I have a co-worker friend that is hell-bent on paying off his mortgage as quickly as possible. Paying down debt of any type and saving for the future is a noble cause, but he’s pretty much obsessed over it and I can’t help but question (as I have to him) what he’s giving up in exchange. So I thought I’d pose it to you as well.
Essentially, he wants to pay off his 30 year mortgage in like 7-8 years. He has a good rate at about 5% (here are rates in your area), so after the mortgage interest deduction, let’s just call it an effective rate of about 4.5% conservatively. That being said, here are the lifestyle and savings choices he’s traded for this goal:
- No more kids – So, this is a guy that I assume makes what I do since we’re at about the same level in the same company. His wife works here too. So, at a minimum, they make about 1.75x my salary/bonus. He claims they couldn’t possibly afford another kid (they have a toddler now). When I raised an eyebrow and joked about my 3, he said it’s because of the mortgage. He’s paying thousands of dollars extra each month to pay it off, so things are tight. I tend to think perhaps he just doesn’t want more kids and he’s telling his wife they can’t afford more. But one would tend to think if money were really preventing giving the kid a sibling, perhaps the $2500 mortgage pre-payments could lighten up a bit?
- Retirement Savings – He’s mentioned before that he saves about 10% of their income in total for retirement. Personally, I’d think investing in a tax-deferred account and earning (conservatively) 6% or up to 9-10% (rosy) over a long period of time beats the heck out of an effective 4.5% return. A lot of people try to save 15-20% for retirement since Social Security likely won’t help people like us much 30 years down the road, if at all, and tax rates and inflation are quite uncertain as well. Perhaps those mortgage pre-payments would be better off directed toward retirement accounts?
- Liquidity – The other downside of this mortgage prioritization is that while those payments turn into equity in the home, there’s no liquidity! In the event of job loss or health issues, at least with a taxable trading account or retirement account, there’s access to those funds, possibly even under the 401(k) hardship withdrawal provision. But with money tied up in the house, you can’t tap that. Especially if you just lost a job – no more liar loan home equity cash outs like the old days. That cash is locked up until you sell your home – which isn’t easy any more.
- Working Mom Forever – He’s kinda freaking out about his wife losing her job as well since her department has projected some cutbacks. I questioned what the big deal would be if she just took the severance, collected some UI and stayed home with the baby for a few years. (We do it on one salary and 3 kids?). He said that clearly wasn’t an option, as it would prevent them from realizing his mortgage pre-payment goals. So, she’s searching around with headhunters now in case she gets laid off, since it’s much tougher to get a job once you’re out of work.
On one hand, of course it’s great to get a mortgage paid off, but these are self-imposed restraints that are having a pretty substantial impact on how they live now and don’t provide for much flexibility or lifestyle choices. I guess if they’re both satisfied with the approach, who am I to question? But this scenario probably exists with people you know as well – people obsessed with paying down a mortgage, fully funding a kid’s college savings account by the time they’re 3, squirreling away so much that life passes them by, stuff like that. Interested in your thoughts.
Overboard – Or Just Very Disciplined and Responsible???
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I think he is obsessed! Before I would put extra money on my mortgage, I would max out my 401K. You can do both! Whenever anybody goes to an extreme, it is very difficult to stick with it.
Yeah, good comment below from some folks outlining risk of not funding the 401k further as well!
If he is responsibly obsessed, then he is good in my books! It would be foolish to pre-pay your mortgage without building up a reserve and having some liquid funds. If he’s taken care of those, and looks like he has, might give him peace of mind sooner than 30 years.
Don’t be obsessed to the point that it robs you of your sleep, but having some seriousness about being debt-free is good.
I have to assume he has a reserve; never asked. Seems pretty responsible, so must.
What is really concerning is his intensity. At this level, after the mortgage has been satisfied, he is going to go through major financial withdraw. The question will be – where to put that focus and intensity. I pity his wife and child.
I do like his goal to become debt free, but I agree that there has to remain balance. I am shocked that a 2nd child would be lost to this intense goal. It is not good for any of them, especially child #1.
Hadn’t thought of that… withdrawal… I wonder if it’s more like “relief” or missing a fix.
This guy is overboard.
Unless this guy has PMI then there really isn’t a need to add that much extra. A little bit is fine, but thousands?
Maybe he checked Zillow and lost his mind 🙂
“Thats not what I paid!”
Way past PMI phase; I’ve seen his spreadsheet!
It seems like he’s gone overboard to me – he’s missing the one thing that’s key about personal finances (in my mind, anyway): the need for flexibility. In this situation, he’s really not flexible at all. He’s going to chain himself to that prepayment until it drags him under.
Situations change, and finances need to change with them.
Yeah, I definitely sacrifice some income and “return” over the years by retaining some flexibility in a crappy low-yield acct.
Your point about liquidity is the most important factor for me. His interest rate doesn’t make it worth overpaying so aggressively. I initially thought I’d follow this route but liquidity and rate of return is much more important to me than being debt free. Nowadays, Instead of counting down to the day when I pay off my mortgage, I count down to the day when I *can* pay off the mortgage, but choose not to do so…When you’re borrowing money for like 2 or 3%, there are much better things you can be doing with it than tying it up in bricks.
I’m w you.
can’t he use an offset account to both “pay down” his mortgage and have liquidity. It’s a common feature of loans here. Your primary savings account offsets the interest. Ie if you owe 150k and have 50k in a savings account you’ll only pay interest on 100k. I think that would address most of your concerns.
I’ve never heard of this – any downsides?
