In 2011, while I was still working in banking, I made a decision not to pay off my mortgage until I retired. I was confident I’d be working for at least another five years. However, in 2012, I retired earlier than expected after negotiating a severance package that covered six years of living expenses. Interestingly, I managed to pay off one condo mortgage in 2015 and sold my primary residence in 2017, which also paid off its $815,000 mortgage. So, I ended up paying off two mortgages after retirement.
Fast forward to today, my family and I live in a home we bought in mid-2020 with a mortgage. We’re full-time parents and part-time writers. We couldn’t resist buying our forever home when the pandemic hit. So, we’re back on the journey of paying down a mortgage. But it’s okay because we now own three properties free and clear.
Let me take you back to 2011 and share why I didn’t want to pay off my mortgage until retirement. At that time, I was a 33-year-old Executive Director focused on career growth, but also feeling the burnout.
I’ve always believed that having a mortgage is a good thing. In fact, my mortgage played a big role in my career longevity. When I was 24, I made some lucky stock picks and ended up with a lot of cash. I used some of it to put a 25% down payment on a median-priced home in San Francisco (~$580,000) and still had enough left for several years of mortgage payments.
By my mid-20s, I started questioning the purpose of work. I had made a lot of money quickly, and the idea of making more money lost its appeal. The 9/11 terrorist attack had also recently happened, which made me want to do something more meaningful with my life.
Despite having a good net worth for my age, I don’t need much to live comfortably. All I need are clean clothes and a place overlooking the beach with a hot tub off the bedroom balcony!
I had been living in a nice one-bedroom apartment with parking for $1,600 for a couple of years and I was tired of wasting my money on rent. The next logical step was to move to a two-bedroom, two-bathroom apartment, but those were renting for $2,500-$3,500 a month in San Francisco. I couldn’t bear the thought of paying more than $2,000 in rent, even if it meant having a roof over my head. I also had an irrational fear of being a 40-year-old renter.
In 2003, I found a cozy two-bedroom condo facing the park in Pacific Heights, a prime neighborhood. After putting down 25%, the monthly mortgage payment and HOA cost were 20% less than what it would have cost to rent. I was thrilled to use my savings for something useful. With the mortgage, I had less savings and a big mortgage to keep me motivated.
Despite owning a nice home, I still believe that liquidity is king. It’s been a decade since I bought my condo, and the payments now seem incredibly low. The condo is now a rental, generating positive cash flow because rents have increased about 90% since then, while payments have decreased 25% due to a refinance.
I have the cash to pay off the entire loan, but I don’t plan to because it’s important to stay liquid. You can put all your cash into your property, but what if the house burns down? Homeowners insurance will hopefully cover at least 80% of the rebuilding cost, but in that moment when your house is burning, you’ll be panicking about whether you’ve lost all your money.
If you’re in a higher federal tax bracket (32%, 35%), it’s beneficial to keep your mortgage as long as you work. The government is taking a lot of your hard-earned money and having that shield helps a lot more than if you’re in the 25% or lower bracket.
Mortgage rates are still reasonable. You can get a 30-year fixed-rate mortgage for around 5.75% or a 7/1 ARM for around 3.125%. That’s why the demand for real estate continues to be strong. So, the smart move is to stay liquid and not make extra payments on such a low rate. Remember, you can deduct interest on up to a $750,000 mortgage, the ideal mortgage amount. And if Joe Biden makes some rules, the limit might go back to $1,100,000.
Cash is always king, and you want to have as much cash as possible to ensure your financial well-being and to take advantage of investment opportunities when they arise.
When you can see yourself retiring in 5-10 years, start formalizing a mortgage payoff plan so that when you finally do retire, you will be mortgage-free. The interest deductions all those years are just side benefits. The biggest benefit is your ability to live in your home rent-free for the rest of your life!
If you can match your mortgage pay down with when you will no longer have a steady income, that is likely the best scenario. Paying off your mortgage early is a very personal decision. You just have to make sure you know yourself!
After all these years, I still think you should keep your mortgage while working. Don’t pay off your mortgage with rates so low. Instead, take advantage of low mortgage rates and invest your savings to build more wealth. When you retire or no longer want to work, then actively start paying off your mortgage.
The combination of rising rents and rising capital values is a very powerful wealth-builder. I encourage readers to invest in real estate to build more wealth for the long term.
In 2016, I started diversifying into heartland real estate to take advantage of lower valuations and higher cap rates. I did so by investing $810,000 with real estate crowdfunding platforms. It was a great way to diversify away from expensive coastal city real estate.
Take a look at my two favorite real estate crowdfunding platforms. Both are free to sign up and explore. Fundrise is a way for accredited and non-accredited investors to diversify into real estate through private eFunds. CrowdStreet is a way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. These are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends. If you have a lot more capital, you can build your own diversified real estate portfolio.
