In 2022, my wife and I finally managed to pay off the mortgage on our vacation home, a goal we’ve been working towards for 15 years. Looking back, I’ve realized that there are three major benefits to paying off a mortgage early, something I didn’t fully appreciate when we paid off another rental property back in 2015.
Back then, I was more focused on the potential returns from risk assets, which seemed more promising. Instead of discussing the benefits of early mortgage payoff, I wrote about the fees and procedures involved, so homeowners wouldn’t be caught off guard when they finally paid off their mortgage. I also touched on the biggest downside of paying off a mortgage early: the diminished motivation to earn money.
The debate between investing and paying off your mortgage continues, but I’ve found a logical solution with my FS Debt and Investment Ratio (FS DAIR) formula. If you follow this, you’ll always come out on top. For those still unsure, let’s tilt the scale towards paying off a mortgage early.
The first benefit is the guaranteed return compared to potential loss. Since 2009, investors have enjoyed strong gains in the stock market. However, after a 27% return in the S&P 500 in 2021, it didn’t feel right to chase stocks. Valuations were high and 2020 had already returned a surprising 16%. So, I decided to allocate more capital to mortgage principal paydown.
Paying off my 4.25% 30-year fixed mortgage early felt good, especially when the S&P 500 lost 19.5% in 2022. This resulted in a 23.75% outperformance difference. Of course, this was mostly due to luck. If I was smarter, I would have sold all stocks and gone short at the beginning of 2022. But at least 2022 was a great reminder that we can and will lose money in risk assets.
The second benefit is the mental relief due to increased cash flow. When you’re already exhausted, it’s easier to boost cash flow by paying off debt than by working more. The greater your cash flow, the greater your chances of surviving a downturn. If your cash flow is great enough, you might not have to alter your lifestyle at all.
When we paid off our Lake Tahoe vacation property mortgage, we immediately gained $2,500 a month in cash flow. That’s $30,000 a year freed up to pay for anything, including investing. However, we actually boosted our cash flow by $3,500 a month or $42,000 a year. I had forgotten my wife was automatically tacking on an extra $1,000 to pay down principal on each mortgage payment for several years.
The third benefit is the courage to live your ideal life. With greater relief from paying off a mortgage comes more courage to retire earlier, relax more, or do your own thing. Taking a leap of faith is no longer as scary.
Since our son was born in 2017, I’ve lacked the courage to take things easier. As a result, in 2018, I pushed toward more entrepreneurship and less retirement. Making more money online to reinvest in passive income-generating assets became a priority.
Paying off a mortgage will give you greater courage to live your ideal lifestyle. Your frayed nerves will heal with less debt.
If you’ve paid off a mortgage early, congratulations! Don’t let anybody make you feel bad for doing so. Sure, you might have been able to make more money investing in stocks, private real estate, or alternative assets. However, the psychological benefits of paying off a mortgage are profound.
With every dollar of debt I pay off, I feel happier. How can we put a price on happiness? Now I can’t wait to pay off my last rental property mortgage once inflation and mortgage rates return to their long-term trend (lower).
If inflation or mortgage rates miraculously don’t decline, then I’ll just have to wait until 12/01/2026, when my 2.125% 7/1 ARM adjusts, to start paying down more principal. Because I sure as heck ain’t paying off a negative real interest rate mortgage when I can buy Treasury bonds yielding ~5%!
The excitement of getting to pay off another mortgage by 2027 is hard to contain. If I succeed, then I’ll have at least $464,628 more rental property equity to boost my net worth. With an extra $2,814.41 a month or $33,773 a year in cash flow, I’ll gain even more courage to kick back and do my own thing.
But for now, paying off my Lake Tahoe vacation property mortgage in 2022 is providing enough mental relief to feel better. Sadly, the relief you will feel from paying off your home early doesn’t last for longer than six months. Once you’ve achieve your goal, it’s off to the next financial challenge.
Readers, what are some unexpected benefits you have experienced from paying off a mortgage early? Anybody else recognize the psychological benefits of paying down or paying off debt?