None than come to mind! Offset mortgages are common in the UK too and they’re freaking awesome…well, you know…as awesome as mortgages can be, I guess. Actually, the one downside is that you may pay a slight interest rate premium for this liquidity. Because you’re not actually receiving interest, it’s tax-efficient.
I’d love to have an offset mortgage but my current tracker mortgage was set up by idiots and so I’m on a rate that is more than extremely competitive, but in any other scenario I’d switch to an offset mortgage. It’s a great product if you want to build up a decent nest-egg in a tax-efficient manner, or for when the stock markets just look overpriced….pay down the mortgage and then when you have somewhere better to put it, just ‘pull it back out’ of the mortgage without penalty.
Yeah, I was that guy, except I did have a second kid. It took me almost 11 years to pay our first mortgage off because we ended up getting a second house for my mom.
For me, yes, it was great to have such a concrete goal as long as you are willing and able to adjust to major life changes. My payoff rate slowed considerably when I had my second child but then it got better again when my first went to school. I also didn’t let it prevent me from moving my mom to town at a time it really needed to happen. I totally turned into obsessive guy when I had 2 daycare payments and 2 mortgages. It just felt like I was living on the edge and one false move and ruin was right around the corner.
During the time I was paying off my house, my retirement actually lost money, so I would have been better off putting more towards my house vs 401K.
I’ll be the lone dissenter cheering on obsessive mortgage guy. You go paranoid debt hated dude!
Wow, nice timing! In my buddy’s case, he’s missed a 100% runup in US equities in just 2 years while paying down effective 4.5% loan. I’ll take the 401K!
I can’t say that I blame the guy for wanting to pay down debt. If he and his wife are comfortable with those choices then so be it. I guess the question is why, especially if they are making sacrafices they will later regret, instead of feel good about. It is interesting this post came up because we are currently evaluating ratcheting down the 401K contributions to help pay off a car and student loans.
Glad it provided some food for thought. I’m a big fan of “balance”.
What I would do is pay off that debt as fast as possible, but use the cushion if needed at various intervals. There’s obviously a lot of extra cash that he’s applying to pay it off that fast, so go ahead and use that for every month where he can, but at the same time, I wouldn’t deny a family vacation or home improvement along the way, and taking an occasional pause for these things will not have that great of an overall impact, and it will make sure that they’re enjoying life along the way.
Come to think of it, I’ve never heard him talk about a vacation. I think they do staycations. Not sure…
Actually, never heard him mention vacation before! I wonder…
Won’t ever pay off my home (I don’t own one) quickly. There’s an important element to the mortgage vs. retirement savings argument that gets ignored: assets in your retirement accounts (401k specifically, but also IRAs in some states) are protected from bankruptcy.
You could be worth $10 million, and your 401k/IRA would be untouchable by any creditor. That’s why I’d prefer to invest in a sheltered account than pay off a home, which isn’t at all protected.
He’s disciplined, but it’s not necessarily responsible, even if it is a noble goal.
Wow, really good point. People (including me) tend to forget about what’s protected in bankruptcy and what isn’t. I hope to never be there, but it’s worth having at least some degree of “insurance” (protection).
Not that it adds much to the convo – but there are some states where the main home is fully protected from bankruptcy (Florida) then there are some states that protect the quity up to a certain amount (like New York).
He’s nuts. I would put more toward 401k and emergency saving first.
Once those things are taken care of, I’ll put some toward extra payment.
This sort of guy reminds me a lot of personal finance bloggers who are super focused on one goal and take their eyes off the fact that one can do multiple things at a time. Pay the house off in 12 years, but use some of that extra cash to build a liquid and equity portfolio.
Who knows if he’s just blowing smoke to make everyone else feel guilty about debt. The reality is that you work so you can live a life that has some interesting qualities to it that you define. Somehow somewhere he believes that there is status in not having a mortgage. It can be impressive. But it doesn’t deliver status per se. And he will have lost 8 years of compounding for his investments. On the other hand maybe he has a plan to be the multi millionaire next door and that will make him happy.
His house must be waaaay more expensive than ours. If we did 2.5K/month pre-payments we would only have 3 years left on our mortgage instead of 10. At the smaller 700/month we’re pre-paying over the summer we would still only have 6 years left.
We’re not letting money goals get in the way of our fertility plans. We’re saving a nice clip in tax advantaged accounts and have recently made the decision to put another 16.5K into tax advantaged accounts rather than do 2 years worth of mortgage pre-payment. (We’re now putting almost all of DH’s salary into our combined retirement accounts.)
And maybe working mom wants to work, regardless of her husband’s goals. Some women do, even mothers. Unnatural, I know. I imagine she also has some say in the additional children question… she may even not want more kids! But when a woman says she’s done with kids, that never goes over well. People always feel like they have to say, “Oh, you’ll change your mind” or “I’m sure if you had another one you’d be happier.” I actually find the question really intrusive (although we do plan to have a second some day) and wish people would stop asking me about my fertility plans at work. Nothing I say ever satisfies them. Finally one well-meaning gentleman has stopped pressuring me (about 4 years of this, including in front of job candidates) to have another kid when I explained in detail the kinds of infertility treatment I had to go through to get the first one. Much easier to say it’s about money than whatever is actually going on, especially when it’s none of the questioner’s business in the first place. Same thing with the working mom, we’re allowed to say we’d love to say we’re at home but we need the money but we’re not allowed to say we love our children to pieces but staying home with them would DRIVE US CRAZY. Coming off a week with DC in daycare and DH at a conference, I know that would definitely be true in my case.
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