Would you give up all the pleasures in life to pay up your mortgage early? One man did, which is amazing. Before we get to his story, let me share my own mortgage pay off story.
I bought my first property a week after turning 26. It was a two bedroom, two bathroom, 1,000 sqft condo in Pacific Heights, San Francisco. It was nothing fancy, but it had one car parking, and a terrific view of Lafayette Park. The condo cost $580,500 and I put down $120,500 for a remaining $460,000 mortgage that I finally paid off 12 years later in mid-2015!
My original goal was to pay off the mortgage by 2013 (10 years), but life got in the way as it so often does when we aren’t honed in with our finances. The original mortgage rate was 5.85%. After several refinances, it went down to 3.375% and I no longer had the urge to pre-pay as aggressively.
HARNESSING DEBT TO BUILD WEALTH
The reason why I didn’t pay down my mortgage faster was because I used my savings to buy more properties and stocks. I knew my career had upside potential since I was only in my 20s. Taking on more risk with more debt seemed like the best way to go.
From 2003 through 2008, the bet paid off. My returns trounced the 3.375% mortgage interest rate. Then the financial crisis hit in 2009, making me wish I had used the proceeds from my vacation property purchase a couple years earlier to pay down debt or hold cash instead.
Today, I don’t regret taking 12 years to pay off the mortgage. I found, and went beyond my maximum comfort leverage point. That’s the only real way you can find out your true risk tolerance. To regain my sense of financial security, I’m presently actively trying to increase my asset-to-liability ratio. As your desire to work and ability to produce income start to fade, it’s important to reduce debt.
The paid off rental property now generates about $50,000 a year in gross income and $35,000 a year in net operating profits (post HOA, property taxes, maintenance). With cap rates getting down to 3% – 3.5% in SF, this property is currently worth between $1,000,000 – $1,200,000. For comparison, in mid-2015 a 610 sqft one bedroom version of my condo in the complex sold for $840,000.
Originally, this Pacific Heights condo was going to be the cornerstone of my retirement income strategy i.e., $35,000 a year in net rental income + $25,000 in Social Security + $40,000 in dividend and CD interest income. Now it’s just one part due to the accumulation of multiple passive income streams.
Would You Give Up Sex, Good Food, And Vacations To Pay Off Your Mortgage Extremely Early?
In personal finance land, paying off your mortgage in 12 years is pretty ho-hum. So I want to introduce you to Sean Cooper, a Canadian who came up with a $170,000 down payment on his $425,000 house he bought in August 2012 as a 27 year old. Three years later, he paid the entire sucker off!
So how did he do it? The first thing I thought about was parental assistance given there’s a massive generational wealth transfer on the way. Sean promises me he received no help from his parents for either the downpayment or the quick mortgage payoff. He had a single mother, and he helped her instead.
This is what Sean did:
- Lived in his basement and rented out the upstairs portion of his house, which contains three bedrooms.
- Lived off ramen noodles, Kraft dinner specials, and water mostly.
- Regularly worked 70-100 hours a week as a pension analyst, freelance writer, and as a part-time meat department clerk at his local grocery store.
- Generated a total annual income of ~$100,000 net, comprised of $55,000 from his FT job, $18,600 from rental income before expenses, and ~$40,000 in freelance income.
- Had discretionary expenses of $9,600/year, i.e., $800/month excluding his mortgage.
- Paid $850 a week to his mortgage ($700+ to principal), and had total expenses of roughly $60,000 a year.
- Mortgage rate was 3.04% for 5 years.
- Doing the math, he therefore used 100% of the remaining $40,000 a year to pay down his mortgage = ~$120,000 over three years, and the remaining $130,000 of his mortgage was paid down monthly at a rate of over $3,000 in principal a month.
- Didn’t go on vacation. Didn’t go out with his buddies to eat our drink for three years. His most exciting vacation was a 24 hour bus ride to Wisconsin.
- Didn’t take girls out anywhere and had/has no girlfriend.
You can read more about his story that caught his nation’s attention here. The 1,200+ comments in the article are particularly enlightening because the feedback is split between praise and vitriol. Sean basically gave up everything so he could pay off his mortgage early.
Feedback On Extreme Mortgage Payoff
One negative commenter wrote, “So basically he wasted 3 years of his life. Life is short, a house is just not that important.“
Another commenter wrote, “Another media PR job to whitewash the economy misery of the youth. 100 hours of work a week = over 14 hours of work a day, every day. Before we celebrate him, I’d like to know more about the psychological price he paid by turning into a work addict.“
I’m totally on board the frugal train, and I think it’s great Sean was able to crush his mortgage so quickly. There’s just no way I could just live off $10,000 a year in NYC or San Francisco after paying my mortgage. After slaving away at a difficult job the first four years out of college, the one thing I really wanted was a place of my own.
