Jonathan’s Mortgage

WHEN MY FIRST WIFE and I bought a home in New Jersey in October 1992, we took out a $150,000 30-year fixed-rate mortgage at 7.7%. I had to remortgage the house in 1998, when we got divorced and I had to cash Molly out. At that juncture, I borrowed $148,500 using a 15-year fixed-rate mortgage at 7.125%.

Still, I was mortgage-free by 2005, thanks to regular—and occasionally large—additional principal payments. To some, this might seem like the height of foolishness: Mortgage rates are typically low and the interest is usually tax-deductible, making it perhaps the most desirable debt you can have. But even with all that, the after-tax cost of a mortgage is almost always higher than the after-tax return you can earn by purchasing high-quality bonds, so I viewed paying down my mortgage as a substitute for buying bonds.

Along the road to mortgage freedom, I took an interesting turn. By year-end 2003, my principal balance was down to $34,000. Interest rates, however, were also falling, and yet my loan was too small to make refinancing worthwhile. That’s when I followed the advice of some Wall Street Journal readers and cooked up my own refinancing.

I took out a home-equity line of credit and used it to pay off the balance on my 15-year mortgage. At the time, lenders were competing fiercely for new customers, so there was just a onetime $40 fee involved and I was able to get a credit line set at half-a-percentage point below the prime rate, which meant an initial interest rate of 3.5%. There was some risk involved: If short-term rates had headed higher, I could have seen my monthly payments spike. But the risk seemed modest—and the problem was gone the following year, when I paid off the credit line.

With the mortgage gone, my fixed costs dropped sharply, and I was able to save significantly more every month and cover my children’s college bills far more easily. There were, no doubt, investments that would have delivered a better return than paying off my mortgage. But making extra principal payments still strikes me as a great low-risk investment—and one that can buy you substantial financial freedom.

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