Why I haven’t paid off my mortgage

November 24, 2017 Leave a Comment Written by dollar500k

You have always imagined your home mortgage paid off with no more monthly mortgage payments. Many among us would do that if we had the cash. However, as tempting and reasonable as it sounds, it may not be the most financially savvy decision to pay off your mortgage now. Here is my personal story and the rationale for not paying off my mortgage while I actually can.

Most of our friends bought houses in 2003, when the market was starting to heat up. My wife and I were also caught up in the frenzy and wanted to buy as well. However, we wanted to buy within our means and not shoot ourselves in the foot in that craze. Once, I think it was year 2004, we signed up for a new townhome without a down payment only to cancel the next day. One of the houses we wrote-up a contract for was already sold before the open-house or so we were told by the selling agent. After that frustrating experience, I decided to not buy in that kind of market and wait a bit for the market to cool down.

By the year 2006 the market was so hot that prices of homes the houses our friends were up by at least 50%at least 50% up. I was not only starting to looked looking like an idiot to my wife and friends, I also started to feel like an idiot myself. However, I persisted and survived. After bearing the social pressure for almost 5 years, we bought our house in September of 2008, when the one once red-hot housing market had cooled off a little bit. It was just before the financial crisis hit and the housing market took a dive (I had always suspected there was something wrong in the market but did not know exactly what). Fortunately for us, we had bought in a good school district and prices in our neighborhood did not go down by a lot. Otherwise also, it did not matter to us since we had bought an affordable house and could continue to comfortably pay the mortgage bill even if one of us lost his or her job. The consequences of losing both of our jobs was a different matter, though.

Initially, I signed up for 5 year rate-renewal mortgage offered by ING (now Capital One 360). Under this plan, I could renew interest rate anytime by paying a cost of $750. Luckily, interest rates kept going down and I was able to renew it multiple times. My mortgage rate started at 5.75% but I paid only 2.55% for almost 5 years until Capital One did not agree to give me the best rate and I had to shop outside for a lower interest rate.

In 2015, the interest rates went really low and I grabbed the opportunity to refinance my mortgage loan at 3.375% for 30 years. Had Capital One honoured their side of the rate-renewal bargain at a better rate, I would have continued with the 5 year rate-renewal mortgage. But outside of that I did not want a 5 year ARM because at such low rates it did not make sense to take a risk for higher interest rate in future.

As in the previous blogs, I am not yet ready to disclose our net worth but I can afford to pay off my mortgage. The reason I have not paid off my mortgage is U.S. government Treasury EE bonds. The treasury guarantees that EE bond would double in value in 20 years. If the value does not double because of the interest earned during those 20 years, the treasury will add the difference to make sure it at least doubles in value. An investment doubling in value in 20 years means an interest rate of 3.52%. Since my mortgage rate is 3.375%, I gain by not paying it off with almost zero risk. I say almost zero because the chances (probability) of the U.S. government going insolvent is almost zero, if not zero.

If your risk tolerance is more, you could invest the extra cash you have in an S&P 500 based index fund and earn a much better rate. Since 1871, S&P 500 has returned more than 9%/year with dividend reinvested. Even without dividend, it returned 4.42%/year on an average. In short-term you may lose money but over a period of 20–30 years you will have a handsome gain on your investments. However, if you can’t afford to or do not want to take risk, stay with the Treasury EE bonds.

Bottom line, I earn a higher interest rate on my money than what I am paying as interest on my mortgage.

What is your mortgage rate interest rate? Are you paying off your mortgage with extra cash or investing it? Share your thoughts in the comments.

To read more on EE bonds see https://treasurydirect.gov/indiv/research/indepth/ebonds/res_e_bonds.htm

Originally published at dollar500k.com on November 24, 2017.