Memorial Day weekend marked the end of our first year as homeowners. As Courtney wrote in our very first post, we are working hard to make extra mortgage payments each month to pay off our home in 5 years or less. I’ll give you the punch line right up front: As of our last payment, in just 12 months we have paid almost 8 years off of our mortgage.
Why are we doing it? The mortgage is our only debt. With that last payment gone, the need to spend so much of our lives making money goes away. We’ll be able to decide what we do with our time, and to pursue the work we love regardless of how much money it brings in. We’ll have time for family and friends, and to make life our number one priority.
The goal, simply, is freedom.
I thought I’d wrap the year with a Hater’s Ball review of the opposition. We’ve heard it all; “Don’t pay your mortgage off, you’ll lose the tax deduction on the interest!” or “At the rate on your loan, you can get a better return investing any extra money!” or “That’s fine, but I couldn’t live like a monk to do it!”
- Tax Disadvantage – Deducting the Ability to Add: It’s true; at tax time you are allowed to deduct interest paid on your primary residence. But the bang to buck ratio doesn’t add up. Let’s say you pay $10,000 in interest on your home in a given year and are in the 25% tax bracket. That means you get to avoid paying taxes on that $10,000 for a tax savings of $2,500. See the flaw? You’re paying the bank $10,000 to avoid paying the IRS $2,500. Without the mortgage, you would save $7,500. This isn’t calculus folks; it’s more like counting with Bert and Ernie. But if you just gotta feel like you’re sticking it to the guv’mint, pay off your house and donate $10,000 to your favorite charity – you’ll get the same deduction without having to give your bank a dime.
- Investus – For the Rest of Us: I covered this one in our tips for homebuyers article, but it bears repeating. True, the interest rate on our mortgage is low (4.99%) and we could certainly expect to get better returns investing in the stock market or mutual funds. But as anyone who lost their shirt in the most recent crash will tell you, past performance does not predict future returns. Think of it in reverse – would you go to your bank, borrow money at 5% against your house, and then go invest in the stock market hoping to beat that rate? By putting money into investments instead of paying off a mortgage, that’s just what you’d be doing. And don’t discount the risk; if you miss making a few deposits into your IRA, no one is going to foreclose on you.
- Deprivation – It’s What’s For Dinner: There’s no doubt, we are a frugal couple. But deprived? Quite the contrary. From our $900 honeymoon to cashing in on our media clutter, we definitely live what one friend of ours calls a ‘radical’ lifestyle. But it’s a rich life, all the more so because it is a life free of stress and fights about money. Not because we have a ton of it, but because we need so little of it. We get raised eyebrows and pitying smiles when we talk about getting rid of cell phones, cancelling cable, or our ‘cheapskate date nights’. But many of those same skeptics are stressed to the breaking point by debt, living paycheck to paycheck because they have no savings, and soothing their anxiety by buying more stuff.
What’s it all mean? For us, time and the freedom to use it is more important than money and the freedom to spend it.