Invest Extra Cash Or Pay Off The Mortgage

Last week I was reading all about how Mr. and Mrs. Our Next Life paid off their mortgage! Kudos to them. When I read that article, I suddenly felt this sense of urgency. We, too, are focusing on paying off our mortgage. In our household, we really value living debt free. And yes, we know we have the potential to make much more money if we would keep our mortgage and invest our extra cash instead of throwing it against an already low-rate mortgage. We also know that there is a potential for us to NOT make as much money by investing and NOT paying off our low-rate mortgage. And so, the debate continues. Should you invest extra cash or pay off the mortgage?

In case you’re wondering, Our Next Life also did a similar post about this very topic. Check it out here!

The Plan – Pay Off The Mortgage(s)

 

vermont-panoramic

Our plan consists of paying off ALL of our debts. All of our debts includes two mortgages: one on our rental property and one on our primary home. There is only one thing still standing in our way. We still owe a whopping $7,000 on one of our cars. That car will hopefully be paid in full within the next few months. I really wish we could figure out a way to be a one-car family, but so far, it just isn’t in the cards. But if you have any suggestions, I’m ALL ears!

After the car is history, we’re going to hit the rental mortgage, hard. After that is annihilated, we plan to take the monthly profit from the rental income and apply it to our primary mortgage. After that is eliminated, our plan is to save money to purchase a second rental property – CASH. After that, our plan is to save MORE money to purchase a third rental property – CASH. And so on and so forth. We want to build up passive income through rental properties so we have the option of walking away from our day jobs. Woot and Woot!

Related: How I Almost Committed Financial Suicide

The Rates

 

We have a 3.99% rate on our rental property and a 2.75% on our primary home. Now, before you yell at me and tell me how ridiculous we’re being to want to pay these mortgages off instead of leveraging this borrowed money and investing extra cash, I would like to remind you that there is no reward for having the most money. We want to have plenty of money; we love investing and watching our stash grow. However, we do not want to have a BIG payment hanging over our heads each month. We want our expenses to be as low as possible. We want to be able to easily afford our expenses if we choose to work at the fast food joint down the street. Because let me tell you, some days, that prospect sounds like a dream. And since I’ve worked in one of these fine establishments before, I know how awesome it can be.

Related: How We Almost Committed Financial Suicide-AGAIN

The Returns

 

vermont-train

We’re movin’ like a freight train to pay off debts! Woot Woot!

After our houses are paid in full, we plan to sit back and enjoy having very nice salaries with very small expenses. We want to enjoy the fact that either one of us (or both of us) could walk away from our jobs to be baristas, and still be able to pay the bills without losing any sleep. And boy do we ever LOVE our sleep! You see, not having these two payments, gives us options. Yes, we could have the same options if we invested the extra money instead – as long as the market continues its upward climb. And these days, that’s anyone’s guess.

The actual return we will see when we pay off these two mortgage is immeasurable. And let’s face it, it’s not like we can’t turn around and pull the money right back out with an equity loan. No, we won’t be totally diversified in our rental properties at first. Our houses are in two different towns and we plan to extend our reach on subsequent rental purchases. Each town is truly a different market. We also won’t have nearly ALL of our money tied up in these houses. AND, we’ll sleep SO much better. For us, it’s worth it. 🙂

Before starting our FIRE journey, I never would’ve dreamed that having a paid off house at a relatively young age would be a possibility. It never even crossed my worried mind. Why? Because I was too caught up in consumption, and the rat race, and making all the financial and relationship mistakes in the book to realize there was a different path. I love living life against the grain, don’t you?

Related: We Made Our Dream Home A Reality

 

What would you do? Would you bet that the market would give you better returns and keep the mortgage(s)? Or would you throw extra money at eliminating your biggest expense? We’d love to your from you in the comments! And don’t yell at us! 🙂

ember

MMC doesn’t do mortgages.

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Lisa is the creator and resident writer at Mad Money Monster. She's a mother, scientist, and financial guru on a mission to save Generation X from working until they die!

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59 comments… add one
  • Jax Mar 31, 2017, 10:43 am

    I go back and forth on this. On the one hand, I’d love not to have that extra payment every month. It would feel so good to have more of a cash flow. On the other hand, I think that the faster way to more cash flow (for me) is to buy more properties. So, I would rather pay the minimum mortgage payment until I amass the real estate empire I want (3-5 more properties) then work on paying down each of the mortgages.

