House Working Part-Time?
Paying off your mortgage is like working at a second job!
By paying off my mortgage early, I get to keep an additional $15,000 a year!
Let’s say that you decide that your first job wasn’t enough money, or that you want to dig yourself out of debt. If you were to get a part time job working 20 hours a week at a wage rate of $14.42 all year round, using straight simple math, that would be the pay rate that it would equal to have $15,000.
But that’s not entirely true, actually you would have to work 20 hour at a pay rate of $18.03 (assuming your in the 25% marginal tax rate). The reasons for the higher pay rate is that the money that you would pay your mortgage with would be after tax money. Even that number is low since I didn’t take out FICA, insurance, state tax, etc!
This year, I’ve really noticed that my checking account balance is growing quickly! I’ve transferred money from my checking account into my online brokerage account every so many months. It’s been great!
Some may say “but what about the itemized mortgage interest deduction and the fact that you cannot deduct the interest on mortgages” . Well, I’m going to tell you a secret… after you get your mortgage payments low enough after a few years, the standard deduction is so high that those itemized deductions really don’t matter! For my family, it didn’t take long to hit the break even point between the standard deduction and itemizing things. Since we were prepaying, we met this crossover threshold after about 5 years.
The extra money has come in handy for us, making it easier to afford sports and other activities for our kids. We are also planning larger vacation, perhaps even overseas soon.
The beauty of that extra $1,250 each month is that I can invest most of that money so that it even grow more quickly!
Do you share my viewpoint that not paying $1,250 extra a month would be equivalent of getting a part-time job working 20 hours a week? Of course, if for some reasons my primary job was lost, so would my pseudo part-time job too.
-MR
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Prepaying mortgage is never a bad idea no matter how one wants to spin it! You make a great point with standard deductions!
Congratulations MR!
Thanks 🙂
The Standard Deduction was a big reason that I excellerated my payments. Unless you have a 250+ thousand dollar mortgage (or there abouts), the Standard Deduction is so high that the benefits of itemizing is debatable…
agreed, that’s why i am not an advocate of it. i find it interesting that many buy a home and justify it bec of the mortgage int deduction and not other more important reasons.
Yeah, the mortgage deduction on taxes should not be a factor in dragging the mortgage out to the full term period.
Completely agree! Any cost avoidance, large or small, is equivalent to increasing income when considering gross pay.
I’m enjoying it! My son just got braces, and normally I would be sweating it (since I always pay off my credit cards monthly), but this time it was no problem and no worries! Truly an awesome feeling!
Ok, I cringed a little, but not too much!
Huh. While my mortgage (minus the escrow) is $14.6K/year, only about half of that would actually be “saved” if I didn’t have a mortgage, because I get to keep the part that goes to principal. That is, I’m buying house with the part that goes to principal. It’s only the interest part that’s like getting a part-time job. And that part gets smaller each year. I’m at about $6K/year in interest these days… which is really less than rent for 3 people and 2 cats most places around here.
I didn’t include the escrow in my calculations above since I still have to pay that portion…
No, when you make a house payment, you make both the principal and the interest…
This is about cashflow, not equity (lol).
I’m making the argument that my cashflow is greater now that I have my house paid off in 10 years instead of 30.
I’m telling you it’s quite literally like having a part time job that pays my an extra $1250 a month!
It’s wonderful to be able to invest that money or pay an cost that arises without sweating it.
Um, okay…
Based on the other comments I think they get what I’m trying to convey.
Read Evan’s post below if you want to see that same material from a different writing style. Our posts differ only in I paid off my house mortgage whereas he paid off his auto loan. Save feeling and meaning, different debt instrument.
No, I think folks are not getting that the part of the mortgage going to principal is not just disappearing, it’s still savings. The part that was going to interest, sure, that’s bona fide new cash flow.
And that cash flow is not the same as income.
How is paying down principal any different than putting money in a 401(k) in terms of cash flow? (Yes, it is different in terms of diversification, but it’s still savings.)
That’s actually a very reasonable advice and maybe by paying the mortgage early I can afford to buy a brand new car. 🙂 Thanks for sharing this!
It would be nice to buy a brand new car! I’ll probably end up buying a used car with cash though…
Although I am not as aggressive as you, I am paying extra principle and an extra payment to have my mortgage paid off by the time I retire.
