Paying off house early: key to success or stupid?

by PNW_CivilEngineer

I’d like to hear your thoughts on the pros and cons of paying off a home early. First, I understand that my mortgage interest is a lower rate than what the market returns on average. Thus I follow the fundamental truth that you are probably mathematically better off if you invested your money instead of dumping it on your mortgage. I feel that there might be more to the story philosophically and from a risk perspective, or at least emotionally.

My wife and I live in a LCOL area and make about $180k. We max out our 401ks and have about $150k in there. We don’t really have much else for savings or investments beyond an emergency fund as we bought a $300k home last year. We are both 28 years old. We bought the house with a 15 year mortgage so our payments are around $2k.

I started a side business two years ago that I have been fortunate to make some reasonable income with (~$20k-$30k ish). My wife and I excitedly realized that we could use this extra income to dump on the mortgage. We realized we could basically pay off the house in 4 years without sacrificing anything lifestyle-wise. So we have been making $4k and $5k payments and everything is going swimmingly.

I am completely dedicated to paying off the house, quitting my day job at about age 32, and using the decreased monthly expenses as flexibility that allows me to start up my own bootstrapped business. I have entrepreneurial experience and know I can be successful. I suspect I can even make a reasonable income working for myself less than full time. At that time I think our portfolio would be about $300k home, $300k in 401k, and perhaps $50k in individual investment accounts. We would strive to make at least $50k as a family moving forward.

I guess I just want to hear what you guys think of my plan. Is owning a home outright even that great of a place to have your money? It seems like I’d have to borrow against it or sell it if I ever needed cash. The emotional benefit of having no mortgage would make it so much easier to start my own business, and the market seems much riskier over a 5 year timeframe than a 30 year timeframe.

I can always go back to work if my business fails I guess, I am a civil engineer with a masters degree and it’s pretty easy to find work for $80k or so.

I am thinking of this lifestyle where my side hustle pays expenses and helps me start a small one man consulting firm, and I work a sporadic schedule with lots of time to go camping and hiking. It makes my heart swoon. Will I regret not having big money in that 401k? Will owning the house outright just leave me cash poor?

Thanks for reading.

 

comment:

People will tell you that you’re potentially missing out on market growth by paying down the mortgage rather than investing. However:

– Paying off the mortgage early increases your homestead exemption in a lot of states (meaning your house can’t be taken from you). For a small business owner who fears lawsuits, this is a non-0 value

– This frees up your cash flow once the mortgage is paid. Some people value the free cash flow

– The delta between your interest rate (4%) and average market growth rate (~7%) is going to vary a bit year-to-year, but generally be between 3 and 6%. Over 30 years this adds up. Over 5 years, you’re looking at a potential opportunity cost of, on average, about $20,000 per 100K of principal. On the other hand, if you simply started paying your house down in 2005 and were done by 2010, you’d be a lot better off than many of your colleagues.

Ultimately, most people with a paid-off house don’t regret it. But this is the personal part of personalfinance.

 

Disclaimer: This content does not necessarily represent the views of IWB.

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