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Re-paying off the Mortgage

We have a problem that I’ll take any day.  We have over $500,000 sitting in our checking account.

What to do with it?

Quickly, the back story. Early last year, we paid off our home mortgage.

“Never again shall you hold our deed in trust” we proclaimed to creditors everywhere.  Our resolve lasted 8 months.

We decided to move. And did so in reverse order. We found a house, bought it, then put ours on the market.  Not having liquidity to hold 2 homes debt-free, we stumbled back into a mortgage. Actually 2 mortgages – one 30 yr fixed, and one home equity line of credit. Always meant as a short term (weeks) setup.

Mr. Market beat us up over the next 6 months – holiday slowness, a dropped contract, then finally a closing. We got a fat check last week and deposited in our checking account.  Now we have over half a million in cash!  Pretty cool/scary.

Since it has taken so long, it’s like a new decision on new circumstances.  Buy something else?  Invest rather than de-leverage?  Or just pay it off.  Before sending that wire to the bankers, I wanted to think through our options:

Car

Something Sensible
Something Sensible

I’ve actually been thinking for a couple of years about a new (used) car.  I haven’t selected myself a car in 13 years.  I’ve been driving my wife’s hand-me-down for 4 years now.  I’ve wanted to get rid of it since I got it.

I’ve been all over the map on what I want to replace it with.  Maybe a truck.  Maybe a simple sedan.  Maybe something cool; maybe not.  Likely used.  No chance of the GT pictured here.

But it’s a big deal to me not to tie large purchases to windfalls.  So the car is still on the list, but not for this mental accounting exercise.

Beach House

Especially this time of year, I would love to have a beach house.  I love the water.  Love spending time around the beach, the boats, the salt air, everything. From my house, it’s less than 2 hours to the coast.

Heaven
Heaven

But this year, and into the foreseeable future, we’ll not be buying a beach house.  Financial Independence is clearly first.  We’re not even close really: allocating that much capital to an asset that will require annual maintenance money also – not happening.

Our FI goal has been particularly freeing on this topic.  I probably would have already bought something at the coast otherwise.  But FI is such a big deal to me that it can wait.

My plan is that in our conservatism, I imagine we’ll overshoot the mark on FI savings somewhere between 50-100%.  A few years into FI, once this creates it’s own snowball, then we can use some of the extra if we want.  Or we can easily pick up and move for a season of life.

So no beach house.

 

Investments

One opportunity cost of paying off a mortgage is the net lost investment returns.

I know in theory we could invest the money and likely make a higher rate than 3+% on our mortgage.  So maybe we’ve left money on the table.

It’s worth a deeper thought on leverage before crying about the missed arbitrage.  The leverage throughout your/my investments does not show up on a typical personal net worth statement.  There is leverage in each company (avg for S&P 500 is a little over half of assets).  And there is leverage in each of my real estate deals (60-80% Loan to Cost).  So leveraging myself beyond this might not be economically sensible anyway.

I think I tend to be aggressive on personal investment strategy.  As I move towards world without W2 income, it’s probably worth not over-leveraging myself.

Also, we’ll have 20% or so left over for investments after paying off the mortgage.  Hard to argue with 80/20 on most things.

Mortgage – Debt Free

So we’re going back to that wonderful place.  A place without monthly auto-drafts to a loan servicer.  A place without those confusing escrow reconciliations.  A place that might be missing out on a bit of arbitrage.

That place is debt-free land.

Even thinking through the economics a second time, I’m sticking to the pay-off-the-mortgage plan.

Mostly though, getting rid of our mortgage is the ultimate statement of living on my own terms to me.  Exiting my job will be nice, but it will be met with questions from friends/family on 100 topics.  Paying off our mortgage is our own private accomplishment.  My favorite kind.  My own game.

Release the wire…

 

4 thoughts on “Re-paying off the Mortgage

  1. I probably would of made a similar choice. Yes interest rates are low and investment gains could outpace it, but the piece of mind is worth so much more to some people. What’s the point of investing $500k if you’re going to be pissed every night that you have a mortgage…

  2. I made the same decision. I actually paid it off twice, first time for peace of mind. And then I took out another mortgage to invest in stocks. It worked out ok but I didn’t like having that autodraft suck all that money out of my account every month. I did not like the decreased optionality and I missed that peace of mind. So I sold down the bond portfolio and paid it off again. Why pay even 3.5% when your bonds are paying you even less? Did not make sense. I can borrow at 2% on a margin loan whenever I want. Ok, it’s not fixed, but that’s ok with me, it will still be low in relation to whatever the current rate is.

    1. Yep, it’s hard to pass up on cheap debt. But it’s also hard to pass up on not having any debt at all.

      How do you borrow at 2%…lowest I’ve seen on home equity lines seem to be 4%?

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