A mortgage represents the most significant debt obligation most Americans will take on in their lifetime, even considering that the average attorney starts with about $150K in student loans. Since it is a low-interest debt—current interest rates for a 30-year mortgage are hovering at ~3%—traditional advice holds that it is most financially efficient to make the required payments and put any excess money elsewhere. This article argues that high-income professionals like Biglaw associates should ignore this advice and pay off their mortgages early. Many Americans have the long-term financial goal of (eventually) paying off their mortgage, and the average American millionaire has paid off their mortgage.
Five reasons to pay it off early:
1. You’re already maximizing your tax-advantaged accounts
Assuming you’ve already prioritized each dollar, let’s also assume the following:
- You’ve been at it for a few years and you’ve been earning a $200k+ salary and yearly raises
- You’ve paid off your student loans, perhaps after refinancing
- You have no credit card debt or car payments
- You’ve got sufficient cash for an emergency fund
At this point, you should be making the maximum allowed contribution to your firm-sponsored 401(k) ($19,500 per year) and your Backdoor Roth IRA ($6000 per year). That leaves you with somewhere around $180k in gross pay. After living expenses and, if you have high deductible health insurance, a Health Savings Account, putting some of that extra cash toward a mortgage is a great way to build wealth. Even making just one additional mortgage payment a year would pay off the loan four years early (for a 30-year loan).
2. You’re not getting a tax advantage
The Tax Cuts and Jobs Act made it more difficult for taxpayers to itemize deductions, so most taxpayers will take the standard deduction. Therefore, it’s much less likely that you can take advantage of the mortgage interest deduction. In effect, this means that interest paid on your mortgage is doing nothing to offset your tax burden.
Couple this with the knowledge that the high-income professional is paying at least 15% in long-term capital gains taxes, and it makes mortgage payoff even more attractive. Putting would-be extra payments into a taxable account while making minimum mortgage payments might, in the long term, reduce your after-tax yield. Besides, once you pay off your mortgage, you can roll your monthly payments into a taxable account and build even more wealth. You’ll pay the same capital gains rate when you sell either asset.
3. You want to retire early
Many people who successfully retire early have paid off their mortgage before the end of its term. Having a paid-off home can be the financial freedom you need by reducing your expenses dramatically and allowing you to retire early. Without the $2-3k mortgage payment, your road to financial independence might be significantly shorter. Even if you’re not looking to retire at 50, paying off a 30-year mortgage in 15 to 20 years could end up saving you tens—or even hundreds—of thousands of dollars in total interest.
By leveraging a Biglaw salary and its associated annual raises, you could either start with or refinance down to a much shorter term, like a 15-year fixed-rate mortgage. A shorter term can be especially beneficial if you want to be aggressive about paying it off: some mortgage lenders charge a prepayment penalty if you pay too much of the balance off in any given year.
4. Rich people don’t have mortgages
An average Joe making about $60k per year might have no choice but to leverage their home for financial benefit. Wealthy people simply don’t have that constraint. In fact, the average millionaire has a completely paid-off home, having done away with their mortgage in an average of about 11 years. Considering that more than 80% of homebuyers take out a 30-year loan, this means the average millionaire took a third of the time to pay off their mortgage.
5. Balancing risk
As investment vehicles go, real estate isn’t exactly ideal, especially when it’s your primary residence. Your money is locked up in home equity until you either refinance or sell the house, your rate of return is much lower than the stock market might give you, and with all the confusing or hidden fees and closing costs, you might not come out ahead, especially in the short run. The 25-year average return on home prices is about 4%, which only beats the average inflation by about 3% over the same length of time. On the other hand, home prices tend to be much less volatile than the stock market. So putting extra money into your home might not be a bad way to hedge your bets if you’re already maximizing your tax-advantaged accounts.
The Bottom Line
What you do with your excess savings after maxing out your tax-advantaged accounts is a highly personal decision. For the Biglaw associate making more than $200k per year, there are some pretty solid reasons why you might consider parking that money in your house by paying down your mortgage. In the end, you’ll experience the financial freedom of having absolutely no debt payments. Paying off student loans feels amazing, so owning a house outright—and eliminating your most significant expense—can only be that much better. Being truly and completely debt-free is quite an accomplishment.
Convinced? Here are some strategies:
Make an extra payment each year with biweekly payments
One winning strategy is to make your mortgage payments every two weeks instead of once per month. Doing this will lead to making one extra payment each year, which can save the average homeowner about four years on a 30-year mortgage. For example, if your mortgage payment is $2000 per month, you’d make a $1000 payment every two weeks. This works especially well when you get paid every two weeks or twice monthly and is an excellent strategy for those with other financial priorities.
Apply your excess monthly income to the principal
A more deliberate (and less automated) approach is to apply the excess of your monthly budget toward your mortgage as an additional payment. When everything else is paid up for the month—food, minimum mortgage payment, etc.—the rest can just go straight to the mortgage. The most effective use of the extra payment is to specify that it should be applied to the principal only. This is known as a principal-only payment. In the long run, this can save you a lot of interest and potentially save you from prepayment penalties charged by the lender. Making principal and interest payments with this excess will definitely pay down the mortgage, but using a principal payment minimizes the overall amount of interest you’ll pay over the life of the loan by reducing the principal balance much quicker.
Throw your Biglaw bonus at the mortgage
Bonuses can be dangerous for someone trying to manage their personal finances in a disciplined way. The possibilities are endless for how to spend your bonus; some of them can exacerbate lifestyle creep and keep you in debt longer. A great way to use your bonus is to apply it straight to your mortgage principal in one big lump sum. This can prevent you from developing a dependence on your bonus to support an ever-expanding lifestyle, all while progressing toward the peace of mind that comes from being completely debt-free.
Refinance your mortgage to a shorter loan term
If you find yourself with sufficient excess cash each month to make an extra mortgage payment, you might want to consider refinancing to a shorter term. The majority of American borrowers take out a 30-year loan to pay for their home, but if you have the income and credit score to support it, a 15-year mortgage term (or less!) can save you a ton of money in interest payments.
This is another strategy for automating an early payoff. Once you’ve refinanced, all you need to do is make the monthly mortgage payments, and your home will be completely paid for in just 15 years. Plus, if your current home loan has a higher interest rate and you can qualify for a lower interest rate, it can save you a lot of money in interest over the life of the loan.
Apply your tax refund to your mortgage principal
On the off chance that you get an income tax refund, funneling it directly toward your home loan can be an effective strategy to pay off your mortgage early. Much like applying your bonus to your mortgage principal, using your tax refund as a lump sum can prevent lifestyle creep and other temptations.
Choose your own adventure
If you’re looking for a great way to leverage your high salary, paying off your mortgage isn’t a bad place to park your excess cash. There are numerous strategies for bringing your mortgage balance to zero before the end of its term, and we’ve only examined a few here. What do you think? Are you going to pay off your mortgage early and get to absolute debt zero? If so, what is your strategy?
Joshua Carrigan is a 3L at George Washington University Law School. Joshua spent eight years as a Nuclear Submarine Officer for the US Navy and is also a licensed skydiver. Four years ago Joshua and his wife embarked on a journey to become debt free, paying off $170,000 in student and car loans along the way.