As some of you might know, I have had a frequent battle with myself about whether or not to pay off my mortgage early.
Because I was paying just 2.5% on the mortgage proceeds, it was a very difficult decision to sell off some of my equity holdings and liquidate some of my savings to pay the mortgage out completely.
At the beginning of March 2012, I started selling off some stocks and finally paid out my mortgage on March 16, 2012.
Why Paying Off The Mortgage Was Right For Me
The one constant that we have in personal finance is that everyone’s situation is different. That is, in effect, what makes personal finance “personal” after all. 🙂
In my particular situation there were a few things that seemed to align, leading me to the conclusion that paying the mortgage off completely was the right thing to do.
1.) Variable Rate Mortgage
While I was paying just 2.5% on my mortgage, it was a variable rate mortgage (Prime – 0.50%). This means that the rate could change in the future, and at this point, rates really have nowhere to go but up!
That said, I had paid down the mortgage enough that even a sharp increase in the rate wouldn’t make or break my ability to service the debt. However, any increase interest rates would result in me sending more money to the bank – I think we can agree that sending more money out is not the ideal situation.
2.) Cash Flow Analysis
Cash flow is the ticket to play the game!
You may have heard me say that before, but it is absolutely true. Regardless of your balance sheet, if you are not generating enough cash to service your expenses (liabilities) then you are drowning.
In this case, it wasn’t that I was not able to service my expenses, but the fact that the amount owing on my mortgage balance required more in cash out-flow each month than the corresponding savings/investments were producing. Put another way, my monthly mortgage payment was higher than my average monthly income stream from my savings and equity holdings.
3.) Emergency Fund
As you know, it is very important to have an Emergency fund. Many financial gurus suggest 3-6 months of living expenses. I am more conservative than that and preferred to wait until I had an emergency fund of 12 months of living expenses.
What is important to note is that my mortgage payment was my largest monthly expense. Once I had amassed enough to pay off the mortgage and still have 12 months of living expenses covered (not including the mortgage payment, obviously) I felt I would have enough liquid cash available for emergencies to pay the mortgage off completely.
4.) Stock Market Rally
Over the course of the previous several months, the stock market had been rallying without any signs of retraction. Many of my holdings had been reaching 52 week highs or all-time highs and the metrics did not seem to justify that kind of steep advance in price. In addition, any rally of several months without a pause or retraction is generally unsustainable.
Note: I am far from a successful technical analyst or market trader, but the length of the rally and the fact that I was finding it hard to justifying adding to existing positions or entering in to new ones, led me to believe that the market may be over extended and it might be a good time to cash out and pay off the mortgage.
As you can see, it wasn’t just one factor, but a number of factors that came together at the same time that led me to believe that paying off my mortgage was the right decision.
It should also be noted that none of the equities or savings that I liquidated to pay off the mortgage came from retirement accounts or my retirement pension/employee savings accounts. It is of the utmost importance that those accounts stay in tact.
As with all decisions related to personal finance, everyone’s situation is unique. This post is not advice for you to pay off your mortgage, or follow the same path that I took. The above set of circumstances just happened to come together for me and led me to the decision to pay off my mortgage.
If there is enough interest, I will provide a follow up post with the dates, prices and names of the stocks that were sold to pay off my mortgage.
If you have paid off your mortgage, or are planning to in the near future, I would love to hear your story in the comments!