The Triple Benefit Of Paying Off Your Mortgage Early (2024)

In 2022, my wife and I paid off our vacation property mortgage after 15 years of ownership. Now that it's been a while since we paid off the mortgage, I realized there is a triple benefit to paying it off early.

I didn't realize one of these benefits when we paid off another rental property mortgage early back in 2015. Sure it felt good to pay off our mortgage early. But back then, there was more hesitation since risk asset returns looked relatively more promising.

Instead of writing about the benefits of paying off your mortgage early, I wrote about mortgage payoff fees and procedures. This way, homeowners don't get blindsided once they do pay off their mortgage and expect everything to automatically handle itself.

In addition, I wrote about the biggest downside to paying off a mortgage early. And that is a fade in motivation to make money.

Triple Benefit Of Paying Off Your Mortgage Early

The debate between paying off your mortgage and investing continues to rage on. But I've long ago found a logical solution with my FS Debt and Investment Ratio (FS DAIR) formula. If you follow FS DAIR, you will always be winning.

For those still wondering what to do, let's now tilt the scale a little more toward paying off a mortgage early.

Benefit #1: Guaranteed Return Compared To A Potential Loss

Since 2009, investors have been spoiled with strong gains in the stock market. Some folks even confused brains with a bull market by buying stocks on margin at all-time highs (and below themselves up).

However, after a hefty 27% return in the S&P 500 in 2021, it didn't feel good to chase stocks. Valuations were high and 2020 already returned a surprising 16%. Therefore, I decided to allocate more capital to mortgage principal paydown.

Not only did it feel good to pay off a 4.25% 30-year fixed mortgage early, but it was also nice to not lose 19.5% in the S&P 500 in 2022. Paying off my mortgage early resulted in a 23.75% outperformance difference.

A 23.75% outperformance difference is mostly due to luck. If I was smarter, I would have sold all stocks and gone short at the beginning of 2022. However, at least 2022 was a great reminder we can and will lose money in risk assets.

But then the S&P 500 rebounded by 24% in 2023, which means I missed out on some of those gains.

A Bear Market Makes Paying Down Debt Wonderful

The reason why paying off a rental property mortgage in 2015 didn't feel as impactful then was because the S&P 500 closed down only 0.7%. It still felt good paying off my rental property mortgage for a guaranteed 3.375% return. However, it wasn't like paying off my mortgage saved me from a bear market.

The value of a guaranteed return goes way up in a bear market. In fact, paying off my vacation rental mortgage is one of the few good financial moves I made in 2022.

If you ever start suffering from investor delusions, pay down your mortgage or any other debt. If you're not paying down your mortgage when you're unsure about risk asset returns, then look for low-risk alternatives. One-year Treasury bonds, for example, are paying a guaranteed ~4.8% return.

Of course, I would have rather had another bull market in 2022 and not saved on mortgage interest expense. But a bear market makes paying off any debt that much better.

Benefit #2: Mental Relief Due to Increased Cash Flow

When you're already exhausted, relatively speaking, it's easier to boost cash flow by paying off debt than by working more.

The greater your cash flow, the greater your chances of surviving a downturn. If your cash flow is great enough, you might not have to alter your lifestyle at all.

When we paid off our Lake Tahoe vacation property mortgage, we immediately gained $2,500 a month in cash flow. That's $30,000 a year freed up to pay for anything, including investing.

However, we actually boosted our cash flow by $3,500 a month or $42,000 a year. I had forgotten my wife was automatically tacking on an extra $1,000 to pay down principal on each mortgage payment for several years.

A freed-up $3,500 a month in cash flow is a significant amount of money for us. It can pay 100% for our family healthcare insurance and our daughter's preschool tuition.

With an incredible strong winter season in 2023 so far, our vacation property rental cash flow could be even higher than expected. For example, our April 10, 2023 payment for March 2023 rents came in at $8,451.68. That means over $6,500 in net rental income after HOA fees and taxes.

Parents Will Feel More Relief After Paying Off A Mortgage

Having children is the main reason why our household expenses have gone up. Children are also the main reason why I've focused on increasing our passive income since 2017.

As a parent, your anxiety naturally increases because you have more responsibility. The helplessness of young children kicks your worry into overdrive. Hence, any type of financial relief feels more powerful.

Now that we've freed up another~ $42,000 a year in cash flow, my 2023 goal to earn $20,000 more in passive income is no longer necessary. I hadn't realized this fact until now because I've always been focused on generating more passive income.

The mental stress relief thanks to a boost in cash flow has been greater than expected. The reasons are due to a bear market and mental fatigue. When we paid off our rental in 2015, we didn’t have kids either.

