By: Marc | Vital Dollar
Every new homeowner dreams of the day that their mortgage will be paid off. Waiting 30 years can seem like an eternity, and getting the opportunity to pay it off early can be a huge relief. But does paying off your mortgage impact your life in the ways that you think it will?
In 2010, my wife and I purchased our first single family home. It was a new construction, 4 bedroom home that was more than double the size of the condo we’d been living in. We paid $235,000, with 20-25% as a down payment on a 30-year mortgage.
Initially, we decided to only make the minimum monthly payment and focus on our retirement savings instead. My blogging business was doing pretty well and we were able to save/invest a good amount for a few years in a row.
In 2014, we had a lump sum of money that came from a blog I had sold, and we decided to go ahead and pay off the mortgage. We felt like we had a good start to our retirement savings, and the previous year my wife had left her job to be a stay-at-home mom. As a family now living on a single income that was unpredictable, we felt like paying off the mortgage would reduce our stress over money issues.
So 4 years into our 30-year mortgage we paid it off. It felt good to be debt free in our 30’s (I was 35 and my wife was 33), but we were already starting to think about the possibility of moving.
We loved our home, but it was in a new development with small lots and little-to-no privacy. From our backyard or our front porch, you could see countless other houses.
We looked at some bigger properties that would give us a little more privacy, and in 2016 we decided to move. This move gave us a bigger property with the privacy that we wanted, but we also had to pay more for it. The house cost $417,500, and we sold our old house for $240,000. We didn’t want to go back to a mortgage, so we paid for this home with cash.
While paying off our mortgage did have some of the impacts that we expected, there were some other things that surprised us. In this article, I want to take a look at the ways our life did and did not change since becoming mortgage-free.
5 Ways Life Changed After Payout Off Our Mortgage
1. Freed Up Money Each Month for Other Things
Not having a mortgage payment every month obviously means we have more flexibility with our money. All of that money that would otherwise go toward a mortgage payment or rent can be used for retirement savings, other investments, or whatever we choose.
If we had put 20% down on our current home and we had a 30-year fixed rate mortgage at 5% interest, our monthly payment would be $1,793 before taxes and insurance. Without the mortgage, that $1,793 can be used however we want or need it to be used.
2. Increased Our Peace of Mind Dealing With a Fluctuating Income
The main reason we changed our initial approach and paid off the mortgage was to minimize stress over finances. We knew that on paper it probably made more sense to continue with a standard monthly mortgage payment and invest the difference, but we felt like the peace of mind was more important to us.
At the time we were new parents, and the thought of providing for kids for the next 20 years can be intimidating if you’re living on a single, unpredictable income that could drop or go away completely.
Paying off the mortgage has in fact given us more peace of mind. Of course, there are plenty of other bills to be paid, but a mortgage is usually the biggest, most important part of the budget. Since the mortgage was paid off in 2014 my business has had ups and downs, and it’s always good to know that without a mortgage or rent, there is one less thing for us to be concerned about.
3. Convinced Us We Could Afford More
As I mentioned in the intro, not too long after we paid off the mortgage we started looking at other homes. Ultimately, we moved in 2016, two years after we had paid off the mortgage.
Our current home was more than a 40% increase compared to what we got for our old home when we sold it. If we paid for a mortgage each month I wouldn’t have been comfortable moving to a more expensive home at that point.
Again, my fluctuating income is a factor here, as I wouldn’t have wanted to take on added risk by going with a larger mortgage. In the end, we got a home that we love, but we had to pay for it.
We weren’t crazy about spending an extra $175,000 for our home, but it was necessary to get the home and property we wanted for our family. We had the money in savings to pay for the house without a mortgage, so that’s what we did.
Although I love our current home and the privacy that it gives us, I’m not sure I would make the same decision if I were to go back in time. While I think we can afford it, I’m not sure that we need it, and I’m not sure that I wouldn’t rather have that money to invest. In this case, I think having the mortgage paid off hurt us because we wound up spending more money.
4. Reduced Our Net Worth
Prior to paying off our mortgage in 2014, we were only making our minimum mortgage payment each month, and we had no other debt. That meant we were able to save and invest more money each month and each year.
If we had decided to keep going with our investing plan instead or paying off the mortgage early, we would have a higher net worth than we do now. Since 2014 the stock market and pretty much all of our investments have done well. By paying off the mortgage we had less to invest, which means less growth at this point.
When we decided to pay off the mortgage we knew that it made more mathematical sense to invest the money instead. Despite knowing that we could have a higher net worth right now if we had decided to invest it, I still think paying off the mortgage was a good decision for our family based on the increased peace of mind. But moving after we already had the mortgage paid off was probably not the best financial decision.
5. Lowered Our Minimum Monthly Expenses
Without the mortgage payment each month, we’re able to cut back further if we need to. Of course, we still have plenty of other expenses like health insurance (I’m self-employed), food, and utilities, but if things get really tight we have the ability to cut back pretty far if needed.
Being self-employed, there are times when lower monthly expenses are a relief. Being able to cover all of the bills with our emergency savings for a longer period of time, if needed, is reassuring as well.
3 Ways Life Didn’t Change After Paying Off Our Mortgage
1. Didn’t Completely Remove Stress About Money
Although we have more peace of mind knowing that our home is paid for, we’re far from stress-free when it comes to finances. Our path towards financial independence has us in a decent spot, but the goal of trying to retire early also brings pressure to constantly make progress or fall behind schedule.
2. Didn’t Make Housing Free
Our budget is lower without a mortgage payment to deal with, but we still have plenty of expenses related to the house. Our property taxes are close to $9,000 per year, which is fairly high for a small town. The bigger property and older home that we moved to also leads to more maintenance and upkeep costs. In total, we still spend over $1,000 per month on things related to the house.
3. Didn’t Change Our Long-Term Goals
Paying off the mortgage impacted our present budget and how we manage our money right now, but it really didn’t impact our long-term goals. Being mortgage-free is nice, but it’s nowhere near as important as reaching financial independence, which can happen with or without a mortgage.
Our net worth goals and our target retirement age are still the same, and we’re still trying to inch closer to the goal all the time.
Paying off our mortgage has had some of the impacts that we expected, like more peace of mind, but it’s also had some consequences that we didn’t expect, like convincing us that we could afford to spend more on a home.
Deciding whether you should pay off your mortgage or focus on investing is a personal decision and there is really no right or wrong answer. For us, it made sense with an unpredictable income to pay off the mortgage, and we haven’t regretted it.
About the author:
Marc is a personal finance blogger at Vital Dollar, where he writes about managing money, saving money, and making more money. He’s been blogging full-time since 2008 in industries like web design, photography, and travel.