That makes sense too, especially with insurance rates so low.
I just hate consumer debt, but I would consider investment debt to start a new business or expand an existing one or buy real estate.
That is a cool example of my favorite reason to pay down debt – the automatic raise you give yourself!
Thanks! Yeah, now that I have that freedom in my paycheck, it is very nice!
Love it! Congrats to you and the family.
Watching your investments grow is almost like watching your children grow, well maybe not that good, but almost!
I have money in my 401k, but it almost doesn’t seem to count to me. I guess because it’s really for a future me and not the present me…
I’ve always had some investments, but now I have the opportunity to start to pour some money into them finally. It’s still a small stream compared to most, but still it does make me happy (as long as they don’t go down).
We are putting an extra $500/month toward the principle. It’ll still going to take forever to pay this place off though….
Wow, that’s pretty good considering all of your other investment/real estate holding!
We went with double payment in the beginning, but then pulled back in the end when we were mostly playing mostly principal. Still we were able to get it in about 10 years
It’s a good analogy! I don’t have a 2nd, but I do have a rental mortgage which I plan to pay off in 5 years. It’s fun!
I really need to get some rental property someday. That is one kind of debt that I wouldn’t mind having (as long as it provided a positive cash flow).
I’ve been on a mortgage payoff journey myself and for me it’s more of an extra emergency fund/retirement plan.
My goal is to someday be able to live off any minimum wage job and survive. When you’re fixed expenses are low, then it’s possible.
I also want the flexibility to be able to exit the workforce if I have to for an emergency, like a sick family member, etc, so having low fixed expenses would enable that.
How are you going to diversify your savings now that you don’t have a mortgage? Mortgage pre-paying was always my way to diversify. That was my “safe” investment with a guaranteed rate of return. Safe things like CD’s aren’t making much.
Note here that FGA understands that mortgage payment is a form of savings and a form of real estate diversification. I also think she’s smarter than Evan (kidding, Evan!)
Lol, I think that any pf blogger that pre-pays their mortgage know that… Especially Evan 🙂
Sandy’s a smart lady. Evan works as a director (I think he’s a director anyway) at a wealth management firm.
You are on the same wave length as I am. Actually I posted about the same though sometime last year. My goal is to have interest income pay out certain levels. I even use the poverty level as a basis of my milestones (this is what I call them).
Yep, the mortgage pre-payment was forced saving, and great! I’m pumping most of my money into investments.
I’m no so crazy about CDs, but I recently read that SAM uses the longer terms ones as asset diversification.
I was thinking about this exact same subject in a slightly different way yesterday…when our mortgage is finally paid off in 6 years or less, that $900 a month is going to go pretty far bridging whatever gap my working-at-home income may have in any given month.
Seeing as I only bring home $26,000 a year now, and that I hope to blog full time when I’m bringing in at least $25,000 in profits a year, the extra $10,800 we won’t be handing over to the mortgage company will definitely fill in whatever holes are laying around!
In fact, I guess I would see living mortgage free as the best part-time job ever since it doesn’t actually require the truly priceless commodity of time! 🙂
Hmm, good point! I was thinking from a money equivalence standpoint.
But you are right, it’s like money from a 2nd job but without doing any work! It’s the best part time 2nd job I’ve ever had 🙂
or it could mean working $1,250 worth less each month 🙂 you can pick your pleasure either way, congratulations. definitely a situation to look forward to for many
In a spreadsheet, I actually tracking my crossover point. This is when my expenses will be less than my income from dividends/investments… By getting rid of my mortgage, I cut my expenses by at least a forth!
So now I’m jealous. I wish I could pay off my mortgage. Do you have any tips on how to pay it off early?
In my case, it was slow and steady… And the use of a good spreadsheet. I created an amortization schedule and whatif analysis.
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Congrats on closing off the biggest monthly expense in a budget! That is my target for ~2013 if possible.
I am looking forward to that point as it secures your lifestyle and frees a decent chunk of cash!
It’s nice, but it only reduced my total expense by about 25 to 33%…
Since I don’t have any other debt to get rid of, now I have to focus on building investment income (or earnings income), since I can’t pay my way out of taxes and food 🙁