Back in 2011, I decided I wouldn't pay off my mortgage until I retired. I was still working in banking and had a strong amount of cash flow. I thought I was going to work for at least another five years. Then, in 2012, I retired by negotiating a severance package that provided for six years of living expenses.
What transpired was interesting. I ended up paying off one condo mortgage in 2015 and selling my primary residence in 2017, which ultimately paid off its $815,000 mortgage as well. In other words, I paid off two mortgages after I retired.
Today, my family and I live in a home we bought in mid-2020 with a mortgage. We are full-time parents and part-time writers. We just couldn't pass up a new forever home once the pandemic began. So once again, we are on the mortgage pay down journey. However, it's fine because we now have three fully paid off properties.
Let me share my reasoning from 2011 on why I didn't want to pay off my mortgage until I retired. Back then, I was a 33-year-old Executive Director who was focused on career growth. However, I was also starting to burn out.
Pay Off Your Mortgage When You Retire
The following was my mindset back in 2011. Today, I still feel the same way about not paying off a mortgage until retirement.
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 I don't have a great track record for picking stocks.
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 (~$580,000) 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 9/11/01 terrorist attack also recently happened. I was actually helping host a Latin America investing conference at 1 WTC earlier in 2001. The attack shook me to my core and made me want to do something more meaningful with my life.
Despite having a good net worth for my age, 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. The return on rent is always negative 100 percent.
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.
However, 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 24% 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.
Found My Starter Condo
In 2003, I found a cozy little two bedroom condo facing the park in Pacific Heights, a prime neighborhood. After putting 25% down cost, the monthly mortgage payment and HOA cost 20% less than what it would have cost to rent.
I wasn't hesitant to put $120,000 down at all. In fact, I was absolutely ecstatic to deploy my savings into something useful. Suddenly, I had much less savings, and a 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. The biggest downside to paying off your mortgage is actually losing financial motivation.
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 due to my mortgage. 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!
Having Liquidity Is Still Important
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 90% 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 and have liquidity.
You can dump all your cash into your property, but what if the house burns down? Sure, homeowners 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 (32%, 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 in a rising tax environment. Focus on cash flow, especially as interest rates have tumbled post the global pandemic.
Mortgage Rates Are Still Reasonable
You can take out a 30-year fixed rate mortgage for around 5.75%. You can also get a 7/1 ARM for around 3.125%. No wonder why the demand for real estate continues to be so strong.
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 $750,000 mortgage, the ideal mortgage amount. And if Joe Biden makes some rules, the limit might go back to $1,100,000.
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.
Don't Pay Off Your Mortgage Until You Retire
When you can see yourself retiring in 5-10 years, start formalizing a mortgage 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!
Mortgage Payoff Updates
Update 1/12/2016 – I ended up paying off one of my rental mortgages that was worth about $1 million because I bought a new single family home with a $1M mortgage in Spring 2014. Four mortgages were too much, so I maintained three.
Update 6/1/2016 – I just finished refinancing a 2.625% jumbo 5/1 ARM down to 2.375% for another 5/1 ARM lock. I'm pretty pumped because I also paid down $130,000 of the mortgage to $850,000. My monthly payments drop to $3,300 from $4,338!
Update 9/17/2016 – I'm now surgically investing $250,000 real estate crowdsourcing opportunities to keep life simpler. My real estate crowdfunding investments generate 100% passive income.
Update 2020 – I got pre-approved for a jumbo 7/1 ARM for 2.125% and bought more big city real estate. I strongly believe there will be a rebound in demand once there is heard immunity.
Update 2022 – I'm now just sitting pretty with my low interest rate mortgages. I expect inflation to subside by 2023 and mortgage rates to go back down. In the meantime, I'm hunting for real estate deals and boosting my passive income.
A Mortgage Will Keep You Hungry
After all these years, I still think you should keep your mortgage while working. Don't pay off your mortgage with rates so low. Instead, take advantage of low mortgage rates and invest your savings to build more wealth. When you retire or no longer want to work, then actively start paying off your mortgage.
Check out the latest mortgage rates online. You'll get real quotes from pre-vetted, qualified lenders in under three minutes. The more free quotes you can get, the more you can make lenders compete for your business.
Invest In Real Estate More Surgically
The combination of rising rents and rising capital values is a very powerful wealth-builder. I encourage readers to invest in real estate to build more wealth for the long term.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. It was a great way to diversify away from expensive coastal city real estate.
Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing. For most people, investing in a diversified eREIT is the easiest way to gain real estate exposure.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build you own diversified real estate portfolio.
Don't Pay Off Your Mortgage Until You Retire is a FS original post.
There is one other major consideration relating to paying off your mortgage (especially during retirement):
We all know that lenders are not only risk-averse, but also have fairly “rigid” formulas which they use to determine eligibility for a mortgage. Should you ever need some of the equity that resides in your home, without a steady income from employment (and even using a calculation which annuitizes an IRA to project annual income available) you may find that even with a large cash pile you cannot get another mortgage. I retired many years ago and now have a great little home-based business which reports modest or no income most years, but throws off a lot of cash (variety of home office deductions, depreciation for investing in assets over the years etc.) I also have a fairly large IRA. Fortunately I decided to re-fi the existing mortgage to a maximum amount several years ago at low interest rates. I did this because I earn > than my after tax interest rate on that money. However, if I did not have this mortgage and needed a conventinal one (excluding some of the equity-share or reverse mortgage plans) my bank would definitely not lend to me, even if I were to have twice the amount of the mortgage sitting in cash in my IRA due to the tax returns which do not show an income necessary to service a given mortgage using their formulas.. even though my cash income is much higher and I also have the cushion of CASH. So.. prospective retirees should be careful to consider that should they ever want/need $$$ later on, their ability to tap it out of the home equity derived from having paid off that mortgage may not be there due to the rigidity (and stupidity) of bankers.
As you updated this article recently, thoughts on the current political climate in relation to loans. I.E, do you think there is a chance your loan could be pulled for something you posted on social media years ago, etc? With a family, play it safe and at least own your primary residence mortgage free?
Don’t think so. If anything, I’d think I’d get a lower rate or loan forgiveness given I’ve been focused on helping others financially since 2009.
Was there something you wrote on social media that hurt you recently? Like a job loss? Giving you work in psychiatry, you have an interesting way of looking at things. Thanks