How would it feel to own your house?
Not owning in the sense that we’re all familiar with where we remain beholden to the bank that actually holds the deed to our property, but really owning it for ourselves.
Since the New Deal, and especially since our veterans returned home after WWII, the long-term home mortgage has become a mainstay of American culture.
In fact, it’s now really difficult to imagine life without a house payment. But I’d like you to try. 🙂
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Life Without Payments
If you’re following the Married Money Management steps, then you’ve already paid off all of your non-mortgage debts.
Assuming you’re not a lifetime renter or a squatter, that leaves your home mortgage as your last debt. Let’s think a bit about the implications of paying it off and living a life with NO payments.
For most of us, our mortgage payment is our single largest monthly expense.
Keep in mind that paying off your mortgage will not eliminate your real estate taxes or insurance, which likely make up a big portion of your current monthly outlay if you escrow those expenses. However, we are still talking about a large chunk of your disposable income that you currently send away to the bank each month.
What could you do with that extra cash flow created by eliminating your house payment?
Give more, invest more, save more and spend more on things that you enjoy. Sounds good to me!
While the positive impacts on your monthly budget are pretty obvious, there are some other benefits that may not immediately come to mind. For one thing, you won’t have to worry about foreclosure if you find yourself facing tough times financially.
As Dave Ramsey likes to say, “100% of foreclosures occur on homes with mortgages.”
You will have also have the peace of mind, security and pride that comes with really owning your home. And that sounds pretty priceless.
Investing vs. Paying Off Your Mortgage
The classic argument against paying off your home mortgage is that you’d be better off financially if you kept the mortgage and used the extra money to invest.
The thought is that your mortgage interest is tax deductible and typically at a fairly low rate, so you could get more financial gain by instead investing your money at a higher rate.
I would encourage you to do your own financial analysis or ask a professional what makes the most sense in your particular situation before making this decision.
However, some important things to keep in mind are that the interest saved in paying off your mortgage is a guaranteed return, while any better-performing investments will likely not be guaranteed.
Also, while your mortgage interest is tax-deductible (but only if you itemize your taxes), the gains on your investments will be taxed. The only time this isn’t true is when you invest in tax-advantaged retirement accounts, but we’re already doing that in Step 6.
Personally, we are opting to pay down our mortgage. We love the idea of eliminating all payments from our life, improving our cash flow, increasing our financial security and taking a guaranteed return while doing it.
Plus, if we find we hate living in a paid-for house, we can always go take out a mortgage and start making payments again! 😉
How to Pay Off Your Mortgage
Paying off your house early is a pretty simple process.
You’ll take any extra cash flow you have each month after completing the first 7 steps of our plan and send it to your mortgage company. They should apply these extra payments directly to your principal and reduce your mortgage balance each and every month.
You can also save up the extra money and apply it once each year in a big payment if you prefer to have the cash 0n-hand throughout the year (caution: some may be too tempted to spend this cash). And you can apply any “found money” like bonuses, tax returns, gifts, etc. to the cause to help accelerate your payoff even faster.
The bottom line is that you need to put extra money toward reducing your outstanding mortgage debt just like you would approach any of the financial goals we’ve outlined in this series.
It’s not difficult to understand, but it will require commitment and perseverance to stick with your plan over the long haul and accomplish this huge goal.
My family will be working on this step right along side you in the years to come. I look forward to hosting a mortgage burning party and inviting you over to celebrate in a few years! 🙂
Beyond Step 8
This post brings us to the end of our Married Money Management tutorial series. I hope you’ve learned a lot along the way and are fired up to achieve financial peace in your family.
So what do you do after Step 8? Anything you want!
Seriously, when you reach this point, you’ll be in the top 1% financially of all Americans, and you’ll have incredible flexibility to give and invest your money however you see fit.
Enjoy it and pay it forward by sharing your knowledge with others!
Here’s a rundown of all the posts available to you in the Marriage Money Management series:
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Hey Dustin,
Great post (as per usual). I’ve often heard that mortgage interest tax-deduction myth touted as a reason for keeping all things mortgage related as a part of a financial plan. The problem is that it’s just really bad math.
If you have $10,000 in annual mortgage interest, you pay that to the bank and itemize it on your taxes as a deduction from your income. If you didn’t send that money to the bank – because you paid off the mortgage – you’d be taxed on that $10,000. Assuming a 25% tax rate, that means you’d have to send $2,500 to the IRS. Now, I’m not a huge fan of sending the IRS anything, but I’ll gladly send them $2,500 instead of sending a bank $10,000. I get to keep $7,500 and still enjoy the paid-for grass between my toes in my backyard.
Besides, if you wanted to recreate the exact same tax deduction as $10,000 in mortgage interest, you could simply give $10,000. That’s a whole lot more fun, anyway.
Let me know when you burn the mortgage, my friend – I’ll send a box of matches to help you out!
Good stuff!
Thanks, Derek! I love your example, and I know it will help others see the math behind my thoughts in this post. I’d love to have you out for a mortgage burning ceremony in a few (or more than a few) years!
I think the big temptation in our society is to move “up” when extra money starts flowing in. The better choice, as you mention, is to live within one’s means and to pay off what is owed in debt. Think of the lack of stress when the biggest decision is what to do with your extra income.
Best,
Lori
You are so right, Lori. It is definitely counter-cultural to get and remain debt-free, but some of the best things in life are counter-cultural. 🙂
13 years, 11 months to go for us! It would be nice if it was sooner, but since it will be prior to college save one year for Calvin, I’m pretty happy with that.
That’s awesome, Wendy! Won’t it be great to have no house payment when your kids are in college? It makes that previous MMM step seem much less intimidating!
Good call! Thanks for the tips, good stewardship principles, and words of wisdom. Keep it up.