis before I take on debt or make a major decision. I go through a lot of “what ifs”and a contingency plan that makes me feel comfortable.

  7. retirebyforty says

    With the interest rate so low and housing market down in the dump, it’s time to borrow as much money as you can and put it into rental properties. Sure you lose liquidity, but the interest rates are so low, you’re not making any money from that liquidity anyway.

  8. JT McGee says

    I absolutely agree with you. I remember one of your tweets when you asked something along the lines of “How big of a bonus would you need tomorrow to pay off a $25,000 (or something debt) at 2%?”

    The correct answer to that question, in my opinion, is $9582093450283457480924534879. Unless the time it takes you to set up online payments is greater than the benefit of having that $25,000 line (meaning you have literally tons of $100 bills), then it doesn’t make any sense to pay it off early.

    And to explore an additional thought, one which many may not agree with, why pay off a mortgage quickly when you price yourself out of a “cut and run” situation. Sure, it doesn’t always make sense to stop paying a loan on a home in which you have negative equity, but if it does, then it’s nice to have the ability to do it. Morals, contracts, pfft, whatever–the contracts clearly state that you make the payments or the bank gets the house. And you pay for it over the next seven years with a super-low credit score.

    You home is a financial asset like any other. Don’t fall in love with it if it means wrecking your finances.

  9. Everyday Tips says

    I think it is personal preference.

    I don’t care about the extra percentage point or two I could make investing my money in the market as opposed to paying down my mortgage.

    I agree liquidity can be an issue for some. However, if you already have some liquidity, then I see nothing wrong with paying down the mortgage. I cannot wait to have the piece of mind you get from being entirely debt free.

    • Financial Samurai says

      I guess I already know what that peace of mind feels like being totally debt free, because we’ve practically all been debt free from birth up to college, and it was no big deal.

      Earning more is much more satisfying than having less debt. Debt, when used appropriately is such a great tool to maximize one’s financial life!

      • Everyday Tips says

        I guess it all depends on what makes you ‘tick’. The way I see it, I can pay down my mortgage and then have a couple thousand dollars each month to invest any way I want. I don’t have to spend a dime on interest, even if it is tax deductible.

        I understand that by investing now I have the time value on my side (although it can work against you if the market tanks). However, not having that mortgage payment every month will give us so much freedom, and that is priceless to me.

        (By the way, I pictured you look my different than the photo in your post. :) )

  10. Evan says

    There is something freeing about liquidity. I think everyone should have a number in their head – that number should represent the liquidity they need to sleep at night. Some call it an emergency fund I just call it a I can sleep at night fund…after that is fulfilled then I don’t see the harm in attacking debt (even mortgage debt)

  11. Will @ HackingTheBank.com says

    It’s nice to be debt free, but when rates are at a very low level, sometimes it makes sense for forgo paying off debt. Just like when rates are high it can make more sense to invest in a 13% treasury instead of stocks.

  12. Robert @ The College Investor says

    I really want to be debt free including my mortgage. When we bought our house, we could have gotten a 15 yr fixed at 4.5% or the 30 yr fixed at 5.0%. We went with the 30 year fixed, but we pay the same payment we would at the 15 year fixed. This gives us the flexibility to pay off the mortgage a lot quicker (it is actually only 2 months longer if we continue this over the life of the loan), but if, for some reason, we needed additional cash flow that month, we could make the normal payment and have an additional $1,000!

    • Financial Samurai says

      That’s a good call and good balance. Where people “get in trouble” is just using that $1,000 to spend it on whatever. Flexibility is so important bc u never know what opportunity you will have to invest, or when u need the money to survive.

  13. Max Bronson says

    I don’t know. I think that if you have sufficient cashflow, then you can pay off your mortage faster and then used that money saved from interest payments to invest instead. Bankers already get enough of our money.

  14. Joe says

    Well, wouldn’t “using accounting to your advantage” include paying off your mortgage ahead of schedule so that you end up paying less interest over time and your house is slightly cheaper over all?

