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[The following is a partial transcript of this episode of The Scott Alan Turner Show. Listen to the full episode to hear this story, listener questions, money hacks, and inspiring stories of people that are changing their financial lives. Subscribe to the free podcast on iTunes or Google Play]
One evening at a party I was speaking with someone about a 7/1 ARM they have on their house. They had this sick 2.0% interest rate for the next five years in. That’s like free borrowed money, right? I bought my first house with a 5/1 ARM. It was fixed rate for the first 5 years, and then it adjusted up after that.
We discussed refinancing to a new 30-year or 15-year with the current rates and if it would be worth it.
I thought back to my first house, the mortgage, the cost. My problem was everything was going towards my house and my car. And nothing towards savings. Regular listeners know the story I sold the car to get rid of the $800/month car payment.
Without a car payment, I was able to put extra towards my house. Between paying extra and an increase in the value, at around the 2–3 year mark I was able to refinance to get rid of PMI that was costing me $130/month, and get a lower mortgage rate.
When everyone started asking me why I sold my car, I laughingly told them, because I was embarrassed at the real reason, I traded it in for a house. It was kinda true. But what was I going to say – well, I’m a money moron and I’ve got no savings and all these bills to pay.
People get to choose where there money goes.
My mistake was I chose a big mortgage and a big car payment that kept me from saving. There are a lot of people that make the same choice as I did, not because they aren’t smart, but they haven’t gained an understanding of the risks of the choices. When things look good:
- the economy
- the job market
- the housing market
everything looks good.
It’s kinda like going outside in late Spring on a cloudy day. It’s not too hot, there’s a breeze blowing, they stay outside a little too long. Then the next day they look in the mirror and have a sunburn. After being inside all winter they forget you can still get a sunburn on a warm, cloudy day.
There was a downside to the really nice weather.
When you first get into a house with a 30-year mortgage, those first years it seems like
- the principal balance doesn’t even budge.
- The interest payments seem about 20x more than what you pay towards the principal
- Is this thing ever going to get paid down
With the extra $130/month not going to PMI, and less going towards interest with my new rate, I was able to put more towards investing and more towards paying down the house. It was just a really good feeling seeing my mortgage go down, down, down each month. It becomes addicting.
- How much extra could I throw at the mortgage each month.
- How low can it go!
- Take that bank!
And it was a good time in the housing market because the value of my home went up quite a bit. I ended up getting married and selling my house (because I was an awesome dude and I loved my future wife!) so she wouldn’t have to move and commute an hour each way.
With that equity from the sale of my house, we paid off the $20,000 second mortgage on my wife’s townhouse which had a 7% interest rate. So the things I had been doing on my own had this huge positive impact on our first months of marriage.
- saving money on interest
- less of a mortgage burden
- getting on the same page with a plan to grow our lives together
This was from Big J, a listener of the show.
Neither my wife nor I have ever lived beyond our means which is arguably the biggest factor in becoming a financial rock star. After 11 years of marriage our standard of living looks remarkably similar to when we started out. Before we hitched our wagons we read a personal finance book together and agreed we would live by the financial principles outlined in said book. Since then, we’ve added four kids along the way so our grocery bill, rec league sports, and music lesson costs have crept up over the years but by and large we’ve stuck to our plan which has culminated in paying off our mortgage, funding our children’s college education, and building $1.5 million net worth by 40 years old.
The effect of paying one’s house off is awesome. I was on the fence, debating whether to invest extra income or pay the house off. My resolve was challenged when I saw market gains over 20%, compared to my returns of 3.5% (my mortgage rate, even less after deducting from my taxes). However we stuck with our plan to be debt free including our mortgage and I can say with certainty we made the right decision for us. After making the last payment there was a wave of relief knowing my single largest financial obligation was gone, kaput, nada mas. See, I have a relatively stressful job that pays me extremely well (at least I think so). I’m still at it, but if the day comes that my health & wellness, or that of my family is being impacted by my job, I can simply walk away and find something different to do.
Secondary effect of paying one’s house off… wealth accumulation. When you focus all your extra cash on paying down your mortgage and then the mortgage is no more, you have a TON of cash each month to use for things like kids college, real estate investing, maxing out retirement accounts (if you’re not already doing that), starting a side gig that requires some capital, and most importantly, being generous. The ability to help someone in need is an incredible benefit to being debt free.
The third effect of paying off one’s house? OPTIONS. Without any debt I’m free to pursue whatever career interests me. I’ve worked in IT my entire life & am ready to transition to something different. I would not be able to pivot from my current job to a new career if I was still making mortgage payments.
Everyone knows the quicker you pay off your debts the less interest you’ll pay, but there’s more than just saving money.
- If I didn’t have that lower mortgage payment, I don’t know if or when I would have been able to leave my corporate job
- which means I would have continued working 80 hour weeks
- I’d be burnt out
- I wouldn’t have been able to volunteer at the Atlanta Botanical Gardens on Friday mornings pulling weeds at out the kindness of my heart.
I hear all the time “yeah but with interest rates so low, I can invest and make more.” That math works on paper all the time.
Math can be a great answer as long as it’s used to answer the right question. The problem is people aren’t asking the right questions to begin with.
In 2017, Bitcoin looked great on paper. In 2018, not so much. People lack the understanding of risk and return, they only look at the returns. Playing the roulette wheel in Las Vegas has a great return of being able to double your money. But the risk is you could lose all your money.
What I shared with the person at the party were the returns you can’t measure, with a risk that doesn’t register:
- What is the return for you on being able to move anywhere, anytime
- What is the return for you on leaving that job or career and pursuing your passion
- What is the return for having more time for travel or spending with your family
- What is the return by not having the stress of ‘gotta pay the bills’.
The risk doesn’t register because it’s off the charts it’s so risky.
The return is so great because you have to sit back, think about it, and imagine what that freedom looks like to you.
The mistake I made was following bad advice and buying into society’s path for life.
It’s kinda like this – if you received an inheritance for the exact same amount as all of your debts, what would you do with the money? Most people would pay off all the debts. At least those people who have been listening to this show, because you know already what that freedom looks like. And if you’re not there yet, you can taste it. It’s coming.
Everyone knows during the housing crisis ten years ago, people were getting foreclosed on left and right.
- Adjustable rate mortgages adjusted up creating huge mortgage payments
- people had no equity in their homes and were underwater just as they lost their jobs
- they couldn’t make payments.
Do you know who didn’t get foreclosed on, who wasn’t underwater, who didn’t have mortgage payments rise?
Everyone that didn’t have a mortgage.
The grass is greener on this side of the fence, when there you own your house and have no mortgage. It’s the Cadillac of grasses – Emerald Zoysia, like they have at Augusta National golf course. Greenest grass and most exclusive grass in the world. But unlike Augusta National, anyone can come play on this grass.