You will often see articles on how to payoff your mortgage early. People seem to make up their minds it’s the best course of action.
What about the question: Should I pay off my mortgage early? Here is my take on both sides of the argument.
The Answer
Reasons NOT to payoff a mortgage are: It’s an inflation hedge, you can write off the interest, maintaining liquidity is important, and the money would be better off invested in higher yielding opportunities. Good reasons to pay off a mortgage include peace of mind and primary residence equity having special protection from creditors and bankruptcy in many states. Poor, but often cited reasons to pay off the mortgage are decreasing expenses and gain a risk-free return equal to the interest rate.
I rushed through listing these answers