Why we chose to pay our house off early.
We do not consider our house as an investment. However, paying off the loan is a guarantee. You are guaranteeing that you will get at least 2.5% – 4% back by paying extra. You could do better investing in the stock market, and I get that the math says to take the 8% – 10% return on investment in the stock market. However, any good financial advisor is going to recommend a diversified portfolio. Because of this, it made sense for us to allocate about 25% of our savings towards our house’s principal. We just paid off our debt instead of investing in other’s debt.
Replacing Bonds
Most financial advisors recommend having portfolios with a 10% to 40% allocation in bonds or fixed-income investments. They suggest this to smooth the ride. When there is a down market, you won’t need to sell your stocks at a loss. With the low-interest rate that bonds returned, we decided in 2008 that we would invest 100% in equities and we would pay additional towards the principal on our house. Since our withdrawal timeline was more than 20 years away, there was no reason to smooth the ride. We wanted the best rate of return on our investment, and the stock market gave us that.
In 2008 we refinanced our mortgage to a 15-year mortgage at 4.25% interest. During that time, Treasury yields were in the 3% range. We decided instead of loaning money out to the government or another business for about 3%, we would pay off our debt at 4.25%
Once The House Is Paid Off
Once your house is paid off, you can significantly increase your contributions on your investments. Stay aggressive with your portfolio selection, because you know your primary residence is paid off. You have one less major expense if something unexpected happens.
Being completely debt free is surreal. Once you pay off your house it is the ultimate F-U money.
When we were aggressive in paying off our mortgage, we invested in the stock market for the long term. It didn’t matter if the market went up or down because we didn’t need to withdraw any of our assets. Now that our house is paid off we don’t have any major expenses so the loss of a job or the market dropping is not a big deal. My wife or I would have no trouble finding a job that would cover our expenses since the largest one is gone. Personal finance is not a one size fits all, this was what my wife and I chose to do. We couldn’t be happier with the results.