What happens when you finish paying off your house?
My wife and I paid off our house in late 2017 and this is what happened to us.
We called the bank and informed them of our intent to pay off the mortgage in full. They responded that they needed $x by 5pm to have the mortgage paid off in full. We told them to look in the one account we had at their bank and that we have already moved the money into that account. They transferred the money from our account on to our mortgage account, hence paying it off.
We drove to the branch where we first got the mortgage 18 months prior and brought some cupcakes and coffee. We treated the staff because we were celebrating having just paid off the house and being 100% debt free.
Our loan officer was surprised and said, “I knew you guys wanted to pay off the mortgage early but I never expected this early.” Our original plan was 4–7 years. Dave Ramsey (financial talk show host) says most working his plan pay off their house in 7 years and most millionaires pay off their house in 10 years. We were lucky to come upon an investment that took off that we were able to sell it and pay off the house. This resulted in a huge nearly $70k tax bill (answer for a different question).
Dave Ramsey says once you pay off your house to go outside and walk through the grass barefoot because it will feel different. We didn’t take his advice because it was nearly winter time and snow was on the ground. Instead, my wife and I continued our celebration by going to a local fine dining restaurant to enjoy a nice meal. Emotionally, we didn’t feel different at all, it was like nothing really happened.
The following month we noticed an extra $1,600 in the bank account that we moved off into a separate account to save and invest for the future. That same month we received a letter from the bank that our mortgage was paid and we received communication from the county that our deed to our house was now clear.
It took three months from the time we paid off the house to have an emotional change. Perhaps this is because it was now March 2018 and the snow had melted and we could actually go outside and feel the grass under our bare feet. I’m not sure, but what happened is that my wife and I realized that we don’t need to keep on going to the same job every day. We could choose to be a baker at the Walmart Deli if we wanted to be. We could choose to be a photographer. We could choose to be whatever we wanted to be. We were no longer beholden to our job that makes a good salary so that we can afford the mortgage payment every month.
This realization gave us more flexibility with our life choices and our careers. We also realized that we have been working so hard on financial goals to get out of student loan debt, save up for an emergency fund, save up for a down payment, pay off the house, etc. that we didn’t have a future goal anymore other than to save for retirement. This is when we realized that we needed another short term goal and we both decided to buy more real estate in cash and we needed to start saving up for it.
Then April came along and we needed to pay our first half payment of our property taxes. Then May came along and we needed to pay the full year of our home insurance. Then October came along and we paid the other half of our real estate taxes. By this time in October we found the real estate area that we wanted to purchase in. By April of the following year we made another tax payment and we flew to the area where we wanted to purchase our next real estate and we paid cash for it in May. We also found more real estate in the same area and started saving up for that as well. We are planning on going back next year and paying cash for more property. We plan to continue doing this while we can.
So what happens when you finish paying off your house? You get the freedom to make choices in your career that you might not have otherwise made and you get to invest in cash and grow your wealth. I recommend everyone pay off their mortgage and get on the path to wealth building. It is really the only way.
TVM man. you just paid off a $X mortgage at 3% when you could be getting a compounded $X mortgage payment amount at 6%-10%.
You just lost 3%-7% a year, so assuming a 100k loan payoff and taking the difference of the higher interest rate, you just lost about $3.5 million over 20-years.
What is the probability of maintaining a 6-10% current yield in today's environment? Have you factored in the risk of losing a job? Imagine the freedom that begins when that monthly mandatory payment is gone...
I think 6% is very realistic, low investment grade bonds pay 6%-9% I believe. Low levered commercial real estate usually have a C-O-C of 8%-10% over a 10-year hold.
I mean, that's why you need a 6 month-12 month reserve account for RE taxes and mortgage payments.
Taxes make that math harder now.
You can’t write off you interest expense anymore. The so call bonds you want to buy you will pay taxes on the returns. Going to make a simplifying assumption and say the marginal tax rate for them is the highest or about 40% with state taxes.
