No More Debt, We paid off the Mortgage

The first major pillar just fell on our journey to financial independence.  On March 1st, our family of three went into the bank, met with the mortgage department and when they asked us what we would like to do with our mortgage, I simply said “I want to pay it off.”

The Process

A few days prior to our journey to the bank, we transferred the funds to the checking account at the bank which held our mortgage.  The process was surprisingly simple, the bank employee just wrote out a withdrawal form from one account and a deposit form into the mortgage account.  It only took about 10 minutes for her to process it.  She told us of a $35 closing fee, of course they would get me for a few more dollars. 

They told us that we would be getting a lien release from the bank in the mail in 7-10 days along with a check for any left-over escrow.  She said that the state would be sending us a deed in about 30 days once all the paperwork on the state’s side was complete.

After those short few minutes, she congratulated my wife and I and shook our hands.   And that was it.

To celebrate, I asked my wife and daughter where they would like to eat a lunch, nothing was off the table.  We simply went to Morning Day Cafe on the City of Liberty’s square.

As we traveled to lunch, my wife and I reflected on the crazy number of signatures and paperwork during the loan application process and all the hassle that was compared to how little you have to do to close the loan. 

Actual cut sheet of our original home brochure.

The Goal

Since 2011, my wife and I have sat down each December and conducted our annual financial planning sessions.   These sessions ensured that we were intentional with our finances, if I had to credit one thing for our financial position, it would be those sessions. 

During our 2019 annual financial planning session, we decided that paying off the mortgage would be a priority.  We believe that you need a plan in order to achieve any goal and our planning was key to ensuring the mortgage was paid off.  It was our 2nd priority after maxing out all of our tax deferred savings, which we are on course to achieve.

From our 2019 annual planning post:

Goal #2:  We have decided to finally kick the mortgage to the curb.  I wrote about my back and forth struggle about paying down the mortgage in “Our Debt Position” post.   In mid-2018, we had the funds to pay it off but instead put the money into after tax investments. Our mortgage interest rate is only 2.75% so I sought out higher gains elsewhere.  Owing anyone money is just not something we want to have over our heads anymore so this is the penultimate goal for 2019.

I had initially projected having the house paid off in May.  Thanks to sticking to our plan, a decent bonus and an income tax refund we didn’t anticipate, we completed this goal 2-3 months early.  Which gives us a head start on hitting Goal #3 for 2019 which is to pile all available funds into an after-tax brokerage account.

We have been using Quicken for almost 20 years and have always known our debt position.  In September 2017 when we found the FIRE movement, we decided to track all of our metrics ever closer including debt.  The vast majority of our debt has always been our mortgage with only about $2k – $3k of credit card debt that is always paid off each month.

We got serious about killing off the mortgage in November and as shown by the red arrow, the slope started to change dramatically. 

The Feeling of Not being in debt

I tried to make a big deal about the day especially to my 6-year-old daughter.  I wanted her to remember this moment as something that she should strive towards in her financial voyage.  She was more interested in reading and what activities we would be doing after the bank.  Aside from a special lunch, I don’t think I made much of an impression on her.

Initially, I really didn’t feel that different, I have had the money to pay it off in our emergency savings and investment accounts for some time. I was searching for higher yields so I never pulled the trigger.  Later on that day as I drove down our street, I started to realize the magnitude of the accomplishment.

When I walked in the door, my wife was in the kitchen.  I told her that when I built this house back in 2001, I couldn’t fathom that someday I wouldn’t owe a mortgage payment.  Then I reflected back to our home, the brand-new furnace and A/C, the new roof and the almost new 2-year-old deck.  I told my wife, I don’t foresee any major expenses for several years. We only HAVE to property taxes and insurance.

We then discussed if something happened and we didn’t have steady income, what would that look like?  We would just need to pay the electric, water & gas bill.  We could live for many years if not forever without any income due to our financial position, damn that is powerful!

Home insurance and real estate taxes?

The bank has always handled the payment of our taxes and insurance for the home via our escrow account. Since I never had to worry about these things, I logged into our home insurance site and found that I could take the bank off of the payee list and have them send the bill directly to me. 

Regarding the real estate taxes, I couldn’t find anything on the county’s website so I guess once I have the deed this will just automatically happen.  If I don’t get something by December, I will contact the assessor’s office.

To ensure I am accounting for these larger one time expenses, I opened a new high yield savings account at CIT Bank. I calculated the total I should owe for these and divided it by 12, then I set up an automated monthly withdrawal from our main deposit account. Each year when these are due, I will already have the money earmarked to pay those expenses. Since the money is FDIC insured, this is money set aside at no risk.

Another case for no mortgage

If you retire early with a retirement horizon of 30-60 years, you have to be cognizant of sequence of returns risk which is sequence of poor returns early in your retirement time horizon. Sequence risk is the number one reason your early retirement plan might fail.

If/When we pull the trigger on full time employment and we experience poor returns we will have to reduce our expenses to keep from withdrawing from our portfolio while it is downtrodden.

Your mortgage is probably the highest recurring expense you will ever have. If you have a mortgage and you have a sequence of bad returns you will have to continue to withdraw funds to pay that mortgage. With no mortgage we would be able to cut our expenses down to the point that we only have to keep the lights on and pay taxes. This will enable us to let our portfolio recover before pulling out assets.

For a great post on how a mortgage could jeopardize your early retirement plans, see this article from Early Retirement Now.

Reflecting back

It was 2001 and only two years after starting full time employment that I purchased this home.  I looked at many homes but couldn’t find one that I really liked in a location that I wanted. 

One thing I remember is everyone telling me to buy as big of a home as I could afford, even my parents.  It would only increase in value and I could sell it at a nice profit and buy a bigger home. In 2001 that is just what everyone around me preached, looking back it is no wonder the housing bubble burst.  I was approved for over $200,000, though I was making about $45,000.  That much debt just scared me. 

Finally, in the early Spring, I found a home I liked but it wasn’t in the location I wanted.  Tired of looking at homes, I decided to find a lot in an area that was convenient for work as well as close to family and friends.

My agent recommended a few lots and I found one near the interstate and we purchased it.  The agent also contacted the builder about having him build the house on the lot.  My mom was a great help in building the home, she helped with picking out the cabinets, appliances, carpet, trim, paint etc…  When the builder and I didn’t agree, she was the bulldog pushing him to make things right.

Notebook I kept during the building of the home.

By September 2001, I had moved into the home.  The total price for the lot and the home was $162,000.  I only had to put down $7,000.  Looking back that seems like a very small down payment but it was before the 2008 mortgage meltdown and anyone could get approved for anything with almost nothing.

Swatches from the building of our home

I was Broke

One item that I didn’t realize is that once you are in a home the next line of expenses appear.  I soon realized that I needed a lawn mower, blinds for the windows, a weed eater, deck furniture and the list went on and on. 

During the building of the home, I had asked for some extras or changes.  Those changes had to be covered out of pocket.  With the $7k down payment and the cost of the extras it strained my bank accounts.  I remember going to the ATM and seeing that I had less than $50.  It was downright scary.  I also had two brand new cars with payments over $1,200 per month with monthly insurance for them at $200.  That moment struck me hard and I vowed never to be in that position again. 

When I bought this house, I only planned on being here for a few years and moving to a home with some acreage.  Here I am 18.5 years later, married and raising a young daughter.  At times, we have considered moving but I am happy we resisted.  We are now free of debt and looking down the barrel of an early retirement plan.