Popular financial columnist explains why he ditched ultra-low interest mortgages and paid off debt early
Would you rather sit back and relax in a home with your mortgage paid off, or take out a super low interest mortgage and put your money elsewhere?
A year ago, Washington Post personal finance columnist Michelle Singletary and her husband crunched some numbers and decided to refinance their 30-year mortgage to 15.
As Singletary noted in a recent column, the couple paid off their mortgage over a period of seven years, and the sense of freedom she described as “maybe similar to that of a bird released from a cage.”
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The couple's interest rate of 2.75% is significantly lower than current mortgage rates, which hover around 6% to 7%. But Singletary got some surprising feedback about the decision from regular readers of his “Color of Money” column.
“For some, paying down debt at such low interest rates just doesn't make sense,” she writes. “Many readers argue they would have been better off investing the extra money on their mortgage.”
Of course, her readers have a three-word answer: a debt-free home. “It's exhilarating to be debt-free,” she writes. “No regrets.”
Low interest rates and payoff debate
Ms. Singletary and her husband decided together to pay off their mortgage much sooner than expected after they retired. They felt prepared because they had been saving for retirement for the past 10 years, and ultimately used money from two retirement accounts from their previous jobs.
According to the Federal Reserve Bank of St. Louis, 30-year fixed mortgage rates stayed below 5% from 2010 through the first quarter of 2022. Meanwhile, 15-year mortgage rates dipped below 3% several times during that same period, including when Singletary and her spouse refinanced their mortgage in September 2016.
As a rough guideline, the Federal Deposit Insurance Corporation (FDIC) suggests that lenders will want your mortgage payments, including property taxes and insurance, to amount to between 25% and 28% of your gross monthly income.
Singletary and her husband found themselves in a similar situation, with their mortgage taking up 20% of their net monthly expenses. “By eliminating our mortgage, we were able to eliminate the largest expense in our budget,” she wrote.
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But the real question some readers posed to Singletary is: Could the couple have made better financial choices?
The somewhat vague nature of mortgage interest rates can make calculations complicated, as while 2.75% is a relatively low number, it doesn't accurately represent the interest you'll be paying up front.
Because mortgages are paid in installments, a large portion of your payment goes toward interest in the first few years. This US Bank mortgage calculator shows that for the same type of 15-year loan Singletary took out, with monthly payments of $3,298, $657 would go toward interest and $2,058 toward principal.
Paying off the loan means no more interest payments and opens the door to investing once paid off, which in this scenario could be around $2,700 a month (after taxes and insurance costs totaling $7,000 for the year).
This is a great argument for paying off your mortgage, especially if you can use the money you save to pay off high-interest credit card debt.
For example, if you invest in the S&P 500, based on the exchange's 12.74% annual return from 2014 to 2024, $32,400 (one year's mortgage savings) could grow to nearly $113,000 over 10 years.
Read more: US car insurance costs have skyrocketed to a staggering $2,150 per year, but there's a smarter way to save. Here's how you can save $820 per year in just a few minutes (it's 100% free)
A peaceful state of mind
A Washington Post commenter with the username “Data Analyzer” made the case for leveraging money markets for mortgages.
“Given that the Vanguard Federal Money Market Fund, which invests in Treasury bonds, has a yield of 5.3%, it is fairly easy to earn a 5.3% return and pay 2.75% interest. This is like printing money for free, and should continue until yields fall below mortgage rates,” they wrote.
But is “printing” money really as lucrative as shredding debt? Picking the right strategy depends a lot on what data you analyze, especially when that involves numbers like blood pressure and heart rate. Or the number of sheep counted overnight.
According to a 2023 survey of 1,000 people by Sleepfoundation.org, 77% of people say they lose sleep because of money worries at least sometimes, and almost half (41%) say they lose sleep because of money worries all or almost all of the time.
A 2019 survey of more than 2,200 people by Capital One's CreditWise found that three in four people (73%) cite the economy as a major stressor, ahead of politics (59%), work (49%) and family (46%).
“Being in debt always feels cramped and frustrating,” Singletary wrote, noting that peace of mind is “another very tangible benefit of being mortgage-free.”
She no longer has to worry about rising property taxes, soaring home insurance premiums or unexpected home repairs that shake up her monthly budget.
“Investing means taking risks,” Singletary writes. “We chose the guaranteed return of paying off our mortgage early.”
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This article is for informational purposes only, should not be construed as advice, and is provided without warranty of any kind.