Reflecting on my decision to pay off my mortgage vs investing

I have to come clean.

Paying off my mortgage early was a bad financial decision.

Buying on the heels of the 2009 housing market crash, I didn’t want to accept any more risk than necessary. From the start of my mortgage in 2010, it was my mission to pay it off as quickly as I could.

After basking in the glow of my achievement, I wrote about how I saved $130,000 by paying off my mortgage early. That post earned me congratulatory messages and virtual pats on the back. It also got me this comment from a VP at Goldman Sachs:

“You realize that if you would have invested that money over the same time you’d probably be pushing millionaire status?  I would challenge you to reconsider how you think of debt. That money is now tied to a house which is illiquid and price sensitive. It can not work for you.  I think it’s incredible that you achieved a goal that you put your mind to, but I believe your fear of having a debt payment and paying interest skewed your idea of financial freedom. Just my 2 cents.”

Goldman Sachs VP

You know what’s the worst thing about naysayers?

When they’re right.

If I purely work the numbers I should have kept my debt. The interest rate on my mortgage was 3.875%. Meanwhile, the rate of return of my index fund over the last 10 years was 13.6%. Not only did I give up about 10% of interest on money put towards my debt over those 10 years, I gave up all future earnings on it. I also gave up tax deductions because of interest no longer accrued.

Despite all of this, I made paying off my mortgage my priority. Why?

It’s about more than the numbers

I was a first-time homebuyer purchasing my home on a single-income at age 25. I never had a loan before. A mortgage was big and scary. So was a house. The housing market had just crashed. Nearly 9 million people lost their jobs. Over 9 million homes were foreclosed.

So many things could go wrong.

I cautiously began looking at houses and met with a realtor. I set my budget at about $150,000. For the Cincinnati market, I could get a good albeit average house for that price. I also knew that payment would not stretch me too thin.

This was the perspective I had heading into the conversation with my lending agent. While I thought meeting a certified professional with decades of experience in mortgages might address my concerns, it only contributed to them.

The Bank is not Your Friend

The bank’s lending agent took the salary I’d earned from my tiny 18 month career and forecasted a total loan amount. Her figure was over $450,000, which she declared as if I’d won the lottery.

Although she shared this “great news!” with me, I was not happy. We weren’t even a year removed from the housing crash caused by banks lending to those who had no business owning a home. Here she was encouraging me to triple my budget and act like it’s in my best interest. Questions angrily ran through my mind.

“What business does a single 25 year old have buying a half a million dollar home?”

“In what world does affordability mean my entire paycheck goes to my house?”

“Why is she trying to convince me to spend 3x the amount I provided my realtor?”

“Is more debt ever a good thing?!”

Suddenly my naive eyes had been opened. At that moment I realized the bank is not my advisor. They are out to make money. My money. The chances of me defaulting on my loan and losing everything is of no concern to them.

I was determined not to be their prey.

Not Today, Satan

Although I continued with the home-buying process (with my original budget), my outlook had been forever changed. All of these external factors took their toll on me.

Feeling like I was going to be the next victim of the financial industry and their selfish goals motivated me to free myself from that contract as quickly as I could. My personal view into the world of mortgage-backing banks did not leave me feeling optimistic about market recovery, let alone preventative transformation. I did not want to be tied to an anchor while the next housing bubble claimed its victims. 

Eliminating my mortgage addressed many of these worst-case-scenario fears. So for me, choosing to pay off my mortgage vs investing was about getting rid of that burden. Having a healthy nest egg 10, 20 or 30 years down the road was less important than the strain of this fear.

Lessons Learned

In hindsight I can see it all much clearer. I looked at my situation through a filter of fear instead of reality.

My fixed-rate mortgage with the bank was not going to magically change. Market downturns happen about every 30 years, but the market grows. I didn’t have the wisdom to trust the impending market correction, nor the backbone to go against the grain of my debt-free drum-beating role models.

The One Thing I’d Do Differently

If I were to do it all again, I would make a single adjustment. Instead of paying off my mortgage entirely, I would aggressively pay down 50% of the loan. Upon reaching the halfway mark, I would hold the remainder of the loan, paying only the minimum. The money I would have put towards extra payments would be diverted to investments.

The reasons for this change are straightforward. First, the total interest amount owed on the second half of my mortgage was only about $26,000. While that may sound like a lot, it’s only about 20% of the total amount of interest for the loan. The other 80% came in the first half of the mortgage. Paying off the first half of my mortgage quickly was far more important than the second half.

Second, had I invested the extra money I put towards my mortgage, I would have made that $26,000 and then some. I know this because I put more than $26,000 in extra payments towards my principle, and the market did not have negative returns in the same timeframe.

Lastly, should any of my fears become reality and I wanted/needed to pay off my mortgage immediately, I could have simply sold my investments and eliminated my concerns.

Giving Myself a Break

Even though I would make a slight change, I realize that these are the learnings that come with experience. So if you find yourself in the great debate of paying off your mortgage vs. investing, remember to consider more than just the numbers. It’s called personal finance for a reason.

One thing is certain. I sleep a lot better at night without debt than I did with it.