Why I’m Paying Down My Mortgage Early And Why You Should Too

Years ago, I announced why I'm paying down my mortgage early. I ended up paying off a mortgage I had for 15 years and feel great about it.

Ideally, we should all pay down our mortgage before we retire or want to take things down a notch. Even with negative real mortgage rates making owning a mortgage more enticing, eventually becoming debt-free is the way.

Let me share my mortgage pay down story and the benefits of paying down a mortgage early.

Why I'm Paying Down My Mortgage Early

After buying my latest primary residence in 2014, I now have four mortgages. Three mortgages felt OK since one was a primary home mortgage. The other mortgage is a vacation home mortgage that produces income. The last one is a rental property mortgage that is cash flowing nicely.

But four mortgages feels like too much, and I plan on doing something about it by paying one off!

I'm sure only a small minority of you think having four mortgages is OK. Even though being leveraged in a rising real estate market is good for building net worth, eventually the good times will end.

What's interesting about personal finance is that we all have different levels of risk tolerance. Some people aren't comfortable with any debt, hence they don't borrow anything.

I admire such people for their ability to live thoroughly within their means. Other people let lifestyle inflation get the best of them and take out massive debt that is not comfortably supported by their income. Obtaining credit is so easy in America. The only people who annoy me are those who expect others to constantly bail them out.

One of the curiosities about debt is the joyous process of getting into and out of debt. There's a certain thrill of buying things with debt. Everybody wants something they can't have or fully afford, including myself. Then once we reach a maximum debt limit, it's almost equally as fun getting out of debt. Each $1 that is paid down feels like a victory.

This post will review my thoughts on the ideal mortgage amount based off the ideal income amount, discuss the history of my first mortgage, share more reasons why I'm paying down that mortgage, and my new mortgage pay down strategy. 

The Ideal Mortgage Amount

The ideal mortgage amount is essentially the maximum amount the government allows you to deduct based off the ideal income level of $200,000. Given the government loves to take advantage of people through a “do it or pay a fine or go to jail” type of rule, it behooves us all to take advantage of anything they allow in return.

The current maximum mortgage indebtedness is $750,000 + $100,000 for a Home Equity Line Of Credit (HELOC). I don't recommend anybody take because the interest rate is higher. A HELOC will just give you more temptation to spend. With mortgage rates under 3% for a 5/1 ARM and under 4.5% for a 30-year fixed, you're paying $30,000 – $45,000 a year at most in mortgage interest.

Given it's a good rule of thumb to spend no more than 30% of your gross income on all housing expenses, an income level of around $200,000 +/- $50,000 is optimal.

As of 2022, mortgage interest phaseout begins with incomes of around $254,200 or more for individuals and $305,050 for married couples filing jointly. All of these numbers coincide with the 500+ survey participants on Financial Samurai. They agree that $150,000 – $250,000 is the ideal income for maximum happiness as well.

Whatever your gross income is, multiply it by 30% to figure out how much mortgage interest a year and other expenses you can afford and work from there to get an appropriate mortgage for you. 30% isn't a hard rule, but a good general estimate based on current rates.

History of My First Mortgage

The mortgage I plan to pay off comes from a property I purchased in 2003 for $580,000. It is a two bedroom, two bathroom condo with parking in a prime location in San Francisco that overlooks a park.

It's nothing fancy, but it has everything I wanted as a first time homebuyer. I put down 25% and took out a $435,000 mortgage on an income of roughly $200,000. My initial mortgage interest rate was around 5%, which has since come down to 3.375% thanks to several refinances.

I lived in this property for two years and loved it. Given it was my first property, I wanted to be a little conservative. But I also felt the itch to buy more because my range was up to a $900,000 purchase price with a $720,000 mortgage. One always regrets not buying more in a rising market. The rise in real estate prices and your own income level helps make this so.

After conducting some mortgage arbitrage on my new house by borrowing $150,000 more than I thought I would at 2.5% to pay down $150,000 worth of my rental property mortgage at 3.375%, I'm left with roughly $118,000 on the rental.

It's been 16 years since I purchased the property. I've been inspired by others around the web who have paid down their mortgages in much shorter periods of time. Sure, they might have smaller mortgages to begin with. However, everything is relative since mortgage amounts are dictated by income amounts.

Financial Samurai Rental Property Value And Mortgage
Property Value And Mortgage Amount History 2003-2014
Rental Property Rent vs. Mortgage
Rental Property Rent vs. Mortgage Payment

Reasons Why I'm Paying Down My Mortgage Early

Here are the three main reasons why I'm paying down my mortgage early.

1) Discomfort. 

The $118,000 rental property mortgage has now become a nuisance. It feels uncomfortable having four mortgages despite the positive cash flow. Every time I log into my Personal Capital account, all I think about is how great it would be to just delete that liability from my net worth as I seek to minimize. The nuisance feeling is the same reason why I decided to pay off my MBA student loans after the fourth year. This was even though the interest rate was under 3%.

One of the biggest fears I have with paying down a mortgage is locking all that money in one asset that might blow up. But given that I've purchased another property, I've effectively diversified my asset holdings. My rental property now only accounts for 18% of my total property holdings vs 28% previously.

In other words, I feel more comfortable having more money tied up in my rental property because the pie has grown. Once I pay down this rental mortgage, I can then focus on paying down my vacation property mortgage.

2) Low mortgage and interest for a while.

3.375% is a pretty good rate for a rental property mortgage. But 3.375% is still about 0.5% higher than the 10-year risk free rate.

If interest rates were going to continue rocketing higher, I would much rather hold onto it. Let's say a comparable mortgage has an interest rate that climbs to 10% in two years. Then of course I should borrow at 3.375% for as long as possible. But since I highly doubt this will be the case, I'm just going to pay it off. If I'm wrong, I've still got two other mortgages at low rates.

Historical 30-year and 15-year fixed rate mortgages chart

3) Lower tax bracket means lower mortgage interest deductions.

A mortgage is most beneficial when one is in a high tax bracket. If you're in the 37% Federal income tax bracket and make less than ~$700,000, you should probably keep your mortgage for as long as possible. The mortgage phaseout will eventually completely nullify the interest write-off potential hence why I wrote “~$700,000.”

Now that I can go between the 25% and 33% tax bracket depending on how much I pay myself, the mortgage interest shield is less meaningful. Remember, everybody gets a standard deduction of $6,200 for single filers, $9,100 for head-of-household taxpayers, and $12,400 for married couples filing jointly and qualifying widows/widowers as of 2014. The deduction will only continue to grow over time.

If you have a mortgage amount above the $750,000 deduction threshold, here's how to calculate it to lower your taxes.

My Old Mortgage Pay Down Strategy

I basically deployed three mortgage payoff strategies over the past 11 years:

1) Refinanced my mortgage every chance I got.

I refinanced my rental property mortgage three times. I originally got a 30-year fixed at around 5%, but soon learned my lesson to switch to a 5/1 ARM a couple years later. The initial mortgage payment used to be divided into 80% interest and 20% principal.

But due to a lower rate, the percentage of the payment going to principal doubled. If you haven't refinanced in a while, now is the time to check the rates online and do so as the 10-year yield has declined from 3.5% in 2018 to under 1% in 2021. That's was an all-time low folks! Unfortunately, rates are much higher in 2022 and beyond due to higher inflation.

2) Randomly threw extra money at the mortgage when times felt good.

I never had a systematic mortgage payoff strategy. I originally thought I would pay off the mortgage by 2013 (10 years), but because interest rates kept on going lower, I decided to delay the payoff strategy and reinvest my proceeds in real estate crowdfunding and other investments.

When times felt good I've gone to the bank to pay down anywhere between $500 to $30,000 of the principal since 2003. But with this post, I'm going to get more methodical now in paying off my mortgage.

3) Paid my mortgage on time.

The principal payments each month have grown from roughly $250 a month now to $1,000 a month with refinancing and extra principal payments.

My New Mortgage Pay Down Strategy

1) Use some after-tax consulting income. 

Consulting income is considered “bonus” income for me as I never anticipated being a consultant when I left my day job in 2012. But it's been eight months now of receiving a steady consulting paycheck. I've been currently living off a small paycheck I pay myself from my business and the excess rental income in order to never touch principal.

Allocating consulting income to paying down a mortgage feels purposeful and will give me added incentive to continue being a consultant. When you don't need to work, it's easier to just do whatever you want and lose discipline at work. Monthly mortgage pay down target: $5,000

2) Reallocate $10,000 worth of expiring structured note investments every six months.

I buy a structured note in an index or particular stock every two months on average to consistently build my investment portfolio, dollar-cost-average, and diversify my equity investments. The investment amounts range from $5,000 – $50,000 a note, and they are in all sorts of different things.

The most recent expired note is a $15,000 LinkedIn, one year note that paid 2.5% interest a quarter if LNKD closed above $168 at expiry. At one point, LinkedIn was under $168 a month (20% below when I first bought the note) before expiration and I would have lost 20%+ of my investment. Because it closed above $168, I got 100% of my investment back plus the 10% interest income.

I feel like I escaped with a $3,000 victory and I plan on keeping that victory alive by going for a 100% guarantee by paying down my 3.375% mortgage down. Annual principal pay down contribution target: $10,000 ($833 a month)

3) Utilize 100% of excess income from target rental property.