    It’s such a difficult question because how do you quantify being able to sleep at night? I don’t think there is a definitive right or wrong answer because it’s about so much more than numbers.

  • Dan Woerheide Mar 30, 2017, 5:23 am

    Great article with some compelling ideas.

    How would I do it? Well, I personally would pay off as you have suggested. There is no gain from leveraged money, especially if Murphy knocks on your door. Meaning, would you borrow money from your current home equity to invest? If the answer is yes, then I ask what happens when you aren’t able to pay the mortgage for some reason? Way too much risk involved in this maneuver. Tax benefits? I can take the exemption for having a mortgage… Well, I would rather save and pay for the tax with my extra available income, oh and by the way, I have increased that tax exemption by investing my now maximized income! Personally, depending on the amount owed on my primary home and the balance of the mortgage and equity on my rental I would even consider selling my rental to quickly payoff my primary home. Start fresh in cash purchasing rentals for the passive income you are chasing. Yes, it would pause my plan for now, but would put me in a much stronger financial position to negotiate steals on rental properties. Much less risk, and if the renters don’t pay, it’s not a “concern”.

    • Mad Money Monster Mar 30, 2017, 11:13 am

      Thanks so much for this thoughtful comment! I agree that leveraged money is not “where it’s at”. We want zero debts and want to negotiate our future rental properties for cash sales. Fortunately, my husband’s income is quite variable and can be quite lucrative. Because of that, we’re thinking we’ll have both our rental and primary home paid off in a matter of a couple of years. My income covers all of our expenses so his is just for debt elimination and wealth building. We like it that way!

  • Mr. Enchumbao Mar 28, 2017, 8:43 am

    We paid off our rental property mortgage back in 2014. Ever since, we enjoy the fact that that monthly income subsidizes our rent. We’re now saving to pay cash for our home.
    After you have enough, it’s all about optimizing happiness and being 100% debt free and having small monthly obligations sure make us happy.

  • FinancePatriot Mar 22, 2017, 9:54 am

    We did pay off some principal for a while, but I realized it didn’t make sense. We started socking away more in taxable investments instead, and boy has it paid off. We now have more in taxable investments than our outstanding principal. I feel like we put too much down on our house and I now regret it. To each their own, but I think having large investments provides more comfort than a paid off home (5 year ARM at 2.89%).

  • Mike @ MikedUp Blog Mar 20, 2017, 10:14 am

    I’d take the same approach as you, no question. Less cash out in the form of monthly payments means less stress and more freedom. I love freedom. Good for you guys and keep it up!
    -Mike

  • Kendal @HassleFreeSaver Mar 17, 2017, 1:02 pm

    Glad I stumbled upon this post since I’ve been seeing a lot of content about how it’s better to invest extra funds that hustle to pay off your mortgage. My husband and I just don’t want to be in debt, period, and the happiness we’ll fill when we send the final payment to our mortgage company is keeping me ridiculously motivated. Kudos to you on your progress and with your plan for passive income — inspiring!

    • Mad Money Monster Mar 30, 2017, 11:15 am

      Thanks for this comment! We also hate debt – obviously! Sorry I’m late to respond, I’ve been updating the site these days and some comments got lost in the shuffle.

  • FirstHabit Feb 24, 2017, 9:35 am

    There will always be math vs psychology decisions like this (Dave Ramsey goes on an on about this). Owning your home is just ‘badass’ (to use a term from another MMM). It’s just one of those things. For me, life is about optimizing for happiness, and paying off the mortgage gives me confidence and freedom. So I’m with you on this one.

    • Mad Money Monster Feb 24, 2017, 10:26 am

      I agree. I want the peace of mind knowing my home is mine and our expenses are minimal. Yes, we could make marginally more money if we invested the extra instead – but we just don’t care. 🙂

  • Fiona Feb 14, 2017, 7:10 pm

    This is exactly what we want to do. We only have one property at the moment but as soon as we pay off this mortgage we will be saving for the next. I know a lot of people don’t pay off mortgages because investing can be better but I would still rather pay of my mortgage quicker and own my home outright.We manage the one car thing by working at the same place, may well change when we have childeren though!

