There’s no such thing as stupid questions. But I’m pretty sure I’m about to ask one. When should I pay off my mortgage?
We’ve been homeowners for a while now. In fact, we were just awkwardly introducing ourselves to new neighbors down the street (I later found part of a stick in my hair, don’t mine me!) last week. They asked us how long we’d lived here, and we both shrugged. A few years.
Actually, we’ve owned our home for nearly seven years. Wow.
For the first few years, we simply paid our mortgage. And we called it that. A mortgage.
In fact, I used to call myself a debt-free blogger and tell people that I had no debt. Cue the not-so-humble brag. Then, it kind of slapped me in the face one day.
If you think a house isn’t a debt, don’t pay your mortgage for a few months and see what happens.
After that moment, we’ve really moved at an almost pants-on-fire emergency pace to douse the debt (after maxing out our Roths for the year, of course).
Though I don’t calculate our net worth with any real precision, I do know that our mortgage is set to dip below six figures this year. As our debt drops and our savings and incomes increase (woohoo for doubling my money!), I’m left with one question:
When should I pay off my mortgage?
Camp 1: Pay My Mortgage On Schedule
There’s one camp in personal finance that does math really well. They would look at our situation and say that we’re homeowners for the long haul, so we should let our money go to work in the market. Looking at averages, it is mathematically probable that we would earn more in the market than we would paying extra on our mortgage.
These practical folks are likely to point out that my husband and I are actually climbing through the ranks of the middle class. Eventually, we will knock on the door of being upper class in terms of income. That’s right. One day, I’ll earn six figures. If my students’ decisions to cover their arms with glue during Supervised Study to “see what happens” doesn’t send me to an early grave first.
Wealthy people do some things differently with their money and even their debt. They leverage it. They actually (at least sometimes) take on debt as a means to earn more money. I can’t imagine that kind of lifestyle, bravado, or mathematical acumen for myself, but I can certainly appreciate how the numbers shake out.
So Camp 1 would answer my question to pay off my thirty-year mortgage in…thirty years. That means my mortgage will be paid off in another 23 years by 2042. When Judy Jetson and I are flying through suburbia in our cars.
Camp 1B: Mortgage Recasts and Mortgage Refinancing
The personal finance world is abuzz with people doing successful refinances and recasts of their mortgages. This isn’t making extra mortgage payments on my current set up, but it isn’t sticking with the 30-year plan either.
What is a mortgage recast?
A mortgage recast is basically when your bank creates a new amortization schedule for you based on your new mortgage balance. The payments that you need to make on the remainder of your loan are recalculated. This happens after you make a large payment on your mortgage balance.
Why didn’t we do one?
A recast actually seemed promising, especially because we love making large lump payments when we can. After inquiring about it with our specific lender, the process and the fees (!!!) associated with it didn’t seem worth it. However, I have heard of several people doing recasts where there was a negligible fee. If you have the option, it’s at least worth the inquiry.
What is mortgage refinancing?
Refinancing your mortgage is different than recasting it. It doesn’t just change your payment amounts. You can refinance your mortgage to adjust the interest term and/or the rate. A mortgage refi takes into consideration your home’s current value and your credit score (so, you know, just another reason why you actually really should care about it). There are also fees associated with mortgage refinancing that are akin to the closing costs you might recall from buying your home. The process can be a bit complex, but many people find it to be very worthwhile.
Why didn’t we do one?
This answer is a little bit more complicated. I know people who manage to do refis for very low fees. The fees can also be wrapped into your new mortgage. But the fees weren’t the real reason we didn’t refinance.
We didn’t do a refi because our future is a big question mark right now. Our current loan rate is very competitive because we were incredibly lucky when we bought our home. Scratch that. When I bought our home. Because my husband (then fiance) was willing to swallow his pride and let me buy the house myself, we scored a more competitive rate. And because our timing was so fortuitous, we scooped up our home at a price so low that the tax assessor actually thought we bought a foreclosure or a short sale.
So our rates are good and our future is uncertain. Our 30-year loan gives us a lot of flexibility. The current payments annoy me because there is a sizable amount of interest in them, but I relish the wiggle room. In the event of a job loss (I’ve been fired twice before!) or another maternity leave (they are very expensive!) or some other event, we love the fact that we can comfortably fit the regular payment in our Oh Shoot! Budget.
Camp 2: Pay Off My Mortgage Early
If you’ve followed me on Twitter for even five seconds, there’s a good chance you’ve heard how much I hate my mortgage.
In case you’ve missed it, I HATE MY MORTGAGE.
Six figures of debt feels downright suffocating at times.
For the past few years, we’ve been working to accelerate our mortgage payoff and saving for retirement. That’s right. I’m a big believer in skipping the either/or in finance and doing both instead.
A short while back, we crunched the numbers and realized that even if we never made an extra payment again, we’ve already shaved a decade off of our 30-year mortgage.
That is thrilling. And it’s not the only mortgage milestone we’ve hit recently.
So When Should I Pay Off My Mortgage?
We hit another wild money goal. We actually have enough money in savings to pay off our mortgage.
So why don’t we? For starters, our savings account is kind of a hot mess by other PF blogger standards. It’s our emergency fund, and it’s a mishmash of other short and long-term savings because I am financially lazy and unwilling to distinguish between an emergency and regular car maintenance if and when my transmission goes out. The mechanic is not going to care which fund it comes out of and neither am I. The bill simply needs to be paid.
But even if we decided to pay off our mortgage entirely, we’d still have about $10,000 left in savings. The issue isn’t just that our savings account isn’t properly named, it’s that we really don’t know what constitutes an adequate emergency fund.
3 months of expenses. 3 months of salary. 6 months of expenses. No, 6 months of salary. No, no. A year!
We are less hung up on the math of an e-fund than we are on the psychology of one. Because money is never just about numbers.
The thought of having less money than what we currently have in savings is disconcerting to us. I realize that we could make extra payments incrementally, rather than in one big chunk. One strategy might be to slowly slice away from our savings until the point of discomfort is too great.
That’s similar to what we currently do in fact. But rather than pull from savings, we take from windfalls and side hustles.
But this process is getting tedious. I’m tired of building a tower only to pull down part of it every month to fill up a hole. Sometimes the idea of starting from zero (or $10,000) seems really refreshing. We could take what we put toward our mortgage and double the amount in a year.
But the idea of starting from zero also feels terrifying.
So the question remains: When should I pay off my mortgage?
So Tell Me…What’s your mortgage strategy? What would you suggest we do? You know it’s more fun to play with other people’s money than your own!