Mortgage or No Mortgage: Why Your Personal Financial Plan Is Crucial

Whether or not to pay off your mortgage is a very individual decision that is based on a number of factors.

My sister and I were having a conversation not too long ago about mortgages as she and her spouse were refinancing their home in Northern California. I was throwing ideas out to her about keeping the original first mortgage they had in place and blasting away the second using a debt elimination tool like Shred My Mortgage. The first mortgage had a healthy balance but a relatively low interest rate and the second mortgage was hovering around $40,000 with a higher than market rate. I was trying to convince her that by creating income efficiency through leveraging a Home Equity Line Of Credit as a checkbook, she could knock out the 40k in a matter of a few months and be left with just the first lien (which could be paid back in about 7-10 years using this system).

Then she asked me, “what if I don’t ever want to pay off my house?”

That question got me thinking about their unique situation versus my unique situation. And to that extent everyone’s unique situation.

My situation

I’m a serial entrepreneur having not held a “real job” (as my in-laws have described it) for over 12 years. There is no pension plan waiting for me, no guaranteed health benefits down the road from a past employer, no 401k match (that’s not provided by yours truly), no paid time-off.

So naturally, my personal financial plan looks significantly different than someone with my sister’s situation (just below).

I made the decision about 5 years ago to eliminate all of my debt including my mortgage. (At the time we had a small vehicle loan remaining and no credit cards or student loans having paid them off early in our marriage.) My logic being if we have very little in the way of monthly expenses we could “retire” far earlier. We spent the better part of 3.5 years bringing a $250,000 mortgage down to about $80,000 by focusing our attention on debt reduction and not on investing for the future. While some financial advisors would tell me that I missed out on one of the biggest run-ups in the market’s history, I think what I did is set myself up for an even bigger win. More on that in a bit…

My sister’s situation

My sis and her family live in Northern California just South of San Francisco. It’s an east bay town that has seen price appreciation on real estate that’s unbelievable. Many many homeowners there would be considered house rich and cash poor (meaning their real estate is worth a lot, but their discretionary income may not be all that high). The logic is I’ll always have a house payment until I sell this place and move to a different state.

My sis and her spouse are both in the education system in California and get paid decent sums to do their job, so collectively their income is solid. Making the house payments isn’t a challenge and the refinance was all about rolling both loans into one and saving about $200 a month. As far as I know they each have car payments as well.

They both know that when it comes time to retire — which should happen earlier than 65 for both of them given their years of service — they’ll have a healthy pension thanks to CalPers (California Public Employees Retirement System).

The fact they have ROTH IRAs and a few other investments for the future as well gives them peace of mind and they will continue that, no doubt, for the foreseeable future. But the reality for them will be a consistent income throughout retirement and an ever-present mortgage payment.

My notion of debt reduction to them doesn’t resonate, partly because they see themselves working for several years yet, and have substantive income from pensions.

My strategy and how it’s working

From the time my wife and I were married we had a philosophy that we lived by — we were going to live a different life than most people. I had a desire to work for myself and we both wanted to be at home as much as possible for our kids’ sake. To do this, we adopted the debt reduction strategy of knocking out our major expenses (cars, student loans & home) as fast as possible so our free cash flow was as high as possible every month. Our theory was: make a lot, spend a little and invest the rest in building a bigger life.

Fast forward to today — we live in a beautiful 3000+ square foot home on a huge lot in a desirable neighborhood that’s close to schools, shopping, and every amenity you could think of. Our monthly housing expense is just under $500. In addition, we have tens of thousands of dollars immediately available in the way of a HELOC and a couple hundred thousand if we so desired by refinancing and cashing out the mortgage.

For that short 3.5 year window we sacrificed investing to create two of the most powerful tools at our disposal — access to massive cash and ridiculously low expenses (resulting in high discretionary money). Today our investments happen in significantly larger intervals than merely dollar cost average investing in smaller amounts. We’re seeing our wealth grow at a faster clip because of what we’re able to invest in — opportunities like real estate, commercial properties and developments that aren’t offered up to those that don’t have $100k readily available.

The complete elimination of our mortgage is no longer our main priority. We realized that while having a zero balance would be cool, we’re able to utilize the funds through our HELOC to invest in a variety of different vehicles. As such, I would guess what we owe on our home will fluctuate between $80,000-$150,000 at any given time. The resulting payment on that amount in a simple interest HELOC comes out to around $500 (currently).

Your personal financial plan is crucial…

Your personal financial plan is different than mine, but is no less crucial than mine. If you’re an employee working a W2 job with a 401k, it might look way different than mine described above. Maybe having a mortgage is just something you’ve resigned yourself to, or maybe you haven’t really thought about paying it off because you didn’t know it was possible. That being said, have you taken time to look to the future and imagine the kind of life you’d like to live when you clock in for the last time? Will there be enough in earnings to allow you to live your ideal lifestyle? Will your expenses grow or shrink in retirement? How will you afford travel and health care, college for grandkids or that new autonomous car that Google just released?

Your advisor may be telling you to sock away a little at a time and someday (if the market keeps working) you’ll be able to live off that pile of money. But what if your personal plan is different than the 199 other clients that advisor has?

Here are some things to consider:

  • If you were to need access to a significant amount of cash, where would you go to get that?
  • What would life be like if you had no car payment? No student loans? No mortgage payment every month? Would you consider changing your career path or your job?
  • How much of your income do you “own”? (meaning how much of what you take home is actually working FOR you instead of paying for things you don’t yet own outright.)
  • Does your current employer offer a 401k with match and are you maxing it out to the greatest extent possible?
  • What does the future look like for you financially? Will that be enough for you to live your ideal life into the golden years?
  • Do you want to leave a legacy for your children and future generations?

Whether you decide to keep your mortgage or pay it off entirely, consider the many options that exist. We have been raised in a society where the banks rake in profits while we invest meager amounts on a monthly basis to build wealth. What if there were a way to change the model so it benefits YOU instead of your banker? Your financial plan should be exactly that — YOURS. Not the same as the self-employed real estate agent, not the same as the W2’d accountant, not the same as the doctors next door… you catch my drift?

Should I payoff my mortgage?

Adam Carroll is the founder and head bald dude at MasteryOfMoney.com. (There are currently no other bald dudes at MasteryOfMoney.com, but Adam is on the hunt.) He has spent the past 13 years teaching people financial literacy in fun ways. You can check out his TEDx talk on YouTube with over a million views HERE. In addition to writing a lot, Adam also speaks for a living.