Given the rental income is $3,800 and the rental mortgage is $1,300 a month, there's a $2,500 spread. Unfortunately, I've also got to pay $500 for HOA, and around $7,200 a year in property taxes. The monthly positive cash flow number is $2,000, but only $1,400 if I were to amortize the $7,200 a year in property taxes. All of these figures are before deductions, which makes the cash flow greater.

Only $300 of the $1,300 mortgage is interest, so from a net worth building perspective, I'm generating more like $2,400 a month. I like the idea of using the excess rental property income to pay down that particular mortgage. I'll keep other income generating assets separate. Monthly mortgage pay down target: $1,400

Related: How To Properly Analyze An Investment Property

4) Continue to pay my mortgage on time.

About $1,000 of the $1,308 a month mortgage is principal. Therefore, $12,000 will be paid off in one year. This is easy to do.

Total mortgage pay down a month: $5,000 from consulting + $833 from structured notes + $1,400 from rental income + $1,000 from mortgage payment = $8,233 a month. Given I've got $118,000 left, I should be able to pay off the mortgage in 14 months. Update as of 6/1/2016 is that I have successfully paid off my rental property mortgage and couldn't feel better. I have no regrets not using the money to invest in the stock market, bond market, or private equity market.

Come Up With Your Own Mortgage Payoff Plan

I know very few people who actually take 30 years to pay off their mortgage(s). Part of the reason is because the average homeowner moves every 10-11 years now.

Another reason is because incomes generally rise over time while mortgage payments stay fixed. This fact is one of the real beauties of property ownership, my favorite investment class to build wealth.

Not only are our incomes rising, but so too are rents and the value of our properties. As a result, homeowners tend to throw extra cash towards paying down their mortgage and solidify a strong financial future as well.

If you can relate to any of the three reasons above on why I'm paying down my mortgage early (discomfort, belief in low interest rates, move from higher to lower tax bracket), then certainly try and pay down your mortgage quicker.

Here are some further general guidelines I'd follow before initiating your own Operation Mortgage Pay Down.

Before You Pay Off Your Mortgage Early

1) Ascertain all your liquidity needs.

With rates so low, there's really no hurry to paying off your mortgage quickly due to alternative investments that can easily provide at least a 2% risk-free return. The real decision has to come from analyzing your current and upcoming expenses.

Money is most expensive to borrow when you need it most. Therefore, it's always good to have some type of liquidity cushion. The minimum I recommend is three months of living expenses and one year of future large expenses covered e.g. next year's tuition.

Let's say a family of three has $7,000 a month in after tax expenses and college tuition is $20,000 a year. I would shoot for having $41,000 liquid. All other money can be used to pay down mortgage principal at a rate based on your comfort level. The more you track your finances, the more comfortable you will be about managing cash flow.

2) Know the alternatives.

Paying down principal is a good thing, unlike getting into credit card debt. So one should feel great paying down a mortgage. But it's always good to know the alternatives just in case you lose your job or have much larger expenses than anticipated.

Do you have your insurance coverage needs updated? Another question to ask is what your house cold sell for. Also ask if you have the ability to earn other income streams? What other assets can you sell and what are the penalties for selling early, if any?

The more alternatives you have, the more comfortable you should feeling paying down your mortgage.

3) Assess how bad you will feel for missing out.

If you paid down your sub 5% mortgage in 2009, you've missed out on 18%+ annual gains for five years in a row in the stock market on that money. Nobody knows the future with certainty. Therefore, it's a good idea to diversify your money by paying down debt and investing at the same time. Follow my FS DAIR framework. Because interest rates are so low, I would use a 20% debt / 80% invest ratio. 

In fact, a good guideline to have is using your mortgage rate as the percentage allocation for paying down debt vs. investing. For example, given my rental property mortgage is 3.375%, I will allocate 33.75% of my cash flow to pay down the mortgage. If the mortgage rises to 6%, I will use 60% of my savings to pay down the mortgage. The remaining 40% will go towards investing.

4) Calculate your realistic retirement age.

It's a good idea to pay off all debt by the time you reach retirement age. Most people in retirement will not earn as much as they did during their working years. But once you've got a home fully paid off, it really doesn't cost that much to live a comfortable retirement life.

Let's say you've been allocating 30% of your after-tax income to homeownership. You're also saving 30% of your after-tax income for retirement. Finally, you're spending 40% of your after-tax income on everything else.

Once you're in retirement, you no longer need to save 30% of your after-tax income. And once you've paid off your home, all you need to do is replicate 40% of your after tax income to live the exact same lifestyle.

Focus On Paying Down Debt Over Time

I thought I would be mortgage free by now after 11 years. But I'm not because I wasn't deliberate enough with my mortgage pay down system.

Now that I've written out three extra strategies beyond my monthly mortgage payment, I strongly believe my mortgage will be paid off in a year. If it isn't, you guys can always chip in a thousand bucks or two!

Mortgage Update 2023

I fully paid off my Pacific Heights 2/2 condo mortgage in 2015! In addition, I also paid off $810,000 of my Marina rental home mortgage in June, 2017 because I sold it! I tried my best for 45 days to find renters, and couldn't, even at $1,000 LESS a month.

Luckily, I got a strong buyer for $2,732,500, a full $1,000,000 more than I would have sold it for in 2012. Hallelujah it feels amazing to have less debt and more flexibility. Then I paid off my Lake Tahoe vacation property mortgage early in 2022.

I ended up writing about the triple benefit of paying off a mortgage early.

Got Into New Mortgage Debt

In 2020, I bought another property at the start of the pandemic because I wanted more space. Now I've got a primary residence mortgage again. But the rate is only 2.125% versus 8.6% inflation. Therefore, I'm in no hurry to pay down this negative real mortgage rate!

There is a downside to paying off your mortgage early. And that downside is losing some motivation to earn. By having a mortgage, it keeps me more disciplined about my spending and savings habits. This is just something to be aware of.

Invest In Real Estate More Strategically

If you don't have the downpayment to buy a property, don't want to deal with the hassle of managing real estate, don't want to take out a mortgage, or don't want to tie up your liquidity in physical real estate, take a look at Fundrise, one of the largest real estate crowdsourcing companies today.

Real estate is a key component of a diversified portfolio. You can invest beyond just where you live for the best returns possible. There is tremendous migration to the heartland of America from the coasts. Further, inflation helps boost rental income and property values.

Take advantage of this trend post pandemic. It's free to sign up and explore Fundrise. I've personally invested $810,000 in real estate crowdfunding to diversify and earn income 100% passively. Valuations in the heartland of America are low and I want to take advantage.


Shop Around For The Lowest Mortgage Rate

Check the latest mortgage rates online. You'll get real quotes from pre-vetted, qualified lenders in under three minutes. The more free mortgage rate quotes you can get, the better. This way, you feel confident knowing you're getting the lowest rate for your situation. Further, you can make lenders compete for your business. 

Why I’m Paying Down My Mortgage And Why You Should Too is a Financial Samurai original post. I’ve been helping people achieve financial independence since 2009. Join 60,000+ others and sign up for my free newsletter!

144 thoughts on “Why I’m Paying Down My Mortgage Early And Why You Should Too”

  1. Peter Apodaca

    Great article,

    There are too many articles on-line on how to build wealth by buying rentals on 30 year loans to buy and “afford” more and more. I think these guys are paid by the banks to get more people in debt. I over extended myself following their methods in 08, we all know how that went. I learned from my mistakes. I now own 3 properties, primary and two rentals, all three on 15 year mortgages under 3%. I have them set up to be paid off on 10 years, by re-investing the profits back into the principal. When it’s all done, no mortgage(s) plus a pension. I will gladly pay the taxes and move on with a peaceful life.

  2. You’re right – the times I’ve paid down extra principle, I’ve always felt a great sense of satisfaction, much more so than when my regular mortgage payment goes out. Thanks for the motivation!

  3. Congratulations on reaching your goal. I recently joined your club 18 months ago. I bought my first rental house in 1996 and my 9th one in 2004. I did like you and threw as much $ at the principal of one of them as I could. I paid off the first one in 2008, and that got the snowball rolling (and growing). With that extra income, I was able to pay off 4 others with brute force between 2008 and 2016. After enjoying 10 years of appreciation, I sold 2 of them in 2013/2015, and cleared enough to pay off the last 2… 7 places paid off in 8 years. And when I got laid off my job in early 2015…. I couldn’t have cared less. Best of luck to you in the future!

  4. Savvyfinanciallatina

    We have a 15 year mortgage with 13 years left to go. I have definitely thought about paying it off early. Right now I’m concentrating on adding money to our investment accounts. I have the money in my ESPP earmarked for mortgage repayment. So whenever I sell company stock then I will use that money to pay off mortgage.

  5. Sam,

    I have read you articles sporadically over the last couple years. I think your advice is always sound, especially given how hard it is to give financial advice when the correct answer to the same question is so often different for different people. This is an excellent website.

    I’m a real estate broker, mortgage broker and property manager of 15 years. I’m 36. I manage almost 200 units in Southern CA.