That’s why I bought my first property after sharing a studio+alcove apartment with a guy for two years, and a dumpy 2/1 at the edge of Chinatown with a woman for a year. I figured, if I was going to work that many hours, I better at least have a nice place to live! I’m sure Sean felt a similar way.
My 20s Was Too Much Fun To Give Up
In addition to wanting to balance hard work with a better living environment, my 20s saw a significant amount of recreational travel. Raised in a foreign service household that moved every 2-4 years, I wanted to visit a new country every year on vacation, and that cost money. Furthermore, how was I supposed to fly back to Hawaii and visit my parents at least once a year? Roundtrip tickets cost at least $350, and up to $1,000 during the holidays.
I also had a penchant for cars in my 20s; from the Mercedes G500 (a $78,000 mistake) to the 1989 BMW 635CSi (a classic car of my dreams I bought for only $3,600 and drove until the brakes stopped working one day). Although I saved 50% or more of my after-tax income every year, it’s partly because I was fortunate to have a healthy salary and annual bonus as well.
Finally, every heterosexual male out of college wants to take out the ladies when he finally starts making money. It’s hard to pick up a date with a bus pass, treat her to a nice meal, or fly her to San Diego for a weekend to see the baby pandas on an annual discretionary budget of $10,000 a year. Having the ability to treat a woman, whether she needed to be treated or not, was a huge motivation for making, saving, and spending money in my 20s.
LET’S ASK SEAN COOPER HIS THOUGHTS
I decided to reach out to Sean and ask him about his thoughts now that his story has gone viral. It’s a small world because Sean was actually one of my freelance writers at a place I was consulting for as their managing editor back in 2014. Let’s see if he was OK to give up so much to pay off his mortgage.
Sam: You’ve gotten a lot of praise for paying down your mortgage in three years, but you’ve also gotten a lot of criticism. Why do you think some people hate you for being able to pay down your mortgage so soon?
Sean: Yes, my story has been very polarizing. Some people either love what I’ve done and want to follow in my footsteps and others think I’m crazy. I think it all comes down your own personal views on money. Canadians and Americans went from nations of savers to spenders. We want everything now – many of us just aren’t willing to make the financial sacrifices, instead relying on credit. I think I hit a sore spot for a lot of people, which has led to the criticism.
Sam: Instead of trying to tear someone down to their level, why don’t more people just do more for themselves to get up to someone else’s level?
Sean: Exactly. Instead of criticizing my story, try to draw inspiration from it. Whether your goal is to pay off your student debt or save towards the down payment of a home, it’s all about setting a goal and taking the necessary steps to achieve it. Unfortunately, there’s no easy answer – it requires hard work. If you aren’t willing to make those sacrifices, you have to be willing to accept your current reality. If you’d like to strive for something greater, then be prepared to roll up your sleeves and get to work.
I see it this way: short-term pain for long-term gain. I may have worked hard for three years, but now I have the rest of my life to enjoy myself. A word of caution: not everyone can pay off their mortgage in three years like me, but if you can learn a lesson or two from my story, maybe you can pay down your mortgage in 15 or 20 years instead of 25 years.
Sam: Given you were able to afford a home in your 20s through no downpayment inheritance, do you think the media is blowing the real estate affordability crisis out of proportion? If you can pay off a mortgage by the age of 30, surely plenty of other people with jobs can at least buy a median priced home with a lot of hustle and discipline no?
Sean: No, I don’t believe the media is blowing the real estate affordability crisis out of proportion. The facts speak for themselves: the average price of a detached home in Toronto and Vancouver is over $1 million. To pay off my mortgage in three years I had to make many financial sacrifices. I worked 70-80 hours a week, lived frugally, took no vacations and put my social life on hold.
I was fortunate to buy my home for only $425,000 in August 2012. Today my home is worth about $600,000. I would have a tough time affording my own house today – that in my opinion is an affordability crisis. While homeownership requires some financial sacrifices, it shouldn’t mean putting your life on hold until your mortgage is paid off.
Sam: There seems to be some alarm about a Canadian housing bubble, similar to the one we had in the United States. Do you agree there’s a Canadian housing bubble? Lending standards seem much stricter in Canada compared to lending standards in the US pre-crisis.
Sean: Everyone from the IMF to the Bank of Canada has said the Canadian housing market is overvalued. While I agree our housing market is overvalued in some markets, I don’t agree that there’s a housing bubble. As you mentioned, lending standards are a lot stricter in Canada compared to the U.S. Canada was praised for its rock-solid banking industry during the financial crisis. Canadian lenders don’t offer NINJA (No Income, No Job or Assets) mortgages.
