Does It Make Sense to Pay Off The Mortgage Early?

About two years ago, I went to an optometry conference hosted by the Public Health Service. I started my career with an PHS residency, and was very close to taking a career position with the government. I ultimately chose to go into the private sector, and bought my own practice in 2002. It has been rewarding in many ways, but I was growing disillusioned with being a business owner, and this conference made me consider going back to working at a government clinic. The wheels started turning, and now I am a month away from selling my practice. Since the buyer has worked for me for the past two years, I am comfortable carrying his business loan as a seller finance.  I will continue to see patients part time in my old office and at a public health clinic (best of both worlds!) on a part time basis. I own our office building, and the buyer will stay in the same space and rent from me. With my husband’s income, my part-time income,  rental income from our residential and commercial properties, and the loan payment from my buyer, we should be doing well barring some unforeseen circumstance. Now that I’ve gone around the world with that introduction, the big question of the hour is should we pay off our mortgage early?

I have continually struggled with a workable budget. I know my husband and I want to be at a point where we can retire in 10-12 years. I just wasn’t sure which steps to take in how to get there. Jake from I Heart Budgets was kind enough to take me on as a Friday Budget Submission, which you can read on his blog. Ultimately, his calculations show that if we stick to our current path, we could be free of all debt, including our mortgages, in about six years. That’s assuming we choose to pay everything off, but is that the best option? When you aren’t sure which path to take, make a list of pros and cons.

Cons of Paying Off the Mortgages

1. Low Interest Rates-Our primary mortgage is a 3.25% and our residential rental is at 4.25%. The commecial rental will be paid off in two years, so I’m not figuring this one in. One could argue that we should find  investments that would return more interest that what we would be paying off.
2. Tax Deductions– We would not have the mortgage interest tax deduction if we paid everything off early.

Pros of Paying Off the Mortgages

1. Money Saved on Interest-If we paid off both properties on the accelerated schedule, we would save over $60,000 in interest. Even if taxes go up, this is much more than our tax deductions would be if we kept the mortgages until their original payoff dates.
2. My Investments Might Suck-If we tried to invest in stocks or other rentals, we could very well make more than 4.25% in interest, but what if we have another 9/11 and the stock markets crashes, or what if we buy a rental that sits empty or has hidden repair costs? What if we pick stocks that are terrible? It’s all a bit of a gamble.
3. Security-Perhaps this is the biggest reason to pay off our mortgage. We love our house and have no plans of moving, at least until our five year old is out of school.  I have never really though about throwing everything at the mortgage. It seemed like a pipe dream, but the more I think about the idea, the better I like it. No matter what happens, we have our house. With watching my in-laws lose a house they were in for over 30 years, knowing that won’t ever happen is a pretty empowering feeling.
4. Increase in Passive Income-If we paid off the rental, even if we never raised the rent, our passive income would increase from around $300 per month to about $650 per month.

It seems that I have answered my own question. The Pros list is double the Cons list. I realize there are some other things that will pop up that we will need to add to the budget like doctor and dental visits, school activities that get more expensive as our daughter grows older, and household repairs to name a few, so we could be a little off on the calculations. We might also make more income that projected and pay everything off sooner. (Perhaps my blog will get bought out for a $$$$!)

When my husband and I got married in 2002, we owed about $350,000 on my business and commercial property, around $100,000 in student loans, and $100,000 in mortgage debt, which increased to $215,000 when we built our house. We also were really stupid and took out car loans and got into credit card debt to the tune of over $30,000. Talk about a negative net worth! Buying my business was the smartest financial move I’ve ever made, even though taking on that amount of debt has kept me up many a night. I think selling will be the second smartest. To think that we can be debt free in six years is amazing, and I’m on board for making it happen. Whether it makes sense of not, we are paying off the mortgage early. I hope you stay around to enjoy the ride!

Do you think we should pay off our mortgage? Feel free to disagree. Do you have a plan for financial freedom? Why not?

I also have a guest post today about how people waste money on eye care at Club Thrifty. Be sure to check it out or you might end up on Holly’s naughty list!

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