    Paying down your mortgage (early) is the American dream, and for so many it is just the right thing to do. Piece of mind, or perhaps a principal payment instead of a trip to the MGM Grand, fine reasons both to pay her off early. But I think it is important to note most people in the comments and generally speaking are thinking of their primary residence. There is a distinction between your home and rental. I call them rentals as your home is an investment too, but a different one. I will address the rentals here as that caught my eye on your post. Advanced real estate as opposed to Real Estate 101.

    If you are trying to grow your RE portfolio, your rentals should have debt. Not fully levered, but a respectable amount depending on your situation. Debt as we all know is powerful. In the wrong hands it is sure disaster. But for those who know how to properly use debt, it is a powerful tool toward success and financial freedom. One can argue the appropriate LTV till the cows come home but let’s use 50% as an example. That is enough to take advantage of the leverage and tax advantages but not so much that you couldn’t weather any financial storm (rates, economy, crash etc). Everything I have levered at 50% is going to cash flow no matter what. And while you are ahead of the curve, you are sill fairly young and it sounds as if you are interested in continued growth. I personally don’t mind working at this point (self employed of course) so I’ll just keep buying till I’m ready to call it quits.

    Every situation calls for specific analysis and thoughts. However in your case I don’t think three mortgages is that many. Everyone is different. Seems to me like the next step would not be to pay down your dialed, appreciating cash flowing SF rentals but rather to take a foray into some 2-4 units. Or perhaps get into some 5+ with non recourse options to get some debt of your personal balance sheet. Keep the empire growing, you seem very capable at all that you do.

    Last, a lot of people here and elsewhere comment on the worries and difficulties of being a landlord. In my opinion managing one or two rentals, as long as they are close to you, is a piece of cake. If you are intelligent and efficient about it plus don’t take anything personally, it takes next to no time at all. Your advice on renting is all quite good. If people follow it managing one or two units doesn’t have to be a second job.


  6. Ladyinquestion

    Hello Sam,

    I was searching for ideas on buying a second home when I stumbled on your website. I would love some advice. My husband and I purchased our first house three years ago (30yrs 3.5%), it is a two family house and we live in one of the apt, our monthly mortgage/taxes payment after rental income is $900. Now during those 3 years we have saved over $70K and decided to look for another two family house. We found one where the rental income is actually greater then the mortgage/taxes by like $800. Meaning our overall out of pocket payment for the 2 mortgages would be like $100 a month. We are both 30 (no kids yet) and scared to go forward with the second home because it would leave us with not much savings for couple of weeks, or should we just try to pay off the house we have now quicker.

    Thank you

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  12. Sam,

    I think you are literally a financial genius. We are very similar in our out-of-the-box thinking, yet you take it to an entirely new level by throwing in curve balls like comparing the mortgage rates to the 10yr risk-free rate and combining that with your opinion that rates won’t rise soon enough for you to put your money in other investments vs. paying down what most people consider “low interest rates.” I grin at nearly every one of your posts because most of your rationale is (at least partly) against widely-held beliefs and I agree with almost all of it.

    I read something about you wanting to become a CFP and I immediately imagined you sitting across the table from a couple you’re pitching to manage their money. I could just see the looks on their faces while you’re explaining the strategy. Your mind would probably be ten steps ahead of them. It’d be hilarious. You’d probably just say, “Ok on second thought, here’s a link to my blog. Read every article and input all your financials into Personal Capital by Tuesday and let’s reconvene.”

    Anyways, with all your financial savvy, how come you’ve never looked into multifamily or commercial real estate? It seems like you’d kill it. I’m not a big fan of the stock market other than low cost index funds because I feel like it’s such an efficient market, but commercial RE is a really inefficient market where your type of mind could really do well. I know you’re dipping into Venture Funding, which is probably one of the only things I consider a more inefficient market than commercial RE (aka you can really get great deals), but man…you seem like you’d kill it in the commercial RE sector. Plus you have the equity to start you off…

    Just a thought…from your financial doppelgänger :-D

    1. Howdy T-Biz! Thanks for dropping by. I actually do some personal finance consulting with 1-3 clients a month, and it’s been very rewarding and fun.

      In retrospect, I probably could have done better in multi-family or commercial real estate. I’ve got a specific post on this topic in the queue you’ll enjoy reading. But for the mean time, the reason I’ve rationed is because I buy property for lifestyle first and money second.

      Best, Sam

  13. I have enjoyed reading your article. It is all so frightening knowing that the wrong move could bring one to financial ruin. I have a question and look forward to your wisdom concerning my situation.

    I am 57 and married. We have a 345,000 mortgage on our primary (3.625 7yr Adjust, opened Dec 2014). We have very little in retirement – 10K (SEP-IRA). I have an investment property that I want to sell (tired of playing landlord) and at a price that will bring me 150,000 after capital gains, etc. I was thinking of refi’ing and paying down the primary mortgage by 75,000-100,000. That would give us back about +/-500/month to add to our retirement, plus we will have another 50-75,000 to build an emergency fund and escalate funding our retirement. Is this reasonable thinking? Thank you

    1. Sounds reasonable to me Jason. 10K in ALL your retirement accounts is not a lot. But, how much is your investment property bringing in, and do you have other income like a pension, and what is your estimated Social Security?

  14. Hello,
    I am an avid reader and look to build wealth as you have done with property ownership. One thing that holds me back from pulling the trigger is dealing with the reality of tenants. Anyone here have such a horrible experience that the negativesin dealing with tenants outweigh the positives? I’m thinking of worst case scenarios of lawsuits about negligence, and things like the recent gas explosion in NYC which may be traced to the landlord in that circumstance.

  15. Gen Y Finance Guy


    I would be interested in possible writing a piece for the blog. I know I saw a post somewhere that you were looking to to have others from the community post on the blog. I have a post coming out at the end of this week on my 7-year strategy to pay off my mortgage.

    I would love to share that with you and see if you would be interested in a custom and unique post around the topic for your readers. Or maybe even something else?

    Let me know what your requirements are and if you are interested. Also let me know if there is a better way to communicate about this other than in the comments of a post.

    Love reading your stuff. It gets me excited about what my blog can become with consistency and time.


  16. Great post Sam. I am totally on board wrt the liquidity argument. Any thoughts on where to store your liquid cash so it can grow at least at 2% keeping pace with inflation?

    1. 5 year CDs are offering 2.2% interest, but I’m investing in a venture debt fund that is providing a minimum 8% annual prefer return. I think it’s worth investing the liquidity around as the SP500 index is yielding over 2%.

  17. Great to get other peoples thoughts on investing in real estate.I have been doing it for forty two years. My first house was mortgage free in eighteen months at age 19 and going in and out of mortgages every now and then, I have ten properties nine of which are let and one I live in.only one mortgaged.At the moment buying physical gold instead of paying the one mortgage off .

    I really enjoyed reading all you comments.
    Kind regards to you all.

  18. I paid off my house. I like to tell people I knocked off 15 years off my mortgage for $25 a week. There were 3 steps:
    1) My mortgage was at Wells Fargo and they offer a bi-weekly payment plan. So if your monthly payment is $2000 they take $1000 out every 2 weeks. This worked for me because I was so bad with money 12-15 years ago; I had a hard time ‘saving’ up to pay my monthly mortgage bill. It was much easier for me to be paid on Friday and have ½ my payment come out on Monday. With this plan there is an extra ½ payment made toward principal every 6 months or so when there are 3 pay periods in a month. This knocked down the principal a lot.
    2) I then realized I could pay extra each Monday and put just in an extra $50 per payment. That was not much but it paid down my debt $100 per month. It only cost me $25 per week.
    3) At the first of the year, I increased the extra payment by $50 (again, just $25 per week). I figured if I could not adjust my lifestyle by $25 a week, once a year, I was too close to the edge anyway. I normally got a merit increase toward the end of each year which helped.
    This took my 30 year mortgage and paid it off in 15.5 years. Feels good. No debt for 4 years.

    1. My Story..

      Saving 75% and use that money to knock off my mortgages…

      1st mortgage = paid off in 4 years, now tenanted

      2nd mortage = paid off in 3 years, now tenanted

      Debt free but I’m in a dilemma… what should i do next ? invest in stock market ? or 3rd mortgage?

  19. Great article Sam! I think you will feel really good once that first mortgage is gone. Maybe it will inspire you to do the rest. :)

    It’s interesting how you mentioned the psychology of getting in and out of debt and how we basically view it as a game [my words]. We paid off our home mortgage earlier this year, way in advance, because we simply wanted to be 100% debt free. It was less about the numbers and more about being in an emotionally satisfying place. The odd thing is since then, all we can think about is moving up in house since our kids are beginning to outgrow our current space. And wouldn’t you know the subject has come up about taking out a small mortgage to get to the price point we want. Haha…I just paid one off and am having thoughts about getting another one.

    I don’t think we will follow through with that…I just find it interesting that our minds work that way – thinking debt is the vehicle and first option to get where we want to go.

    1. Thanks Brian.

      Getting into and out of debt definitely feels like a financial game at times. Getting this fourth mortgage has given me to pay down my more expensive mortgage. Before then, I didn’t have that much desire. It’s pretty fun.

      Let me know how your new mortgage adventure goes. Gotta get what the wife wants right?!