Ok so they buy junk bonds at 7% yield. Take away 2.8% for taxes. The return is now 4.2% versus a mortgage rate of 3.5%. That’s not worth the risks.
Granted I think you can achieve higher returns elsewhere with less tax drag. You can buy Citigroup stock at 10 pe and I think banks are far safer investment than they’ve traded last year. That converts into a capital gain as its equity. So lower tax rate.
But to do a bond arb the taxes would kill you.
Congrats, I am going through the steps right now myself. It must feel amazing to no longer be a slave to debt. People talking about the missed opportunity to arbitrage yield have little understanding of the profound psychological change that occurs when you no longer fear getting laid off, losing your job, or continuing to work a job you hate due to absence of monthly payments.
You could now setup a reserve high-yield savings account that is dedicated to future tax bills to create even more security. Please wish me luck and pray for my wife and I as we seek to do this too.
I think he should fear getting laid off even more. Where before he had this extra cash, now he has to pay taxes. If he gets laid off and can't pay his taxes, the house is no longer his.
Maybe he is flush with cash, and that doesn't make a difference....
I mean you never know what markets are going to do, but he seems bullish as he wants to continue to invest. I think missing out of $3.5 million or any million payday is a huge risk.
Why would someone fear being laid off more when their mandatory monthly payment (assuming a monthly escrow for taxes is contributed monthly) is 25-40% of what it once was? Also you are completely ignoring the real principal risk a mortgage carries...
Also, in this program payoff of the mortgage occurs after 15% of HH income investment each month once all non-mortgage debt is cleared first to 401K (if match) and then to Roth.
While on paper this sounds great, it's overly academic. You get so much optionality in life by being debt free and having cash in the bank.
What if you can now take a risk and start a business that ends up cash flowing way more than the $3.5m over time? Or you invest in real estate deals with 13-15 IRRs. Or they can switch careers to something that pays less up front but has much higher pay down the road? I could go on and on.
The only reason I am where I am is because I was fortunate enough to get out of undergrad with 0 debt, and I'm not foolish enough to think otherwise.
First off, (nearly) congratulations. Second, the OP's story is just copied and pasted from somewhere else, I've seen it, basically word for word, several times before.
And third, the opportunity cost thing is real. Net of everything maybe investing in bonds or dividend paying stocks doesn't represent a massive arbitrage opportunity. But to your point about risk - this OP or wherever they copied this from, is about to go start buying and managing investment real estate. Which is immensely riskier and more capital intensive than just plunking some money down in high dividend equities and banking on long term appreciation.
Yes, and I don't necessarily agree with that strategy - I agree with what you are saying in that people who don't work in RE and really understand the space might be better off in passive yield opportunities. However, as someone going through the program (still clearing automobile/student loans) who has completely digested his material, the advantages of being debt free far outweigh the lost arbitrage. Also, much of the class is about psychology and the idea of living far below your means because personal finance is 20% knowledge and 80% behavior. Much of it is motivational in that it kills the excuses people make for why they can't become debt free.
My class of about 20 people paid off $40k of total debt just in the 8 weeks it lasted and destroyed 22 credit cards plus saved over $20k. Pretty good considering all income/education levels in the class.
Who the fuck is Dave Ramsey
A cuck
False, being a debt slave is much more in-line with being a "cuck" than fighting vigorously to help people get out of personal debt...
https://www.daveramsey.com/research/state-of-debt-among-americans
I think it's a bull shit advice. It also feels good to have your cash in your bank not invested in anything and just looking at it, those numbers are nice - but we can all agree it's a stupid advice.
I have been investing in properties for a long time - rates are at 1.29% in Europe. I can't deduct my mortgage interest from my taxes but in the US you CAN! How fucking incredible is that?! The tax shelter alone should make you not want to pay back your mortgage, ever.
