Agressively Prepaying
Joy and I are in the process of buying a house. I feel like we are only half-way done with this process, but that is in terms of time. Meaning that we close on March 3rd, 2006 and we agreed to buy the house 30 days before that.
People who know about our imminent purchase are offering up their advice on any number of things ranging from realtors, contract clauses that should be included, banks, mortgages, etc.
There is one piece of advice that I have gotten roughly a dozen times now (that is a lot considering that only two to three dozen people even know about what is going on here.) People tell me not to pay down my mortgage aggressively. I’ve heard their reasons. I understand the logic. I disagree.
I want to aggressively pay down my mortgage, and that is what I will likely end up doing so long as Joy is on board with the idea. I will not go around telling everyone to do the same, or even proclaim that it is financially the best way to operate.
I do think that it is the best plan for me. The first thing that people tell me is that instead of putting my money into paying off my mortgage early, I should invest it into something else that will earn money at a higher percentage rate than the mortgage. They will ask me if I know of any good investments that could yield a better earnings rate than the rate that I got on my mortgage. I say, ‘yes.’
I then get an explanation that if I simply invest the money that I would have put into prepaying my mortgage into that other investment I would be better off considering that I will get to write off the interest expense on the house, and that my extra $10-$30 will be making me somewhere in the neighborhood of $1K-$10K depending on how well my investments do.
I disagree with this advice on many grounds, but to throw out one quick realization that I had… I will be able to write off the interest expense for the first five to seven years in either scenario. The way my mortage (a 5-1 ARM) is set up, I will be paying the exact same amount of interest for the first five years regardless of how quickly or slowly I pay off the mortgage.
My plan is to aggressively pay down this mortgage and be done with it in five to seven years. The money that I may have saved and invested will be taxed. Taxation seems to be a consideration for people when they are suggesting that I make minimal payments, but it is only mentioned as a benefit. They say that I can write off the interest that I pay the banks. Well, I see that as something that will be constant for the first five years no matter what route I take. By saving my money and investing it, I will have to pay taxes on the earnings at the rate that I pay taxes, which means that I will need to get a far better interest rate than originally calculated by the advice givers.
The frustrating thing about all of this is that talking about it, typing it out, explaining and explaining doesn’t really do much. The best way to deal with this is to work out all the numbers. I have done this, but I need to do it again. There are many, many variables so I will end up with a big chart, and in the end I will presumably know what is the better choice. However, I take the quick route and think of it like this… In seven years, I can be out of debt and have a house worth a quarter million or more. All my future income can go towards savings and investments if that is my perogative at that time. Using the other method, I will have paid 30% or more of my earnings in taxes each year. Who knows what my investments will earn? Finally, how much discipline will it take to not touch the growing sum of money that is sitting in my bank or brokerage account? Will my wife or I want a new car? Perhaps we’ll want something else? Will we begin to change our spending habits from feeling that we are more and more financially secure?
I know myself well enough to say that for me personally, it makes sense to get out of debt, and to tie the money down so I can’t spend it in some moment of irrational decision making. Perhaps everyone else who is following this advice is immune to the marketing efforts of hundreds and thousands of people and companies, but I do not think that highly of myself. I see a strategy of aggressively paying down my mortgage as a sort of forced saving, forced financial discpline, and a way to stay inspired to work hard and live frugally for at least the next seven years.