  20. wallstreet26

    much respect but you shouldnt pay down your mortgage especially when rates are at historic lows. they are never going to get these cheap rates for prolly decades. I understand you want to ease your fears but its a mortgage and mortgages are like a put option. you get all the upside when markets go up and limited downside when **** goes down. lets say real estate tanks. your mortgage becomes higher than the real estate value. additionally, it goes negative cash flow because the renter moves out. Perfect. stop paying your mortgage. they can only take whatever you put up as collateral which is most likely the investment itself. so you can tell those banks to take over the worthless investment. You lose your 20% down payment, but thats what happens when you play the real estate game (better than 100%). You destroy your credit sure, but if you are rich, you didnt really need the credit in the first place. credit is amazing, since you can make money using other peoples money. You dont have to feel obligated to pay it back because remember they determined how risky you are and charged you interest. lastly you can easily restructure by talking to the banks, they would prefer this route than taking over your worst investments.

    1. ^ won’t happen in SF. His +/- million dollar condo won’t go down < $200k value (barring an alien invasion or WW III.) It's about as safe as safe gets, and a prime vehicle to borrow cheaply against for another acquisition. That's how HNW is readily created in this city.

    2. May I ask how many mortgages you have and what you are doing with your money?

      This one mortgage is a very small portion of my liabilities, and the condo is also a minority portion of my net worth. I have three other mortgages once this is paid down.

      1. I have four mortgages on several properties in SF. My leverage is only 42%. I live off the rental income. All my properties were heavy value added plays- i.e. Expanding living space, adding a unit, lot split, etc., so after the project is complete I gain a lot of equity, plus it cash flows due to highest and best use. In addition I also condo convert, taking the units off rent control. And having non rent controlled units in a rent controlled city is like printing money. The more our Board of Stupidvisors do to suppress new construction and expand tenant rights, the more low rent tenants hoard their units, and the higher marginal rent rates go up! Only in SF…

  21. Oh, and one more thing. Who cares about having four (or more) mortgages, if they are invested in high quality RE that is easily servicing them? That’s the whole point of RE investing! I have four mortgages on various properties in SF, and feel great! Cash flow easily covers all PITI, with choice deductions like depreciation tax returns are a joy, I have lots of equity, and as you say, it’s a cinch to find and retain quality tenants in SF. Of course you want to be cautious about over leveraging, and keep a close eye on the rental market (in SF’s case tied to the tech industry.) But local SF landlords know how sticky rents are, even during 09-11 they managed to go up!

    So under proper circumstances, don’t fear mortgages!

    1. I agree with this. I have eight mortgages an I sleep fine. It’s more about cash flow, equity, and cash reserves than it is about number of mortgages.

  22. Do you own other rental properties, in SF or elsewhere? Elsewhere you write about how RE is your favorite asset class, so I wonder why you focus on paying down the loan on the condo, when you could use it to pull cash out and buy more investment properties. If you picked up 2-4 units (with cheap 30 year fixed loan money) in SF when it was much easier during 2011, or even in 2012, you’d be printing money right now!

    1. I own other properties. I’ve reached my limit and would rather work on my online endeavors and keep diversified. More fun currently too.

      Im paying down my mortgage, not selling the property. There’s a difference. What do you do in SF? Where and when did you buy and are you buying more now?

  23. My father had a friend that would never purchase a new car, instead he would always buy a car that was two years old. The problem with buying a new car, he said, was that as soon as you drove it off the lot it devalued immediately by 20-25%. To him, that was throwing money away. He rathered other people take that devaluation and by the time the car was two years old things leveled off and he got far more for his money.
    But what about treating yourself? What about that new car smell, knowing that the car only has 34 miles and you are the only one that drove it except for that technician at the factory? Its almost a crime to let your whole life slip by and never indulge. Save for 40 years then die so someone else can have the money?

    1. Mark,

      Just curious.Was he like this in every aspect of his life or just for new cars? If he forbore from buying new cars , but indulged in some other pleasures where he spent freely , i think that’s reasonable. I’m not sure if we can judge a person from just one aspect of his spending personality.

    2. Good luck finding a car that is 2 years old that is 25% that the original purchase price. I think this is an old myth that may have been valid in the past, but is not valid now. Besides, I think I would pay that 25% (even if true) just to be the only owner of that car. The 25% depreciation is a myth, but it is not a justification for buying used. We buy lots of things that depreciate much faster than that.

  24. My strategy was refinancing to a 15 year mortgage about 11 years ago. About 8 years ago, I accelerated the principle payments to pay off the mortgage in June, 2017 to coincide with retirement. I had the bank’s customer service representive help me calculate the exact amount.

    Normally, I see no reason to accelerate paying off mortgages for real estate. Mortgage interest rates are so low and subsidized by the IRS due to your tax rate. In the past, I invested my excess money in areas that were diverse and grew faster than the interest rates and inflation. Further, decreasing your interest deductions for tax purposes increases your taxable income. When you invest the excess money, you are subject to capital gains tax. My strategy is not for everyone, but it is a different perspective to paying down mortgages that only yield an adjusted less than 3-4%..

  25. You’re right about finding your own tolerance. We had 4 mortgages and it was a bit much. We owed over $600,000 and that’s too much. We reduced it a bit by consolidating to one duplex. The plan is to pay everything off in 15 years or so. Then our expense will be at a very comfortable level. Probably sell off more properties during that time too.

  26. As I mentioned above personal finance is so personal. Everyone has their own debt payoff strategy or strategy to not pay off debt and when that happens is different for different people. I only have real property debt and student loan debt. My S/L debt is by far the smallest, but still at $40k. It is locked in at a rate of 1.625%. Financially speaking there is no reason to pay off that debt. But psychologically, I hate it. Sometimes I think I should just knock it out as quickly as possible, but other times I just think that is mathematically stupid.

    1. Wow… 1.625% is the lowest I’ve heard for student loans. Financially, it’s best to not pay it off early, but psychologically, it feels great once you do. I paid off mine within 4 years and it felt awesome.

      It’s about peace of mind and happiness at the end of the day!

  27. So I am extremely debt adverse I’m in my early 40’s and have not had mortgage debt in over a decade. I 100% understand that I am not squeezing out every last nickel of returns that I could have made if I was levered to the hilt with a $1M plus mortgage…but I do sleep better knowing that everything I have is paid for. My paid for home represents roughly 20% of my net worth and although to me it feels like it is a little high, but what the hell else is a person supposed to do with the money? Waking up to a view sure beats seeing a brick wall or power lines…and you only get so many sunrises and sunsets. Home debt though is the only type of personal debt that I would suggest for most people, it is a phenomenal way to build wealth and security. Its good to hear your view of balance on this subject!

  28. I agree that most people are probably best served by paying down their mortgages sooner than the 15/30 year term.

    It doesn’t necessarily have to be within 2-3 years, but I really like your point above about developing a split between mortgage paydown vs investment and sticking to it.

    Paying down a mortgage frees up a lot of cash flow to then invest later, and since we can’t time the market, it’s probably best to just pick an allocation and stick to it.

    I think the psychological benefits to paying off debt are also very high. After all, financial freedom is the name of the game. Comparing paying down a mortgage (GUARANTEED saving 3-5% of mortgage interest) to the return on equities during a bull market really is apples and meat loaf. A more apt comparison, as you alluded to above, is the mortgage interest to the 10 yr Treasury, or bank CDs, or some other asset which you perceive the return to be similarly risk free as paying down debt.

    I ended up paying off a condo very early, albeit a much smaller mortgage (<$100k) in a much less expensive city, but have enjoyed having no mortgage for a while. I don't think I could go back to having a mortgage from just collecting the cash flow from my tenants today and keeping some extra cash savings for occasional repairs, taxes, HOA, agent fees, etc.

    Someday when I purchase my next residence, likely once I settle on a location with a family, I'll probably also "allocate" my rental property cash flow to paying down the primary mortgage.

    I imagine it will be very satisfying to watch one asset paying for another asset every month. :)

    1. It definitely is a satisfying feeling. It just takes some risk and guts. There’s no better feeling than identifying a place you would happily live forever, and buy a corresponding forever home.

      Although this new home I bought is smaller, it still has 3 bedrooms, 2 baths, and an ocean view I’ve longed for, but never thought I could afford. Each property I buy, I have hopes of owning forever and passing it down.

  29. Sam, with fixed income yielding so low; I invested half of my “bond” portfolio into paying down my mortgage. I am locked at a 30 yr with 3.375% but holding Bonds in the portfolio (paying less than 2%) while paying the bank at least 3.375% did not make sense.

    I could invest the difference but prefer to maintain my stock/bond allocation based on my risk tolerance. Like you said “Good times will not last for long”. Hat tip to Harry Sit (another great PF blogger for his article)

    1. Good stuff. That’s what I plan on doing as well… allocating my low risk/risk-free portion of my net worth around to pay down this 3.375% debt. I have an expiring 2.75% 3-yr CD coming due which I’ll use a portion as well.

  30. Oh, my. I’m having heart palpitations at the thought of 4 mortgages.

    I abhor debt. My only strategy was too throw every spare cent (after maxing out my registered retirement savings) at my mortgage until it went away. It took 3 years and 10 months for my first home. (The amortization was 15 years and I planned on paying off the mortgage in 7, but I received some really good raises.)