  15. Charlie says

    Nice post. Paying off any kind of loan is motivating to me too. I always pay my credit cards off in full each month and don’t feel good when I have big spending months. I want to simplify my life, build my savings, and give up more of my material things. Having a lot of stuff doesn’t make me feel good anymore it just ends up stressing me out.

  16. Money Reasons says

    I paid my house off early, it just took over 10 years. I could have raided my brokerage account and paid it off in 5 if I wanted too, but that would have made me house rich (figure of speech) and cash poor. Housing is much cheaper where I live though, but then again I don’t live by a beach…

    When I bought my house the interest rates were in the 6.5% and higher range, so I decided to knock my debt down quickly. I don’t think I would do it today with the interest rates at 3.5 to 4.x% or so. The money is just to cheap to do so today.

    Still, I’m very happy that my house is paid off. There is many non-financial rewards in doing so.

    Now that my core debt is defeated, I feel like I can safely take on some additional risk, and still keep a roof over my kid’s heads and food on the table…

    Your way sounds like it works perfectly for you though, so that good too…

    • Financial Samurai says

      Hi Don – I think it’s great you paid off your mortgage early. You did what you felt was right for you.

      I do recall you writing in a post about how you planned to save the difference, but didn’t do so. What’s the latest on that situation? The mortgage disciplines me in my spending habits b/c I don’t need that much to be happy.

      But, with no mortgage, I fear I’m gonna start spending on $1,500 bags from Bally, $500 shoes, business class fairs that cost $6,000 to go overseas instead of $1,500 for economy etc.

      I’d love to get your insights on this.

      Sam

  17. Norman says

    INFLATION is a really good reason a young person today should NOT pay off their locked-in low-interest mortgage. You can come out way ahead financially in the future by paying back that mortgage with cheaper dollars. As you state “It’s been a decade since I purchased my condo, and now the payments seem incredibly low.” My bet is that future inflation is going to average more per year than the loan percentage you could lock in today.

    • Financial Samurai says

      Yes, inflation really is a beautiful thing for landlords and those who use debt to build their wealth. Inflation has been coming down for a couple decades now, so I’m not too sure inflation will pick up significantly over the next couple of years.

      Taking on a mortgage is like shorting bonds in a ways. You gain when bonds go down as rates go up.

  18. Darwin's Money says

    What stocks did you make your millions on? I got swept up in the internet bubble.
    AS far as mortgages, I like to look at it in terms of present value. Why bother paying down a mortgage at 4% effective when you can earn more elsewhere?

  19. Bogey says

    My wife and I just built a new house this past summer and locked in a 30 year loan at 4.50%. We don’t have any plans to prepay, but that could change in the future. Currently, we are looking for additional real estate investment opportunities so that we can put our extra cash to use in this way. People will always need a place to live, that’s why I think rental properties are a fairly sound investment, plus I like that fact that I control the investments and they are tangible assets. Call me crazy, but I find it hard to believe that Fortune 500 companies in which I can buy stock are really looking out for me, the shareholder.

  20. kidgas says

    I agree with you 100%. Just try to take out an equity line when you lose your job or in the middle of a financial crisis. Keeping cash on hand and staying liquid is paramount, in my opinion. Even heading into retirement, if it is possible to get more cash flow while retaining a mortgage, I would do it.

  21. George says

    If you’re willing to take a little gamble, earn 7%-8% Federal tax-free in a municipal bond fund on the mortgage money that you’re borrowed at 3.5%-4%. Uncle Sam rebates some of the mortgage interest and then doesn’t get any part of the dividends.

    • Financial Samurai says

      I’ve been looking at munis for a while, watching them crash 15% and now rebound 5%. NACS is a fund I’m thinking of buying. Just to clarify, no state tax either right? Could be good? The problem is.. 7-8% yields is nice, but munis are either going to hold, or just imploded. In that scenario, 7% doesn’t sound so good.

      • George says

        State tax depends on the fund and the state involved. In Oregon, we’re screwed as the municipalities issue very little debt that the big funds pick up (there are only two private funds that I’m aware of which have exclusive Oregon munis and that’s the only way to avoid the 9% income tax). One could also try to buy the individual bonds, but I’m not wealthy enough to try that.