    • Mad Money Monster Feb 14, 2017, 10:32 pm

      We are definitely on the same page! I cannot wait to not have a mortgage hanging over our heads. I know, statistically, investing the money would probably bring a better return, but it comes down to not caring 🙂 It’ll be such a relief when it’s gone.

      Kudos on being a one car family! I’d love to hear if you can still swing it with kids. Although, I’m sure working in the same spot helps.

  • throwingyourmoneyaway Feb 8, 2017, 11:52 pm

    Congrats on having a goal and a plan. Get those mortgages paid and then take those nice salaries, pay cash for other rentals for some nice passive income and then start investing aggressively.

    • Mad Money Monster Feb 9, 2017, 8:12 am

      Yep! That is the plan. It’s so much fun to watch our numbers consistently go in the right direction! :0)

  • throwingyourmoneyaway Feb 8, 2017, 11:52 pm

    Congrats on having a goal and a plan. Get those mortgages paid and then take those nice salaries, pay cash for other rentals for some nice passive income and then start investing aggressively.

    • Mad Money Monster Feb 9, 2017, 8:12 am

      Yep! That is the plan. It’s so much fun to watch our numbers consistently go in the right direction! :0)

  • FIP Feb 5, 2017, 8:55 am

    Hi MMM!

    Yeah, debt free living provides a lot of “free cashflow” for other investments like a rental property. I’m currently looking at it from an opportunity cost perspective. If there’s no undervalued dividend-growth stock on my watchlist, i’ll simply use the monthly savings to lower my outstanding mortgage debt. Currently i’m also considering to buy a rental property, but will first have to explore the opportunities and constraints (i.e. can I leverage, impact on tax).

    Enjoy the extra FCF that you create with every additional down payment!

    • Mad Money Monster Feb 5, 2017, 10:44 am

      Absolutely! We cannot wait to have the extra cash flow! Paying off our mortgage has been of goal of ours for a long time. After paying off other debts and funding a major renovation with cash, we’re finally starting the journey! Good luck with your rental property endeavor!

  • FIP Feb 5, 2017, 8:55 am

    Hi MMM!

    Yeah, debt free living provides a lot of “free cashflow” for other investments like a rental property. I’m currently looking at it from an opportunity cost perspective. If there’s no undervalued dividend-growth stock on my watchlist, i’ll simply use the monthly savings to lower my outstanding mortgage debt. Currently i’m also considering to buy a rental property, but will first have to explore the opportunities and constraints (i.e. can I leverage, impact on tax).

    Enjoy the extra FCF that you create with every additional down payment!

    • Mad Money Monster Feb 5, 2017, 10:44 am

      Absolutely! We cannot wait to have the extra cash flow! Paying off our mortgage has been of goal of ours for a long time. After paying off other debts and funding a major renovation with cash, we’re finally starting the journey! Good luck with your rental property endeavor!

  • Maggie Feb 1, 2017, 11:43 am

    You know I hate my mortgage! But in your situation, I would focus on paying off the high interest one first and just pay minimum payments on the 2.75% one… then once I hit that win of paying it off… I’d figure out how much I hated the small interest one. 🙂

    • Mad Money Monster Feb 1, 2017, 11:57 am

      Yeah, the rate on our primary is ridiculously low because we refinanced it to a 15-yr term. We could easily let that one slide after the rental is paid off. We’ll see how it goes. But my gut tells me, I’ll want to eliminate it. Time will tell 🙂

      • Mad Money Monster Feb 1, 2017, 11:57 am

        Yeah, the rate on our primary is ridiculously low because we refinanced it to a 15-yr term. We could easily let that one slide after the rental is paid off. We’ll see how it goes. But my gut tells me, I’ll want to eliminate it. Time will tell 🙂

  • Route To Retire Jan 31, 2017, 8:27 pm

    There’s definitely that psychological part of debt that makes you want to get rid of it, even if you could make better use of that money elsewhere. If it makes you feel more at ease, that’s the right thing to do.

    We’re working on getting our house paid off as well. The debt we have on the rental properties though don’t concern us as much since the tenants are paying them down. But like the Green Swan said “To each our own!” All of us have our own lines of comfort.