If you don't like stocks and believe in property more, than just go and lever up on another property rather than paying off your house. Plenty of reasons to take leverage on your house as well, banks are much more willing to give you cash for your main home, much less for a buy to let investment. You should see your house as a piggy bank. So you paid off your house and have no more savings, great. You still need to work. Lever up your house and do all sorts of investments and assuming you don't take too much stupid risk you might be in for a chance of early retirement. Rich people USE debt, that's why they are rich. I pitty the fools who just want to feel the grass on their toes.
Sure if rates go up to 10% and your junk bond yields drop to 1%, it might make sense to pay off your mortgage. In today's environment it's bonkers to pay it off. If you fear a crisis even more! Take on as much debt as possible and just walk out if it all goes to hell.
The paying off your mortgage because it feels good should not be on a finance forum where people supposedly understand leverage. It's the basic of how companies operate and PE works. You should run your life like a company not like a hippie.
There’s a cap on interest deduction, 750k
and You can’t walk off from your home mortgage, wtf you thinking, it’s recourse loan.
The main recourse is on your house. Bank loans are a lot more lenient on your main home because statistically you are a lot less likely to just hand the keys back to the bank on your main home.
Sure there are ways for them to take you to court and try to recover all sorts of things from you aside from your house. Likely this won't happen and it's all state and country dependent. I am not a tax advisor in your state and you can bloody well figure it out - but bottom line is you are sharing the risk with the bank and if it were to fall in negative equity it's very likely you will be able to walk if you do your homework properly.
Cap on interest deduction - are you just posting random facts? 750k of interest is a pretty big fucking tax shield.
Yikes. Guys, OP's giving advice that fits their situation. Not sure how old everyone is here (op and commentors included), but feels like some comments arefrom people who have never seen a recession nor lost a job.
Also, different investors have different risk profiles. Even if it wasn't the most financially prudent move, OP FEELS better. Derisking here might allow them to take risk in other places or, I dunno, just chill out. What a bunch of hardos.
I'm probably going to get MS for this, but you guys need to chill the f out.
Except it's being presented as advice for anyone. Thus, it is open to criticism on those grounds. The OP doesn't get to claim special privilege on those grounds.
It is objectively terrible financial advice. Scared of a recession? Take out a low leverage mortgage. Banks are thrilled to give 30-40% mortgages. Calculate what you'd make as, say, an Uber driver, or some other at-will, easy employment, and size on that.
Telling people to be afraid of debt may help people not be stuck in a grind of poverty, but it will not help them become wealthy. Besides which, it's not advice; it's a truism. People know debt can be dangerous. No one sitting on six figures of credit card debt thinks "oh shit, I wish I knew there was a downside!". This guy is giving "advice" that amounts to no more than received wisdom, while failing to explain or use nuance in saying that debt can be a very powerful tool if used wisely.
Fair enough on the advice for everyone comment. Still, assuming we are all intelligent adults, hopefully we can make that determination for our selves. I'm just happy someone wrote something interesting and worth reading. I'll save my MS for posts which are truly terrible.
All of the 9 and 10 figure net worth people I know use leverage responsibly in their property acquisitions/development and business holdings but purchase personal property, vehicles, etc... all cash. They then shield this bucket of personal assets from liability so if everything fails across their web of LLC's the commercial lenders have no access to the personal bucket.
"It is objectively terrible financial advice."
LOL. You've never seen terrible financial advice if you think paying off your home mortgage is such. Good for OP! Enjoy your freedom to live, invest, and give how you choose.
Which, by the way, putting a mortgage back on your house is one of those options if for some reason you need to.
Very valid point - too much of finance advice is focused on return maximization vs. well-being maximization (the two are not always the same). However, he did post on a finance board, so I think it's fair to criticize him on the universality of this advice. From a pure finance standpoint, with today's interest rates where they are it makes sense to work a carry trade of equities vs. your mortgage. I just bought an apartment and took out 50% in a 10/1 ARM at 2.6% even though I could have purchased all cash. I also could have financed at 80% - the carry trade of equities vs. 2.6% debt is a pretty strong one. However, I decided my personal risk preference/profile fit with a 50% financing - everyone else's will be different. What the OP didn't acknowledge was any sense of opportunity cost - that's the big miss here.
