Marvelous Money: Our new mortgage plan

Two and a half years ago, I shared with you our plan for paying off our mortgage early. In that post, I walked you through our journey up until that point, from simply making extra payments each month to investing the extra payment in a brokerage account. Over the last year there’s been a new plot twist (as I alluded to in this post!), and I’m happy to pull back the curtain today!

Let’s look at a timeline, shall we?

Spring 2013: We buy our house! We pull together a 13% down payment.
Fall 2014: After paying off our car loans, we use about half of what we had been paying to make an extra mortgage payment each month (directly to the bank), and the other half to build up a fund for our next car purchase.
Fall 2015: Car fund complete, we shift the amount we’d been paying toward our mortgage, too. Instead of paying down our mortgage directly, though, we begin transferring the extra monthly amount into a brokerage account and invest it in a mutual fund.*

The main critique of paying off a mortgage early is that it doesn’t make sense to pay off a low interest rate mortgage when you could be earning higher rates of return by investing. We still planned to pay ours off early, but ALSO wanted to take advantage of compounding interest by investing the extra payment instead of applying it directly to the mortgage. We were comfortable with the extra risk that exposed us to (and the extra willpower it required of us!).

When we saved enough to pay off our mortgage, we would pay it in one lump sum. Hooray, right!?

My husband, though. He’s always thinking. And last year, he came to me with a suggestion: what if, instead of simply saving the amount we needed to pay off our mortgage and then handing it over to the bank in one huge sum, we saved a little longer – maybe two or three years, maybe less, maybe more (depending on the market’s performance). If we could wait just a few years longer, then we would have amassed a large enough amount of money that, carefully invested, the returns themselves would be large enough to cover our monthly mortgage payment, meaning our mortgage would no longer need to be a part of our household budget.

It would be as if we had paid off our mortgage, and yet, we’d also be realizing these other benefits:

1. We would not lose the mortgage interest tax deduction (less of an issue under current tax law).
2. By the miracle of compound interest, in 23 years, when we make the actual final payment, our calculations project we should still have anywhere from 50% to 150% of the money we started with (!!!).
3. That large remaining lump sum could then be used to pay for kiddo college tuition, a rental property, a fabulous vacation, some really extravagant generosity, or – most likely – all of the above.

A mostly unrelated but highly adorable photo of Shep and our home

When John first presented this plan, I was not particularly enthused – all I heard was “a few more years of saving” and no “we’re debt freeeeee!!!” scream. (Because technically we wouldn’t be, and it would be weird to scream “we have XXX in our bank account!!!”)

But John’s desire was to make the most of our years of sacrifice, because we both desire to be good stewards of our money. This sounds harsh, but to work so hard to save so much and then sink it directly into a illiquid asset like a home instead of allowing it to continue to grow seemed like a squandering of possibility. If we could steadfastly reach this goal at a relatively young age, it would behoove us to continue that momentum instead of slamming on the brakes by sinking it into our home.

Okay – I was on board. And maybe you’re nodding alongside me right now. This all sounds good, right?!

Here’s the HUGE X factor – with this iteration of the plan, like the last one, we are vastly more exposed to the market than we would be if we were making payments directly to the bank each month. As I talked about in this post, by making those payments directly, it’s like getting a guaranteed 4% (or whatever your mortgage interest rate is) return – nothing thrilling, but respectable for zero risk. Our approach requires accepting that the money we’re socking away could actually lose value – and that’s why we don’t know exactly how long it will take us to reach our goal.

Worth mentioning at this juncture: if you like the idea of trying something like this, I would highly recommend working with a financial advisor (and one who understands what you’re trying to do). Of course, it’s possible to make investment decisions on your own, but I don’t want to give you the impression that it’s just little Miss Creative Director over here knowing all the things and that you should be able to do the same. John IS a financial advisor, and if he weren’t, we would definitely be seeking expertise on decisions of such magnitude.

A final word of caution, the same one I gave in my last mortgage post: I would only consider doing our “next level” system if you have a long track record of steely willpower with your money. It is so tempting to just take a little here or there as you watch that fund grow and other needs come up. If you’re nervous you’d be tempted or don’t want to stomach the risk, just apply the extra payments straight to your mortgage – done and done. Also a fantastic option.

I want to end by saying I realize this post is Marvelous Money 301. It’s a more advanced topic than I usually touch on, and perhaps it feels wildly out of reach for you right now. I get that. I share this not to brag (!!!) or make you feel defeated (hopefully you know that!), but to stretch your imagination of what’s possible, and perhaps plant in you an idea that you’d never heard of before.

My next MM post (series!) is going to be squarely back at the 101 level, and it’s the most-requested topic that I’ve yet to touch on: investing 101! I can think of few topics that are simultaneously as intimidating and as powerful. I’m excited to dig in :)

*Earlier this year, as an experiment, we shifted our money from mutual funds into a managed account. We’ll talk about this more in the forthcoming investment series!

A final reminder: I am not a financial professional, and nothing I say here should be construed as investment advice! I’m just one gal sharing her story :)