    Now I’m buying a new place and it’s going to cost about $150k more than the current residence. I could liquidate some investments and not take out a mortgage, but I cringe at the thought of paying tax on all that capital gains (I’m in the top tax bracket–ugh!). So, the plan is to take out a mortgage or a HELOC, depending on the rate, and pay it off in 2 years.

      1. I’m in Calgary, Canada. I have been a computer geek and a strategic planner and am currently a bean counter. I’ll figure out what I want to be when I grow up one day.

  31. This is a question I go back and forth on all the time. We would love to add another rental property within the next few months, but that would be mortgage #4, and I’m having a hard time with that. Like one of the other comments, I worry that all the properties might have a huge repair at the same time. It would be so much less stressful if one or more were paid off. If I only had a working crystal ball!

    1. Unless you can have a property manager handle everything and never deal with tenants (like I have with my vacation rental), probably wouldn’t bother getting a 3rd rental. Simplifying life feels better!

  32. I’m left a little confused. Based on your criteria, there is no reason for you to pay down any faster. Other situations may be different, where people are more leveraged. For you, you can definitely find >~3.5% returns elsewhere and you have the funds to do so. You’re also not that leveraged at this point so less risk.

    My takeaway point from what you said is the fact that you’re taking on side income, and justifying that side income by using it to pay off “phantom debt” (in your case, since the debt carries literally next to 0 risk in your situation).

    And while I wouldn’t suggest a radio station, I think a podcast would be a welcome addition to the site, where you interview like minded people. That would be a great way to hit $200k faster.

    1. At current levels, I don’t have 100% confidence in finding risk-free 3.5% returns. Remember, I have a highly diversified net worth where I continue to see risk-free returns out of 25%-30% of my net worth.

      This is not phantom debt. This is real debt that I’d like to get paid off to match my income and risk levels.

  33. I would not pay down debt that early. The higher your income the higher your taxes – Why not start a business like restaurant or coffee shop instead or the next app? Start a radio station Sam!

    1. See reason #3 for why I’m paying this one down:

      3) Lower tax bracket. A mortgage is most beneficial when one is in a high tax bracket. If you’re in the 35% and 39.6% Federal income tax bracket and make less than ~$700,000, you should probably keep your mortgage for as long as possible. The mortgage phaseout will eventually completely nullify the interest writeoff potential hence why I wrote “~$700,000.” Now that I can go between the 25% and 33% tax bracket depending on how much I pay myself, the mortgage interest shield is less meaningful. Remember, everybody gets a standard deduction of $6,200 for single filers, $9,100 for head-of-household taxpayers, and $12,400 for married couples filing jointly and qualifying widows/widowers as of 2014. The deduction will only continue to grow over time.”

      Any tips for starting a radio station? Let me know about the margins and startup costs. Thx.

  34. Hi Sam,

    I’ve had a similar change of heart regarding paying down mortgages. Currently I have 7 mortgages (6 rentals, 1 primary residence) in Houston. While they cash flow decently (300-400/mo each) and I make a good income from my dayjob (~130k) I am feeling the upper end of my risk tolerance. I am 26 so only a few years ago, I felt like I could amass 15-20 properties before even thinking of paying off mortgages. However, I’m imagining the day 3 AC units go out, 4 roofs need to be repaired, and I have 6 vacancies in the same month! So much for all that cash flow!

    I will be getting one more property next year. After that, my plan is to maintain a large cash reserve (at least 50k cash) for any large maintenance + vacancies and dump all monthly cash flow into my smallest loan balance. As the mortgages get paid off, it becomes easier to pay off the next one. The properties are in the 175-200k range which is quite large and nice in our market so I get quality tenants which means not much management stress. I quickly learned I do not want to manage 20 tenants. Although I may not make a phenomenal rate of return, I hope to replace my salary after the mortgages are paid off with a comfortable amount of risk for me.

    1. That’s a nice ~$1.4 million portfolio you got there! Can you share how you were able to get so many mortgages and that amount by age 26? Very impressive.

      Yeah, all that maintenance at once would be an arse kicker. I’m going to do a new roof and paint my house next week, and that will be a nice $17,000 expense!

      1. Jonathan Lee

        Yes, to be honest I received an inheritance at the age of 22 for about 125,000. Many may scoff but that is okay. I feel pretty good because I did not spend a single cent of it for personal pleasure. It all went into killing a 20k student loan bill and my investments. I was also lucky enough to have the drive to finish school a year early and get a lucrative degree (petroleum engineering). Starting salary was around 90k at 21 and now am up to 130k. Although this is no where near where some people can make in Wall Street at the same age (such as yourself), it has given me the opportunity to save more than half my income to further invest!

    2. Jonathan, congrats on the portfolio…. But don’t ever forget that real estate can be capital intensive. Keep your reserves high and you will be just fine.

  35. I have three mortgages- one for our primary residence and two for different rental properties. We are paying them all down early. At this point, they should all be paid off in around 12 years from now. We’ll be 46.

    The fact that I hate debt is enough for me to want to pay it all off early, but there are other reasons for us as well. Most importantly, that is the date where I believe we *could* reach financial independence so I want to become debt-free at the same time. My oldest daughter should also start college shortly after that and we want to help her pay for it- she is five right now.

    1. Great job calculating your retirement date and planning to pay off the mortgages to coincide with that date. That’s what I’m talking about!

      And hopefully your oldest daughter will be a genius and get lots of scholarships for college! :)

  36. Hi Sam, I know you’re big into real estate, so I hope you don’t mind me asking a more general question. Do you recommend buying property with the intention to hold for only about 5 years? I’m in the Boston area, and we have some pretty nice 1st time home buyer programs. Basically, I can put 3% down and get a 30 yr fixed mortgage (I know it’s not ideal, but it’s the program) with no PMI. I figured it might be a good opportunity to participate in some property appreciation while also staying pretty liquid via the low down payment. Do you think this is a good angle, or should I wait until I’m comfortable with 20% down?

    1. Mike,

      I buy property with the anticipation to hold on forever, actually. We all know our grandparents or someone’s grandparents who bought 60 years ago and are holding small goldmines. This is my intention to just buy, hold, enjoy and pass it down or generate income. Every single one of my properties I’ve lived in and then purposefully rented it out for income if I outgrew it, or wanted to go on a new adventure and live somewhere else.

      I am very wary of gov’t programs that allow buyers to put only 3% down, b/c such buyers were the ones who really gave the economy one BIG uppercut to the chin during 2008-2010. When you have 3% skin in the game, it’s more tempting to walk away, and walk away many did. With 20-30% down, not so much.

      That said, I would take advantage of the government, b/c that is what a rational person should do. Just promise me you’ll pay your mortgage and not cause your neighbor heartache and pain when the inevitable downturn happens!


  37. Great article Sam! And timely too..

    The past 6 months or so, I’ve been thinking about switching gears and start paying down some of my mortgages too. But, I’m still paying the minimum on all 7, saving up cash, and will soon be ready to increase my rental holdings and debt one “final” time. (I’m not implying I’ll stop buying forever, but I want to cool my jets a bit)

    At that point, I’ll be pretty close to FIRE, so for stability of income, I’m going to start funneling all excess cash into getting F&C on the rentals. (I’ll be letting my primary home sit, since I have a very low fixed rate there – this will be the last one to fall.)

    I’m not sure about how many I want to knock out before retirement, but I feel like I can afford to have some of the smaller ones float along, especially since I’ll have a non-leveraged income from RE notes. I think it depends on how sick of working I am and if I have some sort of side hustle.

      1. Well, I’ve already got enough cash for one of my next purchases (~100k), but I also want to sell my last to CA rentals, each of which will be traded for an out-of-state property. This is going to really ramp up my current cashflow. Finally, the last big investment will be shortly after, going toward notes in the new year. That will be the last of the big cash deployments, it’ll be all debt service using PI and my savings going forward to stabilize the income.

        I’ve never had any issues with more than 4 mortgages, but the big banks will not give them to you. You’ll have to go to a broker – I have a guy if you’re interested. But, if you don’t have a lot of recent W2 income history, that may be the biggest problem.

  38. Louise @ Good Financial Choices

    I’ve gone for the opposite approach of not paying off my mortgage, and investing instead.

    My simple rationale are:
    > It’s my home, and I’ve only got one residential mortgage
    > Have just fixed at 2.19%
    > No benefits to reducing LTV further
    > Happy house is appreciating and housing demand is strong (London suburb)
    > Think I can make more investing
    > Young enough & secure enough to take the risk and ride the markets

  39. Nice post! I am constantly debating if I want to pay down my various mortgages. I think you nailed it on the head…if you have a mortgage that isn’t very large (relative to NW) and the opportunity cost of knocking it off the balance sheet is minimal, I say go for it as I am sure the feeling will be great!

    1. That is what I’m hoping and looking forward to. The feeling of LESS feels great. But to get to less, you’ve got to first go into the thrill of getting more. It’s a weird thing, but something I talk about in this post’s intro.

      Paying down my student loans felt amazing.

