4612 days until mortgage freedom. September 1, 2030. That is if we continue to pay the mortgage as scheduled. But stick with me here, because I’ve got a hybrid approach to get us to mortgage freedom within the next 8 years or so.
It makes my mind numb just thinking about paying the bank roughly $700 a month in interest charges for the privilege of living in this 4 bedroom 2.5 bath, McMansion. I lovingly call our home the Smart Fi Ranch. Imagine what a family could do with $700 dollars a month of increased cash flow. $700 dollars would go a long way towards reaching early retirement. Or $700 could mean we could send our kids to camp in the summer. Maybe we could eat out more often. But nope, currently that $700 just goes to the bank. Can you tell it eats at my soul just a little.
Currently we are on a 15 year mortgage at a rate of 3.375%. This is a really good interest rate by historical standards. We were able to refi into this rate in 2015 near the bottom of the interest rate lows. I have been just letting the 15 year mortgage do its thing. Take bigger bites out of the mortgage balance every month. Until this year when I plan to start my hybrid approach to paying off this mortgage.
Ultra low interest rates
I remember growing up and hearing my mother describe how she was so excited because she had just refinanced our home to a new low rate of 8%. Now I was a child and didn’t understand what she was talking about. But now that I am a home owner of my own I understand the significance of an 8% mortgage interest rate. I cringe with my monthly interest paid on my mortgage. I could only imagine if that $700 doubled to $1,400. It feels like the real estate industry would implode if rates were 8%. Homeowners have become so accustomed to this low interest rate environment we have had for the last couple of decades.
Emotion gets in the way of the math
Here is where things get tricky. The math says I should carry this mortgage the full 4612 days. Any extra money I have, should go into the stock market for early retirement. Here’s why. In the stock market my money could grow exponentially where next years gains get compounded and this years gains. Compounding interest is a beautiful thing. For example:
- First year $100 x 10% = $110
- Second year $110 x 10% = $121
- third year $121 x 10% = $133.10
- fourth year $133.10 x 10% = $146.41 and so on……
Mortgage debt pay down is linear and does not compound. The most you can ever earn as a return on investment is your interest rate. In my case, 3.375%. But wait, there’s more. You only earn that 3.375% until your loan is paid in full. Then you earn nothing. WTF! That’s a real bummer.
Math is void of emotion. It is just numbers. But we are human and we have emotions. I would like the security of knowing I own my own home. I would like to know that I have a place to hang my hat if life took an unexpected turn due to injury or health. I would like to have that $700 of cash flow in my budget back that I am paying towards interest. Most importantly, mortgage freedom fits into my FIRE plan (Financial Independence Retire Early).
The master plan
I like to think of my plan as digging a tunnel from both ends. It is a hybrid approach.
- We refinanced to a 15 year mortgage.
- I add enough to the principle payment each month to get to $20k of principle pay down each year. This amounts to roughly $300 extra on the mortgage payment every month.
- At the same time I try to invest $10k into a taxable brokerage account invested in VTSAX. Currently this account sits at approximately $30k. I have a ways to go. Also currently I have yet to hit that goal of $10k. In 2017 it was more like $6K. Time for a side hustle.
- When my taxable account equals the mortgage balance. I am technically mortgage free. At that point I can decide if I want to cut a check to the mortgage company and pay off the house.
I feel this method gives me maximum flexibility while allowing me to achieve my goal of mortgage debt freedom. I don’t know what the world will look like in 8 years. If the economy tanks or the stock bubble bursts, I want to have that liquid money to invest. Instead of paying off the mortgage, I could invest in rental real estate for the cash flow. These are all things I think about while trying to fall asleep at night. It makes me feel a little like Warren Buffet in that I get to decide where to allocate my capital. In this world there are owners and borrowers. Remember that the borrows make owners rich.
Well that’s all I have for this post. Tell me what you think about my hybrid mortgage pay down plan. Do you have your own mortgage pay off strategy? Please leave me a comment or feedback and let me know.