        States like California issue a LOT of debt, so you can avoid income tax there in a muni fund devoted exclusively to CA munis. On the other hand, is the income tax so hideous that you’re willing to concentrate a chunk of your portfolio in CA debt?

        VKQ is a fund that I buy when it’s at a discount to net asset value (NAV) and sell when the NAV quits rising and the price is on the decline. This is the general strategy one should employ with any bond fund.

  22. Derrik Hubbard, CFP says

    I like the idea of paying extra principle payments to myself into a side fund that is conservatively invested in order that all extra dollars earn compound interest instead of being “dead equity” inside the home to have to borrow back when needed.

    This maximizes the interest deduction during the years that the side fund grows until the side fund is enough to pay off the mortgage.

    The point being to have liquidity during the extra payment phase, and then being able to fully pay the loan off in the future.

    Liquidity, maximum interest deduction, and compound interest working for you, and a paid off home mortgage down the road.

    Derrik Hubbard, CFP

  23. Pickapen says

    We all have different perspectives. I have lived and worked overseas and on 2 coasts. I always viewed a mortgage as a burden and never had the desire to own a property. I enjoy renting and I don’t view it as a waste of money because I am paying the premium to have the landlord worry and maintain the property. I am as free as a bird without a property worry stress or care in the world. Basement gets flooded, electrical gets shot, roof is in need of repair, water damage, cracked foundation, etc, etc, etc. . .not my problem. Local municipality decides to raise property taxes, cost of water and other services; does not affect me.
    I pay the rent premium to complain expect immediate results or simply leave. My investment portfolio has appreciated more than any home I could have owned would have and I like it that way.

    I was raised in a family that owned rental properties and have witnessed the nightmares caused by tenants, acts of god, crappy contractors and bad luck.
    Being a landlord consumes time and effort and being an absentee landlord means even more effort and anxiety as well as added expense. Not the lifestyle for me.
    Depending on the state you live in(eviction laws) a horrible tenant can wipe out years of profit on a property.

    Right now I’m toying with the idea of picking up and moving to Buenos Aires, no house/condo/co-op to worry about. Simply tell the landlord I’m not renewing, time the departure around my lease ending date and I’m gone.
    All I need is a laptop, an internet connection to check my accts and a mobile phone to make calls.

    I view no mortgage as FREEDOM!

  24. Invest It Wisely says

    Was that in the internet bubble? I was still a broke teenager then unfortunately! ;)

    Mortgage rates are low now and I’m not in a rush to pay down the mortgage, but at the same time I recognize that rates could be climbing up. I think I do agree with you that having more income is more security than paying down debt so long as the income itself is not too risky. Although we have about 25% down we are still pretty fresh and without large sums of money behind us, so diversifying income sources and building up side income is important.

    • Pickapen says

      Many people in 2008 and 2009 found out quickly that the money that they thought they could utilize to help them in tough economic times the intensively marketed HELOC became vapor money. Banks yanked HELOC, credit card balances an all sorts of loan products.

      I tell friends don’t even think about buying a house unless you have 1yr in living expenses saved and easily accessible. No need to put yourself in a liquidity crunch of your own machinations.

      • Invest It Wisely says

        Yeah I don’t want to rely on a HELOC as an escape (though I did write a controversial post about paying down the mortgage versus keeping an emergency fund) so that’s why our goal is to save up to 50% of our net income this year and we are keeping expenditures low. Right now throwing it all on the mortgage doesn’t seem like the best thing to do but there is security to be gained from keeping a healthy gap between income and expenses, as well, and we are diversifying our asset base so we’re not overweight house or overweight retirement assets. It’s a little spartan but I’d rather be spartan now out of choice when I can control things rather than have to do it later under bad circumstances.

