So, I’m financially independent and no longer work, but I still have a load of debt. And I love it. This debt has made me some serious money. I’ll explain all, but let’s back up for a moment.
That debt is my home mortgage. I bought my last home for about $175,000. I had the cash to buy it outright, but didn’t. And for reasons that I can’t quite figure out, a lot of folks, especially in the financial independence community, insist on paying off their mortgage early. I’m in the opposite camp. I never pay even a dime more than I have to.
The main reason I didn’t pay cash for my home was because I wanted to keep the money around in case an opportunity (rental real estate) presented itself. This never happened, but something much more interesting did.
Paying Off The House vs Investing
I never got that rental property, so left the money in an S&P 500 index fund. I love numbers, so let’s run them to see how this turned out:
- Mortgage: 15 years at 3.25%
- Amount borrowed: $140,000
- Mortgage interest I’ll pay over the course of my loan: $37,073
Brace yourselves, here come the juicy bits. First, the chart below shows the slightly above-average performance for the S&P 500 since I bought my home:
In the time I’ve had my mortgage, each dollar I’ve left invested has grown almost 63%. The means that the $140,000 that I left invested is now worth $228,200. This is a gain of $88,200. So now, we arrive at this:
$88,200 (S&P 500 growth) >> $37,023 (total mortgage interest)
Less than 5 years into my mortgage, I’m up by: $51,177
How do you like them numbers?
But! But!! But!!!
I can feel the anger in the crowd:
The market has been on an incredible run!
It sure has, but in how many 15 year periods has the market returned less than my interest rate (3.25%)? I have no idea how to figure this out, but I’ll bet that it’s not common. Maybe someone smarter like Michael Kitces or Papa ERN has the answer. I don’t lose sleep over this.
A paid off house gives me peace of mind!
Why? Wouldn’t a bigger pile of money give you more peace of mind? If the S&P 500 returns for the duration of my mortgage are consistent with past performance (~10% with dividend reinvestment), my $140,000 will grow to $584,000.
I paid off my house early and now just invest the surplus.
That’s OK, but you’d probably have more money if you didn’t pay off your house and just invested the whole lot instead.
Debt is evil!
I can get behind this one a little bit. If you have no self-control and worry that you’ll blow your money on handbags, golf club memberships and cruises, please pay off your house. Don’t even consider doing anything else.
And I Didn’t Even Mention…
Interest rates will go up: Would you feel foolish if you paid off your 3.25% rate only to have your bank account pay you 5%? My federally insured (FDIC) Internet bank account was paying over 5% in 2006. Banks won’t be paying you 5% (or even 3%) any time soon, but the rate trajectory is upwards.
Powder keg: Once that money is gone, it’s gone. Well, almost. You can take out a line of credit against your home, but those rates are variable. See the point above.
Mortgage deduction: This is overrated, but is still valuable to some.
You’re mad at me. I know it. While I won’t apologize, I will pat you on the back. If you own your home free and clear, you’re in the minority. Only 20% of Americans are in this boat. You’ve done well for yourself. But you and I have different goals.
My goal is to deploy my money in the most effective way possible, even if it means having debt. And by effective, I strive to maximize my pile. A big pile is peace of mind in my book.
EDITOR’S NOTE: Many of you of course know I’ll agree to disagree here, but I love me a healthy debate so by all means jump on into the comments and let’s talk about it :) I think Mr 1500’s points are dead on if you’re a more “numbers/logical” type person, however, if you’re a more “emotional” one such as myself, well, you need to do what helps you sleep better at night. What’s the point of having more money in the bank if it makes you miserable?? Only YOU know what’s best for you and your family, so keep all this stuff in mind, but at the end of the day make the calls that are most aligned with your own happiness. No shame in EITHER routes here as both of them increase your net worth! It’s not like you’re blowing your money on crack cocaine!
(It does remind me of another guest post we featured here a handful of years ago though… Hard to feel bad for the guy, but it does prove Mr 1500’s point: How I Lost A Fortune Getting Out of Debt)