      1. Well all I can do is quote myself …. As I told a friend of mine… I have done lots of things that didn’t make financial sense but felt amazing. The fact that I can afford to make those decisions makes everything worthwhile. Btw this isn’t about cars, boats, toys, etc. it is about the feeling of being free and controlling your destiny!

  40. Even Steven

    We systematically pay our rental mortgage down each month. We take the current rental income, 80% rental income from our current home(also creates rental income), while still making the regular payment towards the mortgage. We tried just to pay it down as we went and like you found it didn’t put a large dent into it.

    When we decided FI was the direction we wanted to go in, we just happened to have 3 units we were currently receiving income from, I think having zero debt and rental income is the best way to get there.

  41. I have a friend who flips and rents houses. He has 10 mortgages. None of them are all that big. They “cash flow”. All I see is risk. I agree everyone has a different risk tolerance and profile. If it is within your tolerance, I don’t see anything wrong with it.

    I think the perfect mortgage is $0. A paid for house is a great place to be. I’m not a big fan of the mortgage interest deduction. I know many people who borrow because they can deduct the interest.

    If I say to them, will you give me $10,000 and I’ll give you $2,800 back later this year would you do it? There is your deduction. Pay a bunch of interest to get a chunk back.

    If you can buy and your total expenses are around or less than your cost to rent, then I like it.

    Thanks for a thoughtful post.

    1. If I was in the 40% tax bracket, I would. One’s tax bracket plays a significant role in whether to keep a mortgage or not for sure.

      10 mortgages is way too much for me. Good on your friend though!

  42. Money Beagle

    When I got our mortgage down to 3.375% from 5.875%, paying extra lost priority for me in lieu of other objectives like being able to fund our next car purchase in full with cash. Once all of those goals are met, I would reconsider adding extra to the mortgage. Since we also went down to a 15 year note during the refi, it fulfilled the added objective of looking ahead to be mortgage free by the time our kids would start college.

    1. I like the 15 year mortgage not more an more now. 15 years for a 3.375% is pretty damn good.

      Looking at my expenses, there’s nothing really I want to spend money on anymore after finding this home with a view of the ocean. I’ll save for children’s educational expenses, and for caring for my parents, but I don’t want or need anything more. Perhaps this is why I’m more motivated to pay it down as well.

  43. Lance @ Healthy Wealthy Income

    We were actively working toward paying off our house early. I wanted it done before 40 years old. My parents finished paying off their house before I went to college which was great timing so I wanted to do it earlier and faster as well. Then 2008 came around and when the market crashed we looked at it as the opportunity of a lifetime to just in to the market with everything we had. We haven’t made an extra payment to principle since that time and the market returns have been awesome, but with the market at all time highs we are thinking of going back to our original strategy. I’ll probably have it paid off by 45, but I’m also going to have a truck load in investments too.

    When people ask me what is better: pay off house or investments I always say yes. Why limit yourself to one or the other, why not do both if you can do both, but be flexible enough to adjust to the market (both home and stock).

  44. I used to argue all the time that waiting to pay off your mortgage or delaying it was the smart route to go since you could use the money to invest in other higher return (higher risk) things. But now as I’m thinking more practically about early retirement and how I can lower my overall cost of living, paying off the mortgage early is starting to sound like more of something I may move forward with.

  45. Do you have an article explaining why you feel a 5/1 ARM is better than a standard 30 year fixed mortgage?

  46. It is all about comfort level. I am very comfortable with my debt level. I have 11 rentals, 10 have mortgages and the third has a line of credit I use for flips. I have my personal residence mortgaged as well. I can make so much more money using that debt to buy rentals that it doesn’t make sense for my to pay it off early unless I have to. I do use ARMs so I have been paying off one rental at a time using cash flow from my other rentals, but I may be better off using that money to buy more.

    I don’t pay my personal house off or my cars, because they are at 4% and 3% and I can make 20% plus on the rentals.

      1. True, they naturally pay themselves off over time without accelerating the payoff amounts. It is all about risk tolerance and at some point I may have enough income coming in that I decide not to buy more and pay off the loans.

  47. I agree with you and don’t see interest rates climbing in the near-term. I think having 4 mortgages is fine since your investments cash flow and you’ve got a safety net in the event you have to evict a bad tenant.

    I have 2 investment properties in another state, but I am currently renting my primary residence. No leverage on either investment. I know it’s probably a mistake, but peace of mind outweighs the lost opportunity cost of leveraging up what I’ve got and buying more, either as a primary residence or an investment. I also like to be illiquid to control my spending. Both properties are in areas that are being redeveloped (one of them barely cash flows, even without a mortgage, because the city is trying to tax it into a higher and better use), so my long-term plan is to hold out as long as possible. I know I’m missing out on tax savings. I would tell anyone else in my position to reconsider. I also expect my risk tolerance will shift back in favor of more strategic investing in the future, but right now I’m happy to be unburdened by debt and saving for the next great opportunity.

    1. You’re in an interesting situation BH. You’re willing to leverage up and own 2 rentals but not own your primary? I think you’ll feel even more secure owning your primary for the fact that you can bolt the doors and not let the banks take it away without a fight if something bad happens.

      Are you not planning on living where you are long term?

  48. SavvyFinancialLatina

    I followed the entire post and it was a great read. I’m not sure if it applies to me at the moment. We have borrowed $104K at a 3.75% 15 year rate for our first home. Since I’m our financial planner of our little DINK family, I’m concentrating on building our liquidity via cash and investing in index funds at the moment through our retirement accounts. I do think this will be one of the lowest rates I will get in the next couple of decades.

    1. 3.75% for a 15-year sounds decent. I would check anyway b/c I just did my 5/1 ARM jumbo at 2.5%, and rates have come down to 12 month lows currently an I think will stay this way. You could perhaps get 3.25%, but it might not be worth it to you due to fees.

  49. debs @ debtdebs

    Sam, I have three mortgages, but all on the same property! They’re part of a step mortgage program. One is really small, $12K and will be paid off by next year, the next is $46K and will be paid by 2017. Our big one is $169K and will be paid by 2018. We pay $3438/month minimum + an additional $2K or more depending on additional cash flow available. At the end of the day our mortgage term will be 27 years, but we’ve put a lot of consumer debt on these mortgages, as you know. I think 15 years or less is an ideal mortgage amortization, now that I’ve learned the hard way. We’ve got good rates between 2.5% – 2.89% but we want to get them paid so we can retire. I recognized the Bath photo straight away.

  50. Ben @ The Wealth Gospel

    Solid. We’re not in a position yet to own, and that first mortgage can be scary. Always good to see the opinion backed by solid analysis.

  51. I guess so. As per your net worth ranges , I’m at just at the lower end of a 35 year old’s net worth ( I’m 32 years old now) , but I don’t feel risk averse yet. Maybe when I get into the big leagues:).

    I don’t earn a six figure salary yet ( pretty close though) , but live in a low cost of living area in the Midwest and save 40-50% of my post – tax income. As I mentioned , I have my wife’s college bills to consider as well.

    I agree that bad time will come sooner rather than later , that is why I’m focusing on paying off the debt soon so I can be ready and liquid when the next recession rolls around.

    For currency exchanges of smaller amounts , I use Xoom. They have no fees if the amount is more than 1000 USD and generally takes less than 24 hours for the amount to be credited.

    For bigger amounts , its a nominal fee of 10 dollars or more depending on the amount

    1. Soon, your wife will turn into an income generator too, yeah? If so, then all is good.

      We’ll never truly know our risk tolerance until we start losing. Once the losing starts, we learn real quick what we can really comfortably afford to borrow and invest.

      We’ve had 5 good years of upward growth now. I think about 7-8 year cycles when investing, so I think we are slightly more at risk of a correction than of continued robustness. If I pay off my debt within 14 months, there’s only 1-2 years left in the 7-8 year cycle, and I want to be better positioned.

      1. Sam,

        Good point. We only know ourselves and our risk tolerance when we are in a very adverse situation while investing.

        But as I mentioned earlier , I was a relative rookie while investing during the market crash of 2008.However I was unmarried at that time, working in the States and was able to save a large surplus every month , every penny of which I invested in the stock market. Truly ,I bought when there were lakes of blood on the streets.

        The returns since then has boosted my confidence and I always take care to maintain sizable cash reserves for opportunities and emergencies. And as you said , to pay off debt as soon as possible.

      2. Very thorough article and spot on observation regarding risk tolerance. Good luck to Nishanth, but as Sam mentioned until you start losing a lot and feel the market is moving exactly opposite of what you thought it would do consistently which will eventually happen, you won’t know your true risk tolerance. I went through the dotcom bust where many people including myself who made lots of money on paper just got completely burned buying individual stocks, much much more so than in 2008 crash. I thought I was pretty risk tolerant also until I kept seeing continuous sea of negative returns which eventually wiped out 80% of my net worth at the time. It was such a shock, I stopped investing for 4 years afterwards and just saved as much cash as I could. Eventually I wised up and used the years of savings to buy house and investments in 2008 and 2009. Even that was only because my online savings account rate went from 5% to about 1%, so it was just luck.