Factor in taxes then. Whether you can still get much tax benefit on your 2.6 rate is dependent on situation. But you will be paying taxes on your equity side of the trade. That closes the spread a ton and adds a ton of risks.
There are some compromises that are well worth it. I would use debt to finance multi-family investments (under an LLC) and lever the crap out of my portfolio, but when it comes to a house over the head of my family I do not want to risk that, therefore paying off the mortgage. I believe in debt, actually love debt in terms of a business, but hate it personally. That is just my mindset at least, I want to be debt free on the personal side but use business debt. My ideal way, would be to buy a multi-family in cash, then use this to lever in place of a PG and continue to grow upon that as more equity comes available in the properties.
Exactly this. The leveraged business bucket creates a free cash flow stream which flows into the personal bucket that buys a mix of safe conservative assets and long-term growth stocks which is shielded from liability by refusing personal recourse and transferring assets into trusts. This is what the smart people do so if their entire commercial holdings go bust they are still in an advantageous debt free position at a personal level and can survive the rest of their life of this with a nice quality of life if needed.
This is a lot easier said than done. Getting non-recourse loans isn't the easiest thing in the world, especially at the income brackets we're discussing here (since I assume no one thinks this advice is aimed at multimillionaires). And setting up trusts costs a fair bit of money to make sure they are indeed safe from the grasping hands of (divorcing spouses, the government, creditors, etc).
If you can arrange for business loans to be non-recourse, you're probably in a financial position such that all of this advice is redundant and meaningless.
Dave Ramsey’s advice is appropriate for the certain sect of the population who is buried in debt and doesn’t have the discipline to manage their finances appropriately. But since he’s the only financial advisor recommended in the Christian community, far too many people follow his advice.
My deeply religious friend is foregoing all vacations/alcohol/dining outside the house in his 30s trying to pay off his 3% mortgage and cut up all his credit cards. Meanwhile I use credit cards for everything, and haven’t dipped into my own pocket to pay for flights/hotels in 10 years due to the hundreds of thousands of travel miles I’ve accrued. I’m paying a tax adjusted 2% mortgage while I wait for a market downturn, my uber-safe online savings account pays nearly that much in interest, and I expect it will arbitrage over time.
One size does not fit all.
To me, you just lost out on $100MM
Love it when creative writing sophomores write short stories on WSO. This one was comically bad.
@ the guy who generates 6-10% yields via bonds PLEASE contact me ASAP! Unless of course you are Michael Milken, I am a supporter but given your legal circumstances we can't do business.
Generally speaking, you'll rarely find well to do people with debt on their primary residence. Leveraging up your home to invest that capital always proves fatal. This was the theory of everyone before the recession. If there is one thing in life to have low or no debt on, it's your primary residence. This is your shelter to serve you for decades when you are not working and really shouldn't be analyzed as an investment.
Pay off your house. Rarely does someone see a negative consequences from not having a loan on their house.
oi vei, another one of these. yes, dave ramsey is very dogmatic, but he's helped way more people than WSO get their money right so to say he's terrible is just false. rarely are platitudes a good thing
I've seen tons of people create wealth, destroy wealth, and some even do both multiple times. the one common thread is this: live below your means. if you're living on 50% of your income, it doesn't matter if you pay your mortgage off early, invest and arbitrage the difference, you'll still achieve financial success. what I'm against is people arguing over tactics and missing the big picture. like cutting out every vacation and coffee when you're at risk of being laid off and only saving 10% of your income.
/rant
To each his own, but I went the opposite way. I keep levering up my properties, and re-deploying the capital into other investments. That's how you grow your asset column. The debt part is to help you enter into the investments. I don't fear debt if it's fixed and priced low.
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