Only the Mortgage Remains
Hello FOGA Readers! At the end of December, we were fortunate enough to pay off the majority of our debt. Now, only the mortgage remains. This is a huge deal, and we are ecstatic to be at this point. Of course, the question is what to do now?
There are a few arguments on what to do once the mortgage is the last debt remaining. First, there is always the option of focusing solely on paying off the mortgage; this was the original plan. Second, there is paying off the mortgage versus investing. Last is refinancing.
There are pros and cons to each one, and it has caused a lot of debate in the Geek household (do I like that name for us? I think I do). So I am going to be going through them all one at a time and seeing what makes the most sense.
The Original Plan: Paying Off the Mortgage
Before that though, we have to look at my original plan. My original plan, created when I was about 23, was incredibly simple: Pay off the mortgage and free up $1600 a month (it has since gone up due to taxes). That was it. No plan for investing of any kind, including IRAs or any additional funds to our 401Ks.
In my defense, I had no clue about IRAs at the time or the pros of investing. I thought I was smart for just wanting to get to a year’s worth of expenses in our emergency fund. Compounding interest was a foreign concept to me. Also, I had no plan beyond that, and I didn’t have a clue about FIRE. More than likely, we would have ended up in a lifestyle creep.
Obviously, this won’t work anymore since maxing out our IRAs, and my 401K is a big goal this year and beyond. That leads us to the three options everyone keeps recommending.
Investing Over Paying Off the Mortgage
Investing is the biggest one everyone keeps mentioning. Why pay off or pay any extra on a mortgage at a 4.25% interest rate when you could be earning 5% and up with investing? It is a hard argument to shake.
The main pro here is the interest you earn is higher than the interest you save. For example, if we were paying an additional $1000 a month on our mortgage, we would eliminate it 17 years early and save $103,781. That would be only 11 more years of having a mortgage.
However, if we were to finance that same $1000 for the same 11 years at a 5% interest rate, we would have $175,611. That’s $71,830 gain over the savings of paying off the mortgage.
Investing over paying off the mortgage is some pretty solid math. You will have more money in the end by leaving the mortgage the way it is and just focusing on investing. When you consider that 5% is a historically low rate, it’s an even more solid case for investing. So, what could the con possibly be?
My con to this is I still owe $1750 a month. I don’t think I can articulate in words how much I loathe owing people, especially a bank. Add in the fact that until the mortgage is paid off, the bank owns part of our home, and you get me not liking this in the slightest. I guess I am that weirdo who wants to own “every blade of grass” and not
Even with that, I cannot ignore the perks of investing and compounding interest. Still, I don’t see an option for us where we are not making some additional payments on the home.
Refinancing
The other big suggestion people have is refinancing. We did look into it and here’s where we’re at:
When we bought our home a whopping two years ago, the interest rate was 4.25%. Interest rates have risen, so even if we refinanced, the monthly payment would be about the same. We would remove the PMI (we bought as an FHA), but the higher interest rate would put us exactly where we are right now. Oh! And it would cost $8,000 in closing costs.
We also looked into refinancing as a 15-year mortgage. Our monthly payment would go from $1750 to $2239. P
If interest rates start going down again in the future, then this will be an option worth looking into. Right now, it’s an expensive option that costs us more money or a monthly payment that we cannot afford.
What are We Going To Do?
We had our first Money Meeting today and looked over all our financial goals and where we want to be. Thankfully, we are both on the same page about wanting to own our home in sooner than 30 years. We were also on the same page about wanting to invest. So we decided:
We’re gonna do both. 😀 All that for this conclusion. Seems so simple, but fear of missing out is a powerful, crippling agent.
The plan is now to do an additional $3000 (or $250 a month) on the principal of our mortgage each year for the time being. Once we figure out what’s going on with his work situation, then that number may increase. If we never increase the amount, that would save us eight years.
We also plan to invest $5000 this year. This is in addition to maxing out both our IRAs, maxing out my 401K, and, hopefully, fully funding our emergency fund to one year of expenses. It’s going to be a busy year in the Geek household.
In Summation
There are a lot of options available to you when only the mortgage remains. I know this wouldn’t be the ideal option for a lot of people, but it’s definitely the perfect option for us. Now we know where we’re headed, and I am excited for the day we are 100% debt free.
What did you think? Are we crazy? What are your plans for your mortgage?
Until Next Time!
-Ms. FOGA
We are in the same boat with only having the mortgage left. I would love to get rid of the mortgage but it’s hard to deny the math of investing the extra money instead.
That was a hard one for us as well. We’re still going to be looking at it periodically to see what makes the most sense as things change.
Thank you for reading! 🙂
Im going to be in the exact same situation in hopefully aaround6 months time. You can’t shake the math for NOT paying of the mortgage but man would it feel good to be mortgage free.
We were debating following the exact same route as you and start paying off around 200 per month. Over the life of the mortgage even that will make a huge difference
It definitely will. You shave years off your mortgage by paying extra. Looking forward to the day when we can invest an extra $1750 a month because the mortgage is gone.
Thank you for reading! 🙂
We are doing the exact same thing, although we did pay a big chunk off. We may make another chunk payment this year, but it would be composed of investments already made that we are cashing in some of the gains. We call it a risk reduction strategy. It’s really the same thing you are doing though.
One thing to consider is the fact that you will lose the mortgage tax deduction. That may or may not matter in your case, but it’s worth adding to your math. In our case, in didn’t make a difference in our decision. We want that house paid off sooner rather than later.
Thanks! The mortgage tax deduction is not a concern. It’s never enough to get past the standard deduction for us anyway. It’s more about not having debt. Paying it off sooner than 30 years will be great.
Thanks for reading! 🙂