I have a co-worker friend that is hell-bent on paying off his mortgage as quickly as possible. Paying down debt of any type and saving for the future is a noble cause, but he’s pretty much obsessed over it and I can’t help but question (as I have to him) what he’s giving up in exchange. So I thought I’d pose it to you as well.
Essentially, he wants to pay off his 30 year mortgage in like 7-8 years. He has a good rate at about 5% (here are rates in your area), so after the mortgage interest deduction, let’s just call it an effective rate of about 4.5% conservatively. That being said, here are the lifestyle and savings choices he’s traded for this goal:
- No more kids – So, this is a guy that I assume makes what I do since we’re at about the same level in the same company. His wife works here too. So, at a minimum, they make about 1.75x my salary/bonus. He claims they couldn’t possibly afford another kid (they have a toddler now). When I raised an eyebrow and joked about my 3, he said it’s because of the mortgage. He’s paying thousands of dollars extra each month to pay it off, so things are tight. I tend to think perhaps he just doesn’t want more kids and he’s telling his wife they can’t afford more. But one would tend to think if money were really preventing giving the kid a sibling, perhaps the $2500 mortgage pre-payments could lighten up a bit?
- Retirement Savings – He’s mentioned before that he saves about 10% of their income in total for retirement. Personally, I’d think investing in a tax-deferred account and earning (conservatively) 6% or up to 9-10% (rosy) over a long period of time beats the heck out of an effective 4.5% return. A lot of people try to save 15-20% for retirement since Social Security likely won’t help people like us much 30 years down the road, if at all, and tax rates and inflation are quite uncertain as well. Perhaps those mortgage pre-payments would be better off directed toward retirement accounts?
- Liquidity – The other downside of this mortgage prioritization is that while those payments turn into equity in the home, there’s no liquidity! In the event of job loss or health issues, at least with a taxable trading account or retirement account, there’s access to those funds, possibly even under the 401(k) hardship withdrawal provision. But with money tied up in the house, you can’t tap that. Especially if you just lost a job – no more liar loan home equity cash outs like the old days. That cash is locked up until you sell your home – which isn’t easy any more.
- Working Mom Forever – He’s kinda freaking out about his wife losing her job as well since her department has projected some cutbacks. I questioned what the big deal would be if she just took the severance, collected some UI and stayed home with the baby for a few years. (We do it on one salary and 3 kids?). He said that clearly wasn’t an option, as it would prevent them from realizing his mortgage pre-payment goals. So, she’s searching around with headhunters now in case she gets laid off, since it’s much tougher to get a job once you’re out of work.
On one hand, of course it’s great to get a mortgage paid off, but these are self-imposed restraints that are having a pretty substantial impact on how they live now and don’t provide for much flexibility or lifestyle choices. I guess if they’re both satisfied with the approach, who am I to question? But this scenario probably exists with people you know as well – people obsessed with paying down a mortgage, fully funding a kid’s college savings account by the time they’re 3, squirreling away so much that life passes them by, stuff like that. Interested in your thoughts.
Overboard – Or Just Very Disciplined and Responsible???