Similar to the U.S., the lending standards in Canada are a lot stricter post-crisis. The minimum down payment has been increased and the maximum amortization period has been gradually reduced from 40 years to 25 years. Unless the economy suffers a major recession, I don’t see a housing bubble happening anytime soon.
Sam: How are you spending/investing your increased disposable income now that you don’t have a mortgage?
Sean: I’m still living frugally, although I’m not watching my spending as much as I used to. I’ve been dining out more often with friends. I’m also planning to travel. To thank my friends for sticking by me during the last three years, I threw a big mortgage burning party to celebrate. I also went on a $1,000 shopping spree for new clothes. Instead of letting the money just accumulate, I’m saving go towards lifestyle inflation, I’m taking the amount I was paying towards my mortgage ($800 per week) and investing it.
Sam: When do you plan to move out of your basement and live in the main portion of your house and rent out your basement instead?
Sean: This is the question I’ve been asked the most. People are perplexed why I’m stilling living in the basement. As a single person, it just doesn’t make sense to live in the main floor. There are three bedrooms – I simply don’t need the space! That might change when I get married and start a family, but until then I’m perfectly content living in the basement.
It all comes down to cash flow: if I live upstairs and rent out the basement I’ll only earn $800 a month in rent, but if I continue to live in the basement and rent out the upstairs, I’ll earn double that amount, $1,600 a month.
Sam: Do you have a net worth goal or age goal where you plan to leave your day job?
Sean: My goal is to achieve a net worth of $1 million by age 35 (current net worth is ~$670,000). I believe this is realistic. If housing prices keep going up at their current rate, I estimate my house will be worth about $800,000 by 2019. I’ll just have to come up with $200,000 in investible assets. Paying off my mortgage is only one of my goals.
With over 80 percent of my net worth tied up in one asset (my house), my next goal is to build my investible assets. I have over $40,000 of contribution room in my Tax-Free Savings Account (the Canadian equivalent of the Roth IRA). I plan to max that out mid-2016. After that I plan to invest in low-cost index funds in non-registered accounts.
While my story has led to many opportunities, I don’t have any plans to leave my day job anytime soon. I’m currently working on a book that chronicles my journey to mortgage freedom and serves as a blueprint for those who would like to follow in my footsteps. Once the book is released, I plan to do speaking.
Sam: During your mortgage paydown years, how much were you spending on average a month and a year, and how much was your monthly and yearly gross and net income?
Sam: The homeownership rate has steadily declined among all demographics here in the US. How is the homeownership rate like in Canada? Is owning a home ASAP still one of the main goals of the Millennial generation today?
Sean: Despite stricter mortgage rules, Canada’s homeownership rate has been steadily rising. In Canada’s priciest markets, Toronto and Vancouver, a lot of Millennials are choosing to rent instead of buy. This can be a good choice as long as you’re financially disciplined. However, my worry is without the forced savings of a mortgage, some Millennials will choose to spend what they save from renting versus owning on lifestyle inflation instead of investing it.
Sean: Given it is so cold for six months a year in Canada, why don’t more Canadians migrate to the United States? There are plenty of areas where housing is cheaper than Toronto and Vancouver. Further, there’s more job opportunities.
Sam: I think it partially comes down to the U.S.’s strict immigration policies. Foreigners often choose to work and study in Canada because it’s tougher to get a work or study permit in the U.S. There are many Canadian snowbirds that head to Florida during the wintertime. When the Canadian dollar and U.S. dollar were near to parity, there was a lot more interest in investing in U.S. real estate. With the Canadian Loonie hitting an 11-year low versus the U.S. greenback, there’s less incentive for Canadians to head south of the border.
Sam: What do you think is the general perception Canadians have about Americans in terms of work life balance, productivity, ingenuity, financial acumen, and general way of life?
Sean: Canadians and the Americans seem to share a lot of the same views about work. Although the standard workweek is 40 hours, many work upwards of 50 hours. However, there continues to be a productivity gap between Canada and U.S. Despite similar work hours, Americans are more productive than Canadians. Both nations share as a whole share similar views on the general way of life, although it varies between regions.
Household debt in Canada keeps rising, as many Canadians see no urgency in paying down debt while interest rates remain low. The Fed rising interest rates should serve as a wakeup call for Canadians that interest rates won’t be this low forever. Take advantage of low interest rates while they last and pay down your debt. While you may be able to achieve a higher rate of return through investing, there’s no guarantee.
Nothing beats the guaranteed rate of return of debt repayment. To give up everything to pay off a mortgage early takes sacrifice. But I’m sure glad is happy today!
