FREE NEWSLETTER
THIS IS THE STORY of how I thought I’d successfully timed the market—but didn’t.
I started investing in 2007, when the stock market peaked, which wasn’t great. But then came 2009 to 2019. Stocks enjoyed the longest and one of the strongest bull markets in history, averaging some 15% a year. Thanks to that great bull market, my wife and I found ourselves with more in our taxable mutual funds than we owed on our home mortgage.
Should we pay off our mortgage early or continue to let the money ride? It was an issue I struggled with. By late 2019, the stock market’s price-to-earnings ratio was near historic highs as share prices hit record levels. My philosophy: If you’re selling at all-time highs, you can’t be wrong, even if prices eventually and inevitably head higher.
I’ll admit to also being influenced by radio host and personal finance guru Dave Ramsey. Ramsey’s “God’s and grandma’s” advice is to get out of debt, stay out of debt, build an emergency fund, invest for retirement and then pay off your house early. Like most financial experts, Ramsey acknowledges that the math favors continuing to invest in stocks, which historically have averaged around 10% a year, rather than pay off a home mortgage with a 3.5% interest rate.
On the other hand, there’s a kind of magic to a paid-off home. As someone once pointed out, you can’t live in your mutual funds—plus, as I told my wife, if we hate being debt-free, we can easily remedy that problem.
After a few years of hemming and hawing, wearing down my wife, and getting some tax advice from an accountant, we decided to pay off the mortgage at the beginning of 2020. To break up the resulting capital gains tax bill from selling part of our mutual fund holdings, we opted to sell half the necessary amount at the end of 2019 and half at the beginning of 2020. By mid-January, everything was cashed out. I walked the final check into my mortgage company’s local branch. What a feeling—to be completely, 100% debt-free and just days before my 40th birthday.
What came next was even better. As the global economy shut down amid the pandemic, the stock market sank by a third. Clearly, I was a genius. I had just successfully timed the market.
But I also knew a few things about timing the market: It was supposedly impossible and—even if you managed to sell at the right time—you couldn’t reliably time it right on the way back in. Sure enough, even though I had successfully sold at the right time, I didn’t successfully “catch the falling knife.” Having just paid off my mortgage, I was fresh out of cash. With what little I had left, I invested in stock mutual funds in late February, but the market continued to fall precipitously from there.
The market then did what it does best—humble those who think they’ve figured it all out. This time, it was me. The meteoric recovery that ensued was astonishing and, by year-end 2020, the mutual funds we’d sold were 30% higher.
I never liked making the mortgage payments each month, but I’ll have to confess it was also distasteful to write checks to the IRS for our 2019 and 2020 capital gains. Nevertheless, I’m with Sinatra: I have too few regrets to mention. Yes, I missed out on the remarkable growth of a few hundred thousand dollars over the next year. But how would I have felt watching that same money sink 30% in February and March? Would I have sold at those lows? I don’t think so, but I can’t be certain.
Indeed, early last year, while the entire world was going crazy amid the global pandemic, recession and unprecedented lockdowns, I rested easy knowing no one could take our house away. And it isn’t as if we got no benefit from the 2020’s stock market rally. We had substantial money in retirement accounts—and those dollars rode the wave up.
Licensed in both Ohio and Kentucky, Ben Rodriguez practices real estate law in Cincinnati, where he lives with his wife and daughters. Since 2009, Ben’s made a hobby out of personal finance by reading books and articles on the subject, and also listening to podcasts.
Want to receive our weekly newsletter? Sign up now. How about our daily alert about the site's latest posts? Join the list.
Ben,
How many years did you have left on your mortgage? What was the balance? What was the interest rate?
When you get near the end of a mortgage you’re paying mostly principal, and little interest. For this reason, I did NOT pay my mortgage off early.
Congratulations! Having paid off your home at 40, you’re now set to maximize your savings for the rest of your working career. I paid off our home in 1996 at roughly your same age when I received a small inheritance and it was one of the best financial decisions I’ve ever made. Having a paid for home is very powerful financially and psychically – there is something liberating about it. It’ll be interesting to know how you view this decision 5, 10, 20 years down the line.
Ben, we did the exact same thing at almost the exact same time. My final decision was based on the stock market gains enabling the payoff. Sure we hated paying the taxes on those capital gains but as my grandfather was fond of saying, “if you are paying taxes you must be making money…” It’s a terrific feeling being debt free as I receive my final paycheck next week and start my retirement. And I now view the “lack” of principal and interest payment as a positive cash flow in my weird view of home economics.
Good article Ben. As you noted it’s something magical to be debt free. Most financial decisions are made based on gut decisions over a beer or cup of coffee. My guess is long term you will take solace to live a life debt free and increase your saving and the leverage compounding offers you over many years.
We also paid off our house early, in 2004, and feel very good about that. Once we got free of those mortgage payments, our credit card debt just seemed to melt away. (My wife and I had a tough time paying off the mortgage, and resorted to borrowing on our credit cards to stay solvent.)
I discovered the secret to staying ahead in the stock market. Want to know? It’s not selling. We haven’t sold any securities in 10 years, and we’re doing great.
I think what you’re saying is that your personal snowball was already rolling, and that without the ongoing house payment, your existing savings were enough to cover your future expenses?
It’s really nice to get to the point where further contributions aren’t really critical anymore. We still contribute to try to help the snowball grow, but frankly within 5-10 years it should be where we need it as long as market returns aren’t way below historical averages, regardless of our contributions.
I’d like to at least have enough in after-tax investments to pay off the house before we retire, whether we choose to do so or not. However, I suspect that’s going to be hit or miss for us.
Ben it’s great you are a real estate attorney. The next thing my wife and I did after paying off our house was to create a family trust and retitle the property to be owned by the trust. Just a little more
protection in our litigious society. We then used the trust and our wills to designate the charity we want to give our house to.
If you plan on staying in the house you might also want to check your homeowners insurance to make sure you have full replacement value insurance. The cost of rebuilding today is significantly higher than when you bought your house.
I’ve long avoided paying down our house any faster than necessary, figuring that in the long run I’ll do better putting that money in the market. It also provides a nice hedge against inflation. Not everyone has the same priorities, however. It’s important for investors to know themselves, and prioritize their own needs, rather than always attempting to optimize their financial state.
I’ve never heard anyone say they regretted paying off their house early. It’s a milestone, congratulations!
Congratulations Ben. At 40 you still have lots of time to save and invest. As an engineer, I tend to get caught up in trying to figure out the “optimum plan”. What I’ve come to learn is that having a solid plan of saving and investing puts you so much further ahead of the majority. It sounds like you are on a great path to financial independence. Max out the tax preferred retirement accounts if you can.
I like being debt free, but at 40 what about your retirement savings? You say you cashed in taxable mutual funds. Do you have an equal amount in retirement investments? That’s the other part of the equation.
Fortunately, we’re doing quite well there too. We’re super savers. Max out everything. I’m not sure I’d recommend paying off the house unless you were already very well set up in retirement funds. — Ben
We paid off our house in 2014 7 years ago this month BTW, and have been able to invest more because of the elimination of that “nut”.