        I was an engineer for many years and for some inexplicable reasons, many engineers myself included when we first dabble in investing, maybe because we were the smartest kid growing up, think technical smarts translates into completely unrelated areas, especially finances. I often hear engineers who make 100k to 200k claim they know more about investing than wall street pros who pull in millions or some other quips such as “those wall street investment bankers & hedge fund managers don’t know crap”, etc. Just be careful and diversify. Unless you’re willing to dedicate full time to investing, much of your gains are probably just pure luck because of the long bull market.

        1. Josh,

          Point taken. As of today,my portfolio breakup stands at 44% Real estate , 30% equity , 23% bonds and semi-liquid instruments, 3% cash.I’m assuming that should be a pretty good diversified mix.I intend to make real estate and equity equally weighted, but thats about it.

          And I would be the last person to assume I’m pretty special in terms of investing or technical smarts :)

        2. Ahhh, engineers. Funny you should mention about “smartest kids growing up” b/c it’s true. You guys are the smartest kids in terms of academics and test scores (my Berkeley MBA class was 50% engineers), but it often takes more than the brains to get ahead. There needs to be a high emotional quotient as well. I have a post that discusses this in the queue that I think you’ll like.

          1. So true about emotional quotient, temperament, and thinking you’re smarter than others. During the dotcom boom, my less educated friends who didn’t go to college who made some money actually did much smarter things. Most were happy to cash out their profit, take great vacations, some bought fancy cars, and others put down payment on a home. Many of us so called smart and educated people figured they were dumb for leaving so much money on the table. We got greedier and ended up being burned without actually enjoying any of the paper profit.

  52. Zee @ Work To Not Work

    It’s all about the opportunity cost of what you can do with your money. For me, I feel like investing my money elsewhere will give me higher returns than paying off my low interest mortgage so for now that’s where I have my money, focusing on my net worth. But on the other hand, I’m also still paying off a significant amount more in interest than I am in principle so my tax write off still benefits significantly from my mortgage. I think if I were further into the second half of a 30 year mortgage and my tax write offs were diminishing I might look at it differently.

    While I have a significant amount of my net worth that is tied into my home I probably have no where near 4 mortgages worth of money invested into real estate. I know that you said that you’ve diversified your property holdings so that your rental is a smaller piece of the pie but what is that fear of? I’m curious as to if this is a fear that something like a fire could wipe it out or is it more of a fear of a general market decline, in which case your other SF houses would probably suffer too.

    To me it looks like no matter what you’re putting more of your eggs into the real estate basket no matter what, even if your liabilities in one of those single eggs is gone.

    1. The concerns include natural disasters and fires, as well as corrections in the overall real estate market. Although I think we still have several more years to go with AirBnB, Uber, and Box going public, and Apple near record highs, I just don’t know for sure. Hence, I’m going to hedge by getting rid of this mortgage at the very least.

      How many properties do you own? And what is your net worth percentage breakdown by assets?

      1. Zee @ Work To Not Work

        I hope your properties aren’t close enough that the same fire could wipe out all of your SF properties, cause then we’d all be screwed! But some other natural disasters could hit the bay area as a whole.

        I only own 1 property that accounts for about 18% or so of my net worth (give or take some ungodly realtor fees). I’ve been considering purchasing another home to be my new primary home and renting out my current one but I’m not sure I want to play landlord. I think that over the long term a second home would be the better value but I’m trying to make things as passive as I can. The other option for buying a new home would be to sell my current one and make somewhere closer to a 50% down payment. This would increase my overall investments/equity in real estate but it would also lower my monthly mortgage payment.

        If I really do buy another home the debate of how much to put down is going to be a question I’ll have to mull around for a while. I guess it depends on how long I think I will live there, I still don’t know if by 32 I’m ready to decide on a permanent place to root for the rest of my life, or at least 15+ years. I like the flexibility of being able to take off for a year and not having to hire a property manager to make sure everything’s okay. And paying for a home that I’m not in for a year just seems silly to me.

  53. John C@ Action Economics

    I don’t have enough itemized deductions including mortgage interest to offset the standard deduction, so having a mortgage doesn’t help on the tax front at all. For me it is difficult to make the decision to pay extra on the house over investing that money. Currently we are putting about 10% of what we put into investments as extra on the house, which is paying it down at a rate of a 15 year mortgage. If our income increases as projected I would like to have it paid off in 10 years.

  54. Nice payoff strategy looks liek you shouldn’t have much problem reaching the goal f 14 months.

    Haven’t really thought about paying the mortgage off early with my student loans (current loan I’m paying off is at 6.5% vs mortgage at 3.5%) and my wife currently pursuing her Master’s. We do see ourselves moving in a few years to an area with lower housing costs once the student loans are taken care of.

  55. Sam,

    Interesting comment about risk tolerance here. I will share my story which relates not to mortgages but zero percent balance transfers on credit cards.

    I work in America on a work visa , but all of my savings are in India.Last year in July-August 2013 , with all emerging stock markets being in doldrums and the currencies falling freely , I borrowed USD 50,000 on my credit cards. I have around 13 and have maxed out all of them on zero balance transfer offers. I sent the entire amount to India , where I obtained an amount equivalent to 68 rupees to the dollar and put it in a risk free guaranteed CD yielding 9%. When the stock markets crashed even further and looked a compelling opportunity , I took half of that amount and invested it completely ( beyond my normal monthly investments). The other half continues to yield 9% as opposed to zero percent on the borrowed money.

    As of today , the stock market indexes are up 50% and still going strong. I have paid off around 30,000 USD till date (without a dime in interest) and still have to pay off the remaining 20,000 by June 2015. I have enough cash reserves that if in need of a sudden emergency , I can transfer money here to pay my bills.

    I don’t know how many people would do such a thing , but among all the people I know , I have unusually high risk tolerance and decent risk bearing capacity. This is while I support my wife who is studying in college as well :). I suppose if you have invested continuously through the 2008-09 crash , nothing much fazes you. I invested heavily throughout that crash and made great profits from it , but even better , learned some very important lessons about myself.

    1. That is pretty impressive Nishanth. I would guess 0.01% of people in America would actually do that, and at that amount. I think you will find that as your wealth grows, you will become more risk averse as all you want to do is PROTECT your financial nut.

      Things are great right now, but I promise you bad times will come again at some point.

      What are the transaction and currency exchange fees for going into rupees?

      1. Myles Money : It’s pretty easy , I come from a family who would be considered wealthy by Indian standards ( not ultra – rich , but comfortably well -off ) and in a days notice ,I can have say , 35,000 USD transferred here if I had an emergency situation. In India family support is heavy for the children , and that gives me the courage to sleep at night. I have never , ever worried about the lack of money in my life and that gives me this risk tolerance

          1. Sam,

            To answer this question allow me to digress. India since independence was shackled under a socialist economy which stifled all private enterprise and industry.There were too many people and too few jobs , which led to people migrating all over the world for jobs.

            In my case , my father had no option but to go to the Middle East ( Its a very popular destination for Indians owing to proximity and tax-free incomes ) , struggle for 25 years , but ended up wealthy due to his working in an oil company and putting in a lot of overtime. He managed to educate his children very well ( I became an engineer and my sister became a doctor , both without an iota of debt) . When I passed out from college , the IT boom was just starting and there were lot of opportunities to go to the US. My sister moved to England and settled down there. (She is a citizen now)

            Nowadays , wealthy Indian families leave it to their children to choose , whether to migrate abroad or stay in India.India has much more opportunities now than when I passed out at first. But migration or not , the family support system exists and yes , there will be massive generational wealth transfer.

    2. Isn’t inflation in India somewhere around 8%? So if you were to transfer that money back into USD you would only have 1% or less real gain?

      1. David,

        Yes it is around 8% (CPI) , but healthcare and education inflation are even higher. The gains in USD would matter to me only if I intended to transfer the money back to the States , which I don’t intend to do ( unless in case of an emergency ).

        India’s economy is on a real growth path and I have been investing in the Indian stock market (via mutual funds) for the past 10 years. I have been able to get anywhere from 17-20% annualized returns , so it seems pretty good deal to me.

        1. Nishanth,

          How are you able to invest in Indian mutual funds? I thought NRIs/PIOs residing in US/Canada are not permitted to invest in Indian mutual funds?

  56. My wife would like to pay down our mortgage ASAP. I am more “financially rational,” and see all sorts of investment opportunities that can earn us more than a mortgage costs. Our compromise was to go from a 30-year, to a 15-year fixed at 2.875%. This will be paid off before our retirement. But, we will not prepay it; there are a lot of stocks that yield this much or more, and someday, a day I assert will happen within the term of the loan, interest rates will be “normal,” and CD’s will heartily beat this.

    We did go through the “build up debt, then pay it off,” which I don’t remember being fun *at all.* Fortunately (but not surprisingly) this hit us when we were quite young, so the big mistake was with what now looks like a relatively small amount of money. I would characterize the payoff as having an atmosphere more of grim determination than triumph. Looking back, it does feel very good to be debt free and in control of our financial life.

    Sam, I did catch a mistake–a change in thinking that occurred in the article:

    regarding the debt to income ratio, you correctly describe it at the beginning of paragraph 8: “…it’s a good rule of thumb to spend no more than 30% of your gross income on all housing expenses…” Really, it is usually described as needing to cover your whole mortgage payment: principal, interest, taxes, and insurance.

