My husband and I were having a conversation the other evening about an acquaintance of ours who complained about the evil-ness of having a mortgage. Two things immediately ran through my mind: 1) Isn’t having a mortgage just part of growing into adulthood? And 2) It sure seems like more and more people are anti-mortgage.
Yes, I know, it’s shocking when I run the amortization schedule on my own mortgage and see the total amount of interest we will pay the bank over the term of our loan. It’s pretty much like saying I will devote two years of my income to the bank. No income left for anything else. Not even groceries. Just send my paycheck to the bank. For. Two. Years.
Then, I think about paying income taxes. If I retire at 65, I’ll have given 11 years of my income to the government. Suddenly, the two years I’ll have given to the bank doesn’t seem so bad. There’s some perspective for me.
Okay, I’m done with the tangential thinking for now. Back to the conversation we were having.
The conversation I had with my spouse revolved around whether having a mortgage is really so awful. No, we weren’t attempting to justify the existence of ours to feel better about our current position. We enjoy having conversations about financial policies for our family (we treat our family a bit like a business, yes) and it’s natural for us to revisit those policies and assess whether a change is needed. So, the question we raised is: Should we use our extra monthly income to quickly pay down our mortgage, like our acquaintance is doing?
(I’m not going to use the tax deduction for mortgage interest as a reason to keep the mortgage. While the deduction is available for those who itemize, it’s not a significant benefit for us when compared to the total cost of the interest paid over the life of the mortgage.)
The first thing I thought we should consider is the time value of money. This is a financial concept that assumes money can earn interest and, therefore, is worth more in your pocket now than later. Of course, this concept assumes you’ll do something invest-y with that money in your pocket (and not blow it on a shopping spree to Nordstrom). Let’s say our mortgage interest rate is 3.5%. If we pay down our mortgage early, it’s basically like earning 3.5% on our investments. So then, what else can we do with our money to earn more than 3.5%?
That got us thinking about other things we could do with that extra monthly income. We could invest in our homesteading operations, such as create a bigger chicken coop for increased egg sales. Or, we could make improvements to the homestead that would save money over time. Better insulation, maybe? Heating costs in the winter are high despite the fact that we also use our wood-burning fireplace.
Of course, other people who aren’t thinking of homesteading investments may have other financial priorities to consider. They may be building an emergency savings, or saving for college or a home purchase. Others may realize they’d prefer to put some money aside for retirement. The value of having peace of mind in your financial decisions should be considered. If you’re on track to pay off your mortgage before you retire and you’re nervous about your retirement account balance, you know what to do with that extra monthly income to ease that anxiety.
For us, we are choosing to keep our mortgage and invest in our homestead. For now. What about you? What are your financial priorities right now? What would you do with extra monthly income?