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.
Today, my family and I live in a home we bought in early 2019 with cash. We are full-time parents and part-time writers. It feels great not to have a mortgage in retirement.
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, especially with mortgage rates at all-time lows.
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.
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!
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 So Low
Mortgage rates are so low now. You can take out a 30-year fixed rate mortgage for around 3%. You can also get a 7/1 ARM for around 2.75%. 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. 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 2021 – 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.
I’ve also decided to focus on making as much money online before getting vaccinated. Once there is herd immunity in 2H2021 or 2022, it’s back to early retirement life. Hopefully by then, I will have bought another undervalued rental property to boost 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 Credible, one of the largest mortgage lending marketplaces where lenders compete for your business. You’ll get real quotes from pre-vetted, qualified lenders in under three minutes.
Credible is the easiest way to compare rates and lenders all in one place. Take advantage of lower rates by refinancing today.
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Fundrise allows everyone to invest in mid-market commercial real estate deals across the country that were once only available to institutions or super high net worth individuals. Thanks to technology, it’s now much easier to take advantage of lower valuation, higher net rental yield properties across America.
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