    — Jim

    • Mad Money Monster Jan 31, 2017, 9:11 pm

      Exactly. I am absolutely aware that, statistically speaking, it’s better to keep the mortgages on both properties and just keep investing in the market. I just can’t convince myself to be motivated to move in that direction. There’s no rule against changing direction in the future. But for now, this is for us 🙂

  • Route To Retire Jan 31, 2017, 8:27 pm

    There’s definitely that psychological part of debt that makes you want to get rid of it, even if you could make better use of that money elsewhere. If it makes you feel more at ease, that’s the right thing to do.

    We’re working on getting our house paid off as well. The debt we have on the rental properties though don’t concern us as much since the tenants are paying them down. But like the Green Swan said “To each our own!” All of us have our own lines of comfort.

    — Jim

    • Mad Money Monster Jan 31, 2017, 9:11 pm

      Exactly. I am absolutely aware that, statistically speaking, it’s better to keep the mortgages on both properties and just keep investing in the market. I just can’t convince myself to be motivated to move in that direction. There’s no rule against changing direction in the future. But for now, this is for us 🙂

  • youmeanme Jan 31, 2017, 5:19 pm

    Thanks so much for sharing this. I’m in a similar camp.As I can’t increase my monthly mortgage payments I’ve got the money in a short term savings account accruing interest until I make a lump sum payment this year to lower the principal.

    • Mad Money Monster Jan 31, 2017, 6:10 pm

      Awesome! That lump sum payment will feel really good later this year. You’ll need to stop back and let us know 🙂

  • youmeanme Jan 31, 2017, 5:19 pm

    Thanks so much for sharing this. I’m in a similar camp.As I can’t increase my monthly mortgage payments I’ve got the money in a short term savings account accruing interest until I make a lump sum payment this year to lower the principal.

    • Mad Money Monster Jan 31, 2017, 6:10 pm

      Awesome! That lump sum payment will feel really good later this year. You’ll need to stop back and let us know 🙂

  • Mrs Groovy Jan 31, 2017, 3:19 pm

    As someone with no mortgage who also enjoys her sleep (and is about ready for that afternoon nap right now) I’d say you absolutely are doing the right thing. As for your rental properties, investing in real estate is much less riskier if you can do it with cash.

    • Mad Money Monster Jan 31, 2017, 6:10 pm

      Yes! I knew we were doing the right thing 😉 I really could’ve used an afternoon nap today. Instead, I’m still stuck at work, but we’re getting closer to FIRE everyday. Our thoughts on paying cash for rentals is to avoid risk and use cash as leverage to get better deals. We’ll see how it goes! 🙂

  • Mrs Groovy Jan 31, 2017, 3:19 pm

    As someone with no mortgage who also enjoys her sleep (and is about ready for that afternoon nap right now) I’d say you absolutely are doing the right thing. As for your rental properties, investing in real estate is much less riskier if you can do it with cash.

  • Full Time Finance Jan 31, 2017, 12:05 pm

    Certainly a personal decision. We mix and match treating our mortgage as our bond allocation, so it goes in according to asset allocation.

    • Mad Money Monster Jan 31, 2017, 6:08 pm

      Yep, it’s totally personal and choosing my option is oftentimes emotional. I’m okay with that. But I definitely understand looking strictly at the numbers. 🙂

  • Full Time Finance Jan 31, 2017, 12:05 pm

    Certainly a personal decision. We mix and match treating our mortgage as our bond allocation, so it goes in according to asset allocation.

    • Mad Money Monster Jan 31, 2017, 6:08 pm

      Yep, it’s totally personal and choosing my option is oftentimes emotional. I’m okay with that. But I definitely understand looking strictly at the numbers. 🙂

  • less4success Jan 31, 2017, 10:56 am

    We were following a similar path, trying to pay down our mortgage so that we could downshift at work and not have to worry about a huge mortgage payment every month.

    A word of caution, however (assuming a fixed-rate mortgage, like we had): if you’re in the process of throwing all extra money at your mortgage and you lose your job(s), your lender isn’t going to care how much you’ve paid down (unless you refinance), so you’ll still be on the hook for a large payment, even if your income suddenly decreased.

    We faced this situation when my employer suddenly initiated massive layoffs — fortunately, my job didn’t disappear, but it was too close for comfort. After that experience, our plan morphed into saving as much in taxable investments, with the goal of paying off the mortgage in full, once we had sufficient savings.

    • Mad Money Monster Jan 31, 2017, 6:07 pm

      You bring up an EXCELLENT point! We are throwing the additional money at the principal but have considered doing it your way before we started. In light of your comment, perhaps we’ll tweak our strategy a bit. Thanks!

  • Kate Jan 31, 2017, 10:38 am

    I paid off my mortgage 2 years ago (after having it for 14 years) and don’t regret it one bit! I’m definitely of the camp that is approaching FIRE with the lowest expenses possible, rather than the biggest portfolio.

    Since I’m single, keeping my expenses low is really important in the event that I’m ever laid off. I don’t have another person’s income to live off of and there’s a very real possibility that I’d have to take a lower paying job if the economy turned. Knowing my house is paid for provides far more security than a bigger portfolio.

    All in all, both approaches are great and you really can’t go wrong with either one.

    • Mad Money Monster Jan 31, 2017, 6:03 pm

      I agree that either side of the equation is a Big Win. I was also single for many years and I know the stress of being the sole provider. I also had my daughter for a few years on my own. That gave me double stress. Haha. Obviously, things are much better now, but I can relate to everything you’re saying. Kudos again on annihilating your mortgage. So awesome! 🙂

  • Get Rich Quick'ish Jan 31, 2017, 9:45 am

    I like to focus on paying off the debt you hate most. I’d apply similar logic here. Would would make you happiest (or being the most peace).

    I’d could make a strong argument for either option here so it looks like you’re in a good position. Consider me envious!

    • Mad Money Monster Jan 31, 2017, 5:58 pm

      Thanks! I agree completely. I tried to to do it the opposite way (invest instead of paying down the mortgage) but it just didn’t light my FIRE, so to speak 🙂

  • chausson8a Jan 31, 2017, 7:51 am

    Whatever plan works for you is the best plan! We went down the route of paying off the mortgage early, as for us it opened up so many more opportunities without that around our neck. Now all those payments are ramping up our savings and investments.

    Good luck with whichever route you choose.

    Paul

    • Mad Money Monster Jan 31, 2017, 7:54 am

      Awesome! It is definitely not the most popular decision in the financial realm, but we really want that debt eliminated. Our focus is LOW monthly expenses. We’re also not in our 20s anymore, so getting rid of the mortgage is a TOP priority. Glad to hear you were happy with the same route!

  • freedom40guy Jan 31, 2017, 7:40 am

    Great post. It sounds like you guys are doing the right thing in so much as you’re doing what works for you and what you feel comfortable with. You probably could get better returns investing the money, but its not a sure thing, and eliminating the debt sounds like it is your main priority. For what it’s worth, I recently wrote about this very topic over at my site — <a href="http://www.freedom40plan.com/2017/01/21/how-to-turn-a-30-year-mortgage-into-a-15-year-mortgage/&quot; How to Turn a 30 year Mortgage Into a 15 year Mortgage .

    • Mad Money Monster Jan 31, 2017, 7:49 am

      Awesome! I will go check it out. Yeah, we know it’s not the most popular decision to go for the paid off house over investing – but we don’t care 😛

    • Mad Money Monster Jan 31, 2017, 6:07 pm

      You bring up an EXCELLENT point! We are throwing the additional money at the principal but have considered doing it your way before we started. In light of your comment, perhaps we’ll tweak our strategy a bit. Thanks!

  • The Green Swan Jan 31, 2017, 7:16 am

    To each our own! You’ve thought through your plan thoroughly and that’s great. It’s not for everyone, including myself, but being debt free does have its advantages as you pointed out. I can’t argue that the feeling of being debt free would be amazing and quite liberating, I’m sure! So good for you and good luck getting it done and building that RE empire! I look forward to following along.

    • Mad Money Monster Jan 31, 2017, 7:48 am

      Yeah…we know the numbers definitely lean in the opposite direction and that ours is the unpopular route. We just want the debt gone for emotional reasons – as is usually the case. I look forward to having you along for the ride! 🙂

    • Mad Money Monster Jan 31, 2017, 6:03 pm

      I agree that either side of the equation is a Big Win. I was also single for many years and I know the stress of being the sole provider. I also had my daughter for a few years on my own. That gave me double stress. Haha. Obviously, things are much better now, but I can relate to everything you’re saying. Kudos again on annihilating your mortgage. So awesome! 🙂

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