Related: The Biggest Downside Of Paying Off Your Mortgage Early Nobody Talks About
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Related: The Canadian Housing Market Is In A Big Bubble
I have been following your blog for quite a while. I would like to share something. My name is Nick. Currently 23 years old. At 22, I finished a well respected accounting school and with 60k worth of debt, I was able to obtain a public accounting job with decent income. For a whole year, I was partying, going out and blowing money. What a mistake was that. Looking back now, I wish I stayed home, said no to all the women and friends. And spent more time studying for my cpa and then gmat ( I want to become a financier). All this so called partying is pointless. You accomplish nothing by it. I only want to do one thing now- and that’s finance. Finance is my life, my passion. For everyone who beats this guy up for wasting 3 years of his life- it is never wasted until YOU personally think so. I applaud him for doing this and now I will jump back into my busy season and more cpa studying until I pass the fuck out. Best regards samurai. You rock.
I didn’t give up the financial level that he did but I did give up 5 years of my social life to finish my undergrad nights/weekends/online while working 50+ hrs/week — 3 yrs – did FT classes all 4 seasons + 2 yrs weekend MBA with even more social sacrifice…fast forward 10 years from not having a degree and I now make about $275k/yr all in counting RSUs and bonuses at 70% of target (in a cheap cost of living area in the SE USA) and averaging a salary increase of around 25% CAGR the last 5 years. I’m not nearly as close to some friends as I was in large part due to my career/school focus for 5 years in my late 20s. I think its still worth it but somewhat difficult to measure. It’s safe to say my income would be probably 1/3 of what it is today if I hadn’t made those sacrifices.
I was surprised how negatively some people reacted to his story. I think it is pretty impressive what he was able to accomplish. I doubt that I would have made as many sacrifices as he did if I was in the same situation though. But I agree with his logic of continuing to live in the basement however even after paying off the mortgage. Being able to get double the rental income and not have to move is pretty sweet .
I applaud what Sam did. I did something very similar – built my first home when I was in my 20s. I put 35% down and then put every extra cent I could towards the principle, and between my main job (average salary), part-time teaching gigs at a local University, some freelance work, and some blog income I was on track to pay off the mortgage in 7-9 years. An unexpected inheritance allowed me to pay it off in less than 5, but even without that I was feeling pretty proud of the sacrifices I made in my younger years to rapidly pay down my mortgage. More importantly than being mortgage free, however, was the sacrifices I made when I was younger have become habits. I know I can live without cable, designer clothes, and fancy toys. I now have a healthy stock portfolio, several rental properties, and a slightly better paying job but I still live rather frugally. The healthy saving habits I learned in my twenties have served me well in life and have allowed me to get in a position where I can splurge a little now and more importantly, have security and comfort. I now work because I enjoy what I do, not because I “have to.”
Sean should be an inspiration to his peers! My guess is the naysayers who think it is so important to ‘live’ for those three years will be the same people complaining in their 40s, 50s and 60s because they are stuck in a job that stresses them out with no retirement in sight.
I keep going back and forth on my current plan to pay off loan and how fast (can I) do it.
In addition I’m at 4% 15 yr (refi in July 2011).
Details:
Refi was for $207K
Home value is ~ $505K per Zillow (Seattle WA)
P&I is $1530
Extra principle in 2015 was $7.5K
I owe $129K
Question: Interest rates are rising and I see those 5/1 arms at 3.25% ish. But when I plug that into an amortization table my payoff would “only” change by 2 months earlier? In addition even a “free” refi would cost me $2K I’m guessing. Should I refi?
If I retired today (I’m 55) I can pull $$ from my 401k without 10% penalty. Is that crazy to payoff a mortgage with retirement savings? (it’s about 15% of my balance and I also have a pension).
Decisions, decisions.
My man Sean:
Super impressive discipline on the savings. I myself bought a house in my 20’s. It was a 4 bedroom, I converted the den into a 5th bedroom and rented out 4 rooms, for 8 years. I saved a ton as a result but no way was I as lean as you spending wise.
Here is what I did different. My house was about the same price – $480,000. My rate too, almost the same – 3.375%. But I didn’t put a single penny of additional principal. I bought as many more properties as I could. I still do.
If your goal is to have one house and a simple comfortable financial situation. You win. If your goal is to get your net worth higher your real estate needs some debt. I like 50-70 LTV. Your primary can be an exception if that makes you happy but yours has a rental component. Rough numbers you paid down $250,000 in debt in three years. This could have been used to buy two or three more properties. With your intelligence, and discipline and work ethic it’s a pretty safe bet you can make well North of 3.04%.
If I was you I’d cash out 400k and this very minute and buy a multi unit or two. Or house if you prefer but I think you might really like the better cash flow of the multi.
Just my two cents,
Matt
I agree with Matt on this, I consider debt and leverage a valuable tool in building wealth. At the very least now that you have a completely paid off property you can acquire another and really go long on the real estate market.