Written by: Mrs. Horizon
“Just imagine how much we could save if we didn’t have a mortgage payment,” Mr. Horizon lamented while we sat down to write out our monthly mortgage payment. “I know,” I answered, “It would really move the needle. But it is what it is.”
It is what it is; not questioning the status quo, not thinking outside the box, not truly embracing the FIRE mentality. FIRE challenges us to think about money in a new light to give us a different perspective. So why was I just simply accepting that I HAD to pay a mortgage payment? Because who doesn’t have a mortgage payment? But what if we didn’t have to write that bill out every month? Little did I know, Mr. Horizon had been pondering this question and the path to get there almost since we had bought the house.
One night, a few months ago, we were relaxing and talking about our finances when Mr. Horizon said, “Hear me out, this is going to sound crazy…” Usually whatever comes after this preface is going to really make me question his sanity. Mr. Horizon brought up the possibility of nearly emptying our brokerage accounts and paying a huge amount on the house. I was in shock, use all of the money that we had been saving? That was all earmarked for our early retirement! I laughed him off and continued with our previous conversation.
Days later the prospect was still nagging at me; what if we really did do that? It would obviously save us a bunch of money in interest but how much would it hold us back on our journey to FIRE? I started doing random calculations on my phone at work and as soon as I came home, I opened a blank excel spreadsheet and began the task of working through multiple scenarios.
First, I looked at the scenario where we pulled it all out today and paid it on the house then continued saving (as we do now) while making manageable payments on the house (Scenario 1). Then I looked at the scenario where we paid payments and saving (as we do now) until our brokerage accounts equaled enough to pay off the house (Scenario 2). My third scenario was a control scenario where we keep our brokerage accounts as they are and continued with payments on the house. Below is a chart showing the results of this investigation.
It was obvious that sticking with the “control” plan was not going to be in our best interest. It would cost us the most amount of interest, take us the longest, and we would have the house paid off after FIRE! It was a good comparison but not the path for us. Scenario 1, where we used our brokerages to pay as much on the house now then go back to our current pattern of payments and saving, would save us the most in interest but would potentially take over 4 more years to fully pay the house off. Scenario 2, where we would continue saving and paying as we are now until our brokerage accounts were equal to the remaining principal on the mortgage, would be the fastest of the methods but is dependent on the markets doing well for the next two years. None of the methods were ideal but we figured we would continue with our current financial plan and review our options in six months.
Two months later we were walking and talking about the mortgage plan. What makes the most sense? Mathematically scenario 1 would save us the most money but the timeline was longer than scenario 2. It was during this walk that I realized that I had made a huge assumption based on our current lifestyle, I assumed that we never stopped saving in our brokerage accounts. It never occurred to me because in my mind it is a set-in-stone expense that we cannot stop. What if we paid off the house with the money in our brokerage accounts now, like in scenario 1, but rather than continuing our brokerage savings we dumped as much money as possible into the house, while maintaining out 401k’s and IRA’s? The whole car ride home we talked about it and decided we had to do the comparative math on this third scenario.
In comparison to the control and other two scenarios, scenario 3 saves us the most in interest, is the fastest, is not dependent on market growth, and best of all still allows us to get to FIRE in the same timeline as the other methods! We had found our path toward a completely debt-free life!
“Wait!” some of you might be saying, “Why pay off your mortgage at a low interest rate rather than keep that money invested in the market where you can make more than that????”
The Great Debate:
To pay, or not to pay (it off), that is the question. There are two distinct camps when it comes to mortgages, those who believe paying off your mortgage fast and those who believe in using that money to invest. There have been many articles written, podcasts recorded, radio talk shows broadcast, and books published with valid arguments on both sides of the great debate. The camp you are in depends on your feelings about debt, your investing goals, along with your idea of a sense of security. If you don’t like the idea of debt at all and a fully paid off home gives you a deeper sense of security, then chances are that you are in the “pay it all off ASAP” camp. Mr. Horizon is in this camp and although we know that mathematically we could hit our golden FIRE number sooner by investing (as seen above) we would still have a mortgage to pay for another 23 months!
Obviously, the Horizon household has decided that paying our mortgage off early is the best decision for us and there are multiple reasons for this. The first reason we discussed earlier, it gives both of us a sense of security and although this is purely emotional and immeasurable it matters to us for the life we are striving to create. Our second reason is simple, we both agree that interest is a complete waste. Although our interest rate is below the 7% annual estimated return from the market, we still do not want to end up paying nearly double our loan amount just in interest. Our third reason is that we want to be able to focus on one goal at a time. For now, we focus on the mortgage then focus on FIRE. We are both individuals who tend to do better with our goals if we can focus most, if not all, of our attention on it. Since we both tend to thrive in this environment, we decided to use it to our financial advantage. The fourth reason we wanted to do this was because if we can pay off the house before we start growing our family, we wouldn’t have our money being pulled between saving, the mortgage, and childcare. This brings us to our fifth and final reason, we both believe that the market is due to go down. Usually we do not promote trying to time the market but the outlook of the market in 2019 and 2020 being not so positive, we figure if we can take our money out now to pay off the house and buy back in when it is lower that could be a big opportunity for us.
These five reasons resonate with some, but others would disagree because they are in “invest your money” camp. There is no right or wrong, just what works for you and your household.
The Grand Plan:
The general outline of our grand house payment plan has been laid out but the specifics are still hazy. Mr. Horizon and I had a long conversation filled with many spreadsheets one night to lay out exactly how we wanted to make this happen.
First it is important to note that we are 6 months ahead on our mortgage, meaning that our next mortgage payment is not due until September. Mr. Horizon insisted that we pay ahead right when we got the house so that we had a bit of a buffer for the “if” in life. This aspect is a key contributor to our plan.
This month we will withdraw all our money from our brokerage accounts (minus a few individual stocks) and pay a large lump sum toward just our principal. We will continue to pay as much as possible toward our principal (not making an actual mortgage payment) for the next six months. This will save us quite a bit on interest and allow us to jump ahead more payments than if we actually paid a full mortgage payment. After that we will be putting all our extra money, outside of 401k and IRA contributions, toward our mortgage in large monthly mortgage payments.
Using our realistic living expenses numbers, tax advantaged account contributions, taxes, and income we calculate that we could have the house completely paid off 14 months from now! Giving ourselves a bit of a cushion, we want the house to be paid off 27 months from the day we moved in, or 18 months from now. After the house is no longer an expense, we would shift the money that was going into the house into our individual brokerage accounts to work towards our FIRE goals.
So back to the question that I was asking myself at the beginning, who doesn’t have a mortgage payment? With some determination and hard work, the Horizon’s will be added to this list in the near future! FIRE has not only taught us how to handle money but how to look at it differently. This perspective is what helped us find a viable option to pay off our mortgage and buy ourselves a sense of security. If you had told either of us a year ago that we would be having conversations about paying off our house, I don’t think we would have believed you! But we are both ready to embrace this challenge and are excited for our plan to begin taking effect soon! Needless to say, next month's trail log is going to look a little different!