Wait, Did Paying Off Our Mortgage Kind of Make Us Financially Independent?

So, we did it. We sold a bunch of stock, pulled together our dividends and ESPP payments from June, scrounged up all the cash we could find, and paid off the mortgage last Friday. Pending some paperwork that has to go from the bank to the county, we are mortgage free and own our home outright.

It's a great feeling, if a little more subdued than we thought it might be. Maybe it's because we'd been mortgage free once before. Or maybe it'll just take some time to sink in.

Maybe we're a bit distracted as Mrs. Done by Forty was offered a job on the same day, and her decisions on that are more pressing than celebrating a milestone.

We did celebrate, of course. We made a fancy dinner, opened a bottle of champagne, and like any loving couple does, competed ruthlessly against each other in a board game about corporate domination of space:

Mrs. Done by Forty won. It wasn't close.

After sending in the final payment, I figured I'd go to the Mad Fientist's laboratory and see how these changes would impact our timeline to financial independence. Since our mortgage rate was 3.75% and it was a very new mortgage, I assumed it wouldn't really impact our projections very much when working towards the 4% rule. The spread is only a quarter percent, right?

Right before paying off the mortgage, here's what the Mad Fientist's laboratory predicted for our FIRE plans a couple weeks ago on June 30th:

Click for bigness.

One year and one month isn't too shabby. This would be under the assumption of the 4% rule and we are planning for 3.5%, but still.

So let's see what happens to your financial independence plans when we take about $262,000 out of your portfolio all at once. Here's what the Mad Fientist's laboratory projected under that scenario:

Click for bigness.

Yikes. Using a big chunk of our portfolio to pay off our mortgage would push our FI plans out by a year and a half.  

Right after putting those figures in, I started feeling some regret.

But wait! Paying off our mortgage doesn't just reduce our portfolio...it also reduces our expenses. What happens if I take that red expense line from the Mad Fientist graph (which is a rolling average of our last twelve months of spending), and reduced that by the amount of principle and interest we paid each month ($1,267).

What would would happen to our timeline then?

Click for bigness.

Um. 

Wait, what? 

Does this mean we're financially independent? How did this happen?

I think the reason paying off the mortgage accelerated our progress towards financial independence, at least on paper, is that the $262,000 we still owed resulted in an annual principle and interest cost of $15,200, too.

Four percent of $262,000 is only $10,480: a good bit less than the $15,200 we would be paying in P&I over the next 28 years or so with the mortgage. So eliminating that annual cost, while certainly shrinking our portfolio quite a bit, seems to still have gotten us ahead.

Another way of putting this is that to cover our annual P&I expense of $15,200, using the 4% rule, we'd need $380,000 invested: roughly $118,000 more than it would take to simply pay off the debt. This would, not coincidentally, take us a bit over a year to achieve at our current savings rate (and presuming the market also returned 7% during that year on our portfolio): basically the amount of time the Mad Fientist's laboratory was telling us it would take to hit financial independence.

In other words: the reason we'd have to work an additional 13 months to hit financial independence was because we were planning on saving up enough to cover the annual mortgage expense with additional investments, instead of just paying it off.

I was, and am, somewhat surprised to see how eliminating the mortgage seems to have, maybe, sort of, made us financially independent under the 4% rule. A few caveats though:

• The current calculations apparently are predicting our new, mortgage-less budget will only be $32,256 (or what would have been $47,456 with the P&I). Even though this figure is truly what we spent the past twelve months minus principle and interest (and that year includes some weird expenses, like hitting our out of pocket maximum for Baby AF), we want to assume a little higher figure just to have at least some cushion. 
• There are going to be new expenses once we leave work that aren't showing up in the past twelve months of our budget: like buying our own health insurance, replacing the car at some point in the future, eventually having to buy a new roof, a new AC unit, etc. Just like every other, this year isn't average. Almost all early retirees are probably underestimating their future expenses if they're using their prior years as a baseline.
• Most critically, while the Mad Fientist's lab defaults to the 4%, we are planning on using 3.5% in our assumptions.  

Still, these are all things I can dive in to in future posts. There will be a lot of time for pouring over the details of our new plan. The bottom line is that we still have some work to do to be truly financially independent.

Still, while I definitely don't want to dole out advice on whether other people should do with their mortgages, I'm surprised by the results. Everyone is going to have their own unique interest rates, will have purchased homes at different prices, and everyone's going to be at their own place in their amortization schedules. Some people will have just gotten their mortgages, some will be close to paying it off.

I'd say that if you're working towards financial independence and have a mortgage, don't be a dunce like me and wait until you send in the final payment to figure out what the impact will be. Look at your current mortgage balance, and take some time to do the math.

We all have our own feelings on debt. Many of us like leverage, especially if we can get it at low interest, and want to use that lever to maximize gains all the way through financial independence. Others of us are fairly anti-debt, and will try to get all of it out of our lives if we can, opportunity costs be damned.

Either way, do better than I did. Take out a calculator, and let the math do the talking. 

As always, thanks for reading.


*Photo is from Me in ME at Flickr Creative Commons.