    But in the line after the paragraph, you narrow the definition: “Whatever your gross income is, multiply it by 30% to figure out how much mortgage interest a year you can afford…”

    Sounds like a real estate agent got to you, trying to push up the price you are considering!

    1. I’ve added “Whatever your gross income is, multiply it by 30% to figure out how much mortgage interest a year and other expenses you can afford and work from there to get an appropriate mortgage for you. 30% isn’t a hard rule, but a good general estimate based on current rates.” to be more clear.

      At the time, I WISH there was a real estate agent who pushed me to buying a $900,000 place instead of a $580,000 place. I would be several hundred thousand wealthier by now!

      But no, this is a post about paying off mortgage debt, not figuring out what more real estate to buy.

      1. Sam,
        I understand your situation, but there were a lot of people who were pushed to buy more house than they could afford (think liar loans) and ended up getting wiped out. To me, the thing to keep in mind is that the realtor is a salesperson, not a financial advisor.

        The surprise is that the loan officer we talked to (yes, at a bank) was the same way. Again, even though they worked at a bank, they are *salespeople*, and directly benefit from bigger transaction amounts.

        Your advice to figure out yourself what you can afford is spot on. The key thing is to take control of the situation. Plenty of “helpers” are happy to drive for you, but they may not be going to the same destination as you would steer yourself.

  57. Jay @ ThinkingWealthy

    I think this boils down to risk tolerance at the end of the day. You have the assets to cover your liabilities but you just don’t like seeing the line item on your account like you said. What if you used that $8k a month for a 5th property? Would that be too much risk to stomach?


    1. A 5th property is definitely too much property for me to handle at this time. Maybe I’ll feel differently in 3-5 years, but not now as I’m doing work on the house and it’s taking a lot out of me (new post coming).

  58. Heck, just having one rental home mortgage bothers me, hence our moving to a 15-year mortgage whose monthly payments exceed the rent that the place can earn. Part of my thought process to paying it off more quickly also included my desire to no longer be upside down in the house, which should occur in about 16 months.

    That way, if we decide to sell, we can at least break even then, without dipping into anything else. I don’t expect that we will, but that is a bit of piece of mind that I wanted.

    1. I definitely approve of going from 30-year fixed to 15-year fixed if folks can handle it. Good stuff.

      The way you look at your mortgage is not how I’m looking at it b/c it’s just accounting in the end. I’m looking at it from a risk/return, use of capital approach. Given rates are going to stay low for a while, 3.375% is a decent return now.

      Do you ever plan to sell your house Mike?

      1. Right now, we don’t plan on selling it, but we want to be able to if our plans change. Part of my stance about debt I think is based upon autonomy– that is, debt (might not) allow you to move as fluidly as you might want to from one thing to the other. Plus, I just hate it psychologically (though I realize that this might involve a certain irrationality or it might betray a wrongheaded approach to not considering debt as a tool).

        The biggest life event that we have ahead of me is the moment I go from being a very well-paid, senior military officer to a military retiree, with a nice retirement income, but with a big reduction in salary nonetheless. Having agility at that moment is our primary objective.

        Once we know what happens after that, we will make most of the remainder of our plans for rental properties, debt levels, actual retirement income, etc.

        1. Gotcha. I hear you on the psychological stuff for sure. It’s why I paid off my student loans within 5 years, even though it was only at 2.5%, which was cheap back in 2000.

          I think you will truly be happy with your income as a military retiree. The pension is going to be amazing, as will the freedom to do what you want. You will no longer have to save for retirement and you’ll find retirement to be cheaper than you thought.

          When is the ETA for retirement again?

  59. This is got to be the most complicated mortgage pay down strategy I’ve ever read :) Looks like you put a lot of time and thought into it. In 2012 I decided to pay off our 15 year mortgage early and it should be gone next year. The strategy? Continue max out retirement savings, continue having a 1 year emergency fund, be mindful of other expenses and just plow every single dollar available after that into paying off the mortgage. Zero debt INCLUDING mortgage is the end game here and for me it doesn’t really matter how complicated or simple the strategy is… “just do it!”

  60. Sam – I’m surprised by this post. This seems to go against other strategies you have written about. Personal finance is highly personal – go figure. You have not previously written about debt paydown, particularly on real estate that is cash flowing nicely for you. I guess the 4th mortgage finally got to you. All in all, I would probably do the same thing if I were in your position. Sounds like you will still have quite a bit of debt, so freeing yourself of one mortgage will improve your cash flow.

    1. Yes, I still have three other mortgages to pay down. Maybe I’ll get used to 4 mortgages in six months time, but for now, I find it uncomfortable. $118,000 is not that much to pay down. So close to the finish line, so I might as well sprint.

  61. I bought my first house when I was 21 in 2008 (after receiving a $30,000 tax free reenlistment bonus in Iraq, thanks Marine Corps!) and never had any intentions of living in it. I started renting it out right away, as I was still overseas in Iraq and Okinawa. My original loan was for $96k after putting down 30% and my interest rate was 6.275% for a 30 year fixed! Eeek…

    One year later in 2009 I refinanced to a 4.625% 15 year fixed. The entire time I was making double mortgage payments, acting as though I never received any rent money. The rent was covering the payment and then some, and I was matching it. At one point I was paying $3k a month, just because I could.

    I now own two more houses, and have decided to slow down on paying off the mortgages. It’s great to have it completely paid off, but as you mentioned I need to remember to keep investing money as well. I have over $130k tied up in a house now and a good majority of that could have been working for me in other investments making more then my interest rate!

    Great article. If I could get a HELOC for 4.5% would you suggest I try and take out a $90-95k HELOC and investing it? I feel like all that money sitting in the house is being wasted, what do you think?


    1. Hi Seth,

      Congrats on staying disciplined in your mortgage pay down, and pretending like you never received any money! You’ve developed a fantastic financial attitude that will serve you well for decades.

      I am against HELOCs because 1) they are at a higher rate than a primary or rental mortgage, 2) it gives you temptation to spend and go in reverse. To take 95K HELOC to go try and beat the market by at least 4.5% or spend on something else is a losing proposition.

      Just focus on rebuilding your liquidity to 95K instead, interest free!

  62. I really can’t bring myself to pay off my mortgage. I’m just too drawn to putting any spare cash into income generating assets – I find the thought of missing out on potentially greater returns a bit excruciating! And of course I can’t rid myself of the unrealistic over-confidence to believe I’ll always achieve amazing returns on my investments, waaaay above the mortgage rate…

    Unfortunately we don’t get any tax deductions for mortgages here in Australia, so it’s probably not as compelling tax-wise to take out such massive loans – but you don’t really have much choice here given how ridiculously expensive property prices are!

    I also agree on the thrill of buying things with debt, with money that isn’t yours – although I’m never tempted to do this with consumables – only stocks. And I like your strategy of using consulting income to pay down the loan – giving some purpose to what you’re doing. I know that’s something I’d definitely need to keep me motivated.

    1. It would feel weird for me to take on a mortgage with no mortgage interest deduction as I’m so used to it. This is probably the reason why the mortgage interest deduction will stay as law forever. Too many Americans have become accustomed to this benefit, so the gov’t can’t take it back now!

      Once you get close to your Number, you will want to pull back risk.

  63. Seems like a solid strategy. Risk is a personal issue, and everyone is different.

    You didn’t directly mention inflation, but another thing that mortgages give you (especially fixed rate or long duration before reset ARMs) is a nice hedge against rising inflation. Paying back a mortgage with inflated dollars has got to be a wonderful feeling.

    Of course predicting inflation is a lot like trying to predict today’s stock market. Since inflation is at record lows it’s certainly _likely_ that inflation will rise in the next 10 years… but who knows. Many people thought that QE and the low fed fund rate would lead to rapid inflation by now, and that hasn’t happened.

    That being said, If I had 4 mortgages I’d be looking to pay one of them down too. Our risk profiles must be similar :-)

    1. Inflation is definitely something I’ve considered, given inflation and rates are intricately linked. I don’t expected interest rates and therefore, inflation to rise much at all, hence why the value of having cheaper debt isn’t as great.

      See point # 2 in the section on why I’m paying down this mortgage:

      2) Low rates for a while. 3.375% is a pretty good rate for a rental property mortgage. But 3.375% is still about 1% higher than the current 10-year risk free rate. Because I don’t think interest rates are going to rise by more than 1% for years, the “value” of my 3.375% mortgage is not as great as others who believe interest rates are going to skyrocket. Let’s say a comparable mortgage has an interest rate that climbs to 10% in two years. Then of course I should borrow at 3.375% for as long as possible. But since I highly doubt this will be the case, I’m just going to pay it off. If I’m wrong, I’ve still got three other mortgages at low rates.”

  64. ArizonaTrader (@ArizonaTrader)

    I agree with you about your comfort level remarks. They should play a role in this decision. I have to chuckle because I can just imagine financial planners reading this post gasping in disbelief because someone wants to pay off their mortgage early with historically low rates like yours.

    1. One thing I didn’t mention in my post was that a 3-year CD at 2.75% is coming due for about $55,000. I will use some of the proceeds to pay down 3.375% debt. It’s a no brainer as I’ve allocated this money to the “risk-free” portion of my net worth.

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