        • Pickapen says

          that’s a good way to go about it if it helps you you and our partner sleep better at night and reduces stress.
          Personally I am they type to max out my tax deferred retirement vehicles 1st and hen everything else has a variable allocation depending on the priority. As long tsy is printing money, the fed is keeping rates and inflation in firmly in sight and investors gobble up our debt, no need to pay down a mortgage. equities and munis are providing some solid returns, corps are sitting on record amounts of cash, m&a activity is picking up, ipo’s are waking up,the world is in turmoil and we have a prez election year coming up but the economic recovery is happening but it looks like it won’t be in lockstep with the employment situation which is less than stellar. Looking more and more like a jobless recovery.

    • Financial Samurai says

      Internet bubble indeed. Contrary to what the media or people might think, a LOT more people made A LOT more money than they lost money in the internet bubble. People just keep it quiet.

  25. Sunil from The Extra Money Blog says

    i’ve taken on a lot of debt, and good debt, a lot of it which has financed several real estate transactions. as for my personal residence, i have always believed in paying full cash for it. the liquidity is still there in the form of fixed deposits however, enough to give me the comfort i need. the key enabler is enough income streams that have created a consistent / constant flow of liquidity. i understand this is not a route for all to take, and in that case i agree that locking in a 3-5% mortgage rate is a great way to benefit from increased short term cash flow and long term tax benefits – hoping it makes sense to itemize. for many, itemizing only puts them slightly ahead of taking the standard because you only benefit from the increment you go over the standard deduction amount.

    that said, Sam, have you ever forecasted out a buy vs. rent model? any good analysis you have come across that you can share?

    for me, locking in a mortgage only makes sense in an environment where real estate prices are appreciating (to lock in the price), which they haven’t in the last few years. interest rates become a moot point during the hold/wait duration as they buyer (me in this case) plans on paying full cash for the property.

    similarly, for someone with cash flow in mind, locking in a mortgage make sense in a rising interest rate environment, regardless of whether home prices are appreciating or depreciating.

  26. Jerry says

    I do think you have a strong point about liquidity being king. If you pay off your mortgage and you are cash poor it may lead to a vulnerable situation for you. We have a mortgage but we rent out our home and the rent just covers our mortgage, taxes and insurance. It’s fine and we’re glad that we have something coming in.

  27. youngandthrifty says

    It’s different here in Canada, we don’t get to deduct interest off our taxes unfortunately (unless you use your abode for work or you rent out part of the property and declare taxes on the rental income).

    My dad has multiple rental properties and the banks love him because he refinances in order to deduct the interest (he’s an accountant too). He has enough cash to pay it all off, but he would rather not let the government deduct crazy taxes on him.

    So you have a good point :) Hope I get there one day too.

    • Financial Samurai says

      That really sucks that you don’t get to deduct the mortgage interest off your income, AND Canadian taxes are high! Do Canadians ever talk about leaving Canada to make money elsewhere given these policies you guys have?

  28. Anne says

    I know the benefit of debt to give you retirement income. In 2002 I had 12 properties, all of course with mortgages but selling all but 2 could have given me a healthy income for life by using the funds gained with the upturn in the market to freehold two. plus $333 per week National Super for those over 65 plus the rent from a flat I had also built on my property,
    I bought one for $95,000 got it valued at $140,000 morgaged it up to 80@ ($112,000)
    and put the equity of $27,000 off my own property mortgage and the rent covered the whole $112,000 I did this many times more, but instead of continuing to reduce my own mortgage with the extra equity I gained, I sold every rental I had 18 months before prices went thru the roof and I spent it !!! In the finish after only owing $59,000 on m y own property I finished up with a $134,000 mortgage and $30,000 Credit cards which I could not manage and had to sell my home. off my own mortgage .
    I am 74. and finished up in a local council 1br flat living on $234 a week after rent. Yes, its new and yes, its lovely but its not mine. Please, anyone reading this realize NOW Retirement may seem a million years away. ITS NOT Start acting so when it DOES arrive you are ready to live, travel, and have a ball.

    • Financial Samurai says

      Thanks for sharing your story Anne! I think you did the right thing except for spending all your proceeds no?

      You can’t lose if you lock in a gain. I love property for the long term!

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