When times are good, cash flow is secondary because your asset values are rising. During bad times, your asset values are declining which makes your cash flow more important.

When you're full of energy, you have no problem conquering loss with more effort. When you're exhausted, like I am, it feels wonderful to no longer have to work as much.

Analogy With Getting A New Life Insurance Policy

I experienced the SAME type of relief once I was able to get a new 20-year life insurance policy during the pandemic. For years, I fretted about not being able to get an affordable new policy. I had made the mistake of getting only a 10-year term policy at age 35, two years before having my son.

The mental relief I felt, alone, after getting my new life insurance policy is worth way more than the monthly premiums. Check out PolicyGenius for free, real life insurance quotes instead of shopping around at each carrier one-by-one.

As a parent with debt, getting life insurance is a must.

Benefit #3: More Courage To Live Your Ideal Life

With greater relief from paying off a mortgage comes more courage to retire earlier, relax more, or do your own thing. Taking a leap of faith is no longer as scary.

Ultimately, having a greater ability to do what you want is the biggest benefit of paying down debt.

Since our son was born in 2017, I've lacked the courage to take things easier. Probably due to evolution and the survival of our species, most parents feel a surge in responsibility once their baby is born.

As a result, in 2018, I pushed toward more entrepreneurship and less retirement. Making more money online to reinvest in passive income-generating assets became a priority.

Since the 2000 dotcom bubble burst, I've been scarred into believing funny money assets are ephemeral. Hence, it may be wise to regularly convert funny money into real assets to protect your wealth long term.

Starting in late 2017, I also became more active in recording podcasts, partially just in case I was no longer able to write. Even though I make no money from podcasting, it's wise to build an archive of episodes in case I one day want to accept advertisers.

Further, I spent two years writing my WSJ bestseller, Buy This, Not That starting in 2020. If Financial Samurai disappeared, I could reinvent myself as a multi-book author and speaker. It's not at the top of my list, but it's a hedge against loss.

Paying off a mortgage will give you greater courage to live your ideal lifestyle. Your frayed nerves will heal with less debt.

Feel Great About Paying Off A Mortgage Early

If you've paid off a mortgage early, congratulations! Don't let anybody make you feel bad for doing so.

Sure, you might have been able to make more money investing in stocks, private real estate, or alternative assets. However, the psychological benefits of paying off a mortgage are profound.

The lack of courage is why some people never change careers even though they hate their jobs. Fear of rejection is why we don't ask someone out even though the upside to happiness is massive.

I shared in my latest weekly newsletter how I was feeling more optimistic about the future but wasn't sure why. Now I know having one less mortgage to pay off is a contributing factor.

The Next Mortgage Payoff Conquest

With every dollar of debt I pay off, I feel happier. How can we put a price on happiness?

Now I can't wait to pay off my last rental property mortgage once inflation and mortgage rates return to their long-term trend (lower).

If inflation or mortgage rates miraculously don't decline, then I'll just have to wait until 12/01/2026, when my 2.125% 7/1 ARM adjusts, to start paying down more principal.

Because I sure as heck ain't paying off a negative real interest rate mortgage when I can buy Treasury bonds yielding ~5%! In 1H2022, when I paid off our vacation property mortgage, mortgage rates and Treasury bond yields were much lower.

It is surreal most homeowners can now live for free given we can earn a higher risk-free return compared to our mortgage interest rate. Alas, living for free won't last forever.

The excitement of getting to pay off another mortgage by 2027 is hard to contain. If I succeed, then I'll have at least $464,628 more rental property equity to boost my net worth.

With an extra $2,814.41 a month or $33,773 a year in cash flow, I'll gain even more courage to kick back and do my own thing. Ah, perhaps paying off a mortgage is another reason why happiness increases after 50!

But for now, paying off my Lake Tahoe vacation property mortgage in 2022 is providing enough mental relief to feel better. Sadly, the relief you will feel from paying off your home early doesn't last for longer than six months. Once you've achieve your goal, it's off to the next financial challenge.

Readers, what are some unexpected benefits you have experienced from paying off a mortgage early? Anybody else recognize the psychological benefits of paying down or paying off debt?

Reader Suggestions

If you want to invest in real estate more strategically, without leverage, check out Fundrise. Fundrise is my favorite real estate platform with over $3.5 billion in assets under management and 450,000 investors. The firm focuses on investing in heartland real estate, where valuations are lower and rental yields are higher.

I'm bullish on real estate in 2024 and beyond as the asset class plays catchup to stocks and other risk assets. Mortgage rates coming down plus pent-up demand plus a soft landing in the economy bodes well for real estate.

With mortgage rates finally coming down from their 2H 2022 peak, you may want to shop around again with Credible. Credible has a network of lenders that compete for your business.

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