My Latest Hobby: The Mortgage Payoff Debate

I spend an inordinate amount of time googling "Should I pay off my mortgage?" and moderating or filtering out outsized extreme opinions in one direction or another in long threads and discussion available on the Bogleheads forum dating back over a decade.

Mortgage Payoff Rules of Thumb

There are advocates on each side of the invest vs. mortgage payoff debate from prominent personal finance experts. The truth of the matter is that while there may be a "one size fits most" answer for a target audience, the strong emotional and psychological component tied to the decision makes the ultimate 'right' answer highly personalized. Most finance experts and individuals would agree, however, that before one even thinks about paying off their mortgage they should prioritize the following:

1. If appropriate, refinance an existing mortgage to take advantage of lower interest rates

2. Build or maintain an Emergency Fund (6-12 months of necessities)

3. Max out all tax-advantaged accounts available (Roth or Pre-Tax or Employer-Matched retirement, health, college-savings accounts)

I've got my bases covered. Now what?

I research the mortgage payoff debate because due to my combined high income, high savings rate, and low annual expenses, I will soon find myself in the fortunate position of fully funding my emergency fund and tax-advantaged accounts with extra funds leftover to do one of three things: invest in a taxable brokerage account, pay off mortgage, or pay for home improvement projects.

Once someone has all their bases covered, here is a simplified list of the main arguments I have seen in the invest vs. mortgage payoff debate:

Personally, I am debt averse and have previously lived through a period of being mortgage free -- and I remember loving it! Without a mortgage payment I quickly built up a large savings fund, felt free to travel internationally at a whim, and felt like I could be flexible or take risks with my career. At the same time, I did not invest in the stock market during this time even though I had the funds available parked in a cash savings account, which was admittedly a rather large financial mistake.

Intellectually and mathematically, I now know that in 10-15 years I will be financially better off if I continue investing extra funds in a taxable brokerage account rather than paying off the mortgage. But emotionally, I would love to have a paid off mortgage! I'm not the only one who thinks and feels this way -- I love this article from Physician on FIRE: "Paying Off the Mortgage Early is a Mistake I'll Never Regret", as well as "10 Ways to Pay Off a Mortgage Quickly" (which includes links to their mortgage payoff journey) by The White Coat Investor.

For "2021 Me," the Pros outweigh the Cons of Paying Off the Mortgage

While I haven't worked out all the details, I would love to have a paid off primary mortgage by 2025. Here's my reasoning:

1. Planning for Single Earner Household: My life partner and I met later in life. We truly enjoy each others' company, and would both love for him to be able to quit his day job to focus on his passion projects, along with directing his creative design, building, and home improvement skills and time towards improving our home life and getaway property. I know, deep down in my gut, that I would not feel comfortable carrying the financial burden and responsibility of being the sole earner unless, at minimum, all debt (including the mortgage) and planned large expenses (e.g. home renovations) are paid off. So, a paid off mortgage is just one milestone along our joint goal of becoming a single earner household.

2. Planning for Marriage and Elimination of Mortgage Interest Deduction: We also plan to get married in 2025. Once we are married, the higher standard deduction for married filing jointly ($25,100 in tax year 2021) from the Tax Cuts and Jobs Act combined with the $10,000 cap on SALT (State and Local Taxes) deduction will put us in a position where we will benefit more from the standard deduction than itemized deductions, rendering the mortgage interest tax deduction inapplicable.

3. Live Completely on Unemployment: Later on when we are married and have also taken the plunge to make me the sole earner for the household, with a paid off mortgage our expenses will be low enough to be able to theoretically live completely off of unemployment insurance benefits in our state and a $0 Emergency Fund.

4. Low Mortgage Balance Relative to Income Reduces Investment Opportunity Cost: Over the next 4 years (with expected raises), my remaining mortgage balance will be roughly half my average annual income. This means that over a 4 year period, I can still save and invest half my income, live on 25% of my income, and pay off the mortgage with the remaining 25%.

5. Economic Uncertainty: We are still living through the pandemic, with uncertainty over what the coronavirus endemic world will look like over the next few years. While the stock market has continued its march "up and to the right" for the most part in 2020, there is no guarantee that the market will continue to blindly diverge from the economic devastation and recession that is the reality of today, nor that any of us have true job security in this economy.

6. Future Tax Uncertainty: In the United States, we've already tripled the economic stimulus package for Covid relief as compared to the Great Recession in 2008. A key difference between the Great Recession and the Covid-19 crisis is that the Great Recession in 2008 was borne out of crises in the financial markets that spilled over to the real economy and every day people. The Covid-19 crisis, in contrast, instantaneously and directly affected masses of real people and the real economy. As a country, we will have to pay back the stimulus package, and I have a feeling the solution will involve increased taxes: increased income taxes by way of higher marginal tax rates, and potentially a more complex tax bracket for capital gains tax as well. As a late start earner, I expect to pay higher taxes, and do not see the current 15% capital gains tax on taxable investments as a tax rate I can count on.

7. Asset Allocation: Since all my investments are aggressively in the stock market (mostly in index funds) and I do not have any bonds in my portfolio, I take the perspective that mortgage paydown is similar to a "negative bond" from an investment return and riskiness perspective.

8. I do not need to be highly leveraged to pursue FI: For those pursuing a path to FI via real estate investing like the Bigger Pockets community, maintaining a high level of liquidity is extremely valuable. In my particular situation, the fastest way to FI is for me to continue to be a high-value employee in my specialization area and thus directly increase my performance bonuses and RSUs through my full-time job while also maximizing all the benefits offered to me and my family by my employer.

9. Reduced Workplace Stress: I have a stressful, high-paying job. Paying off my mortgage will enable me to reduce the stress and anxiety associated with job loss in a big way. I know that from past experience, reducing financial dependence from my job (even in moderation) has helped me be a more productive employee with clearer perspective at highly stressful crossroads.

10. Moving on to other hobbies that don't keep me up at night: I've been thinking about paying off my mortgage ever since I got it 3 years ago. I've been researching the mortgage payoff every week since I started my new job and realized I would have extra funds leftover to potentially devote towards the cause. I am truly looking forward to paying off the mortgage and not thinking about it again!

Okay, but....

The only catch here is that I do not want to find myself "house poor" with all my financial eggs in my house and be forced to take out a loan after paying off the mortgage to pay for unexpected or large expenses. If I had enough liquidity a year ago, for example, I would not have had to take out a loan to pay for the getaway property.

I also do not want a partially paid off mortgage, only to find myself out of a job with both a required mortgage payment and limited liquid funds to ride the storm. The benefits of a paid off mortgage in lowered fixed expenses only come when the mortgage is completely paid off, or when a large enough payment has been made to qualify for the mortgage company to recast the mortgage.

It is also difficult for me to settle on what an appropriate taxable investment threshold amount should be before paying off the mortgage. According to this Forbes article, a rule of thumb is to have at least 2x in savings relative to your home value. For my $350K home, this amounts to having $700K in savings and investments (including retirement) before paying off the mortgage from a separate fund that does not touch the existing $700K.

Big numbers overwhelm me, and $700K sounds like a big number to me! This seems like a good stopping point to digest and take a breath. In another post, I will share a few proposals on how to meet my 2025 mortgage payoff goal while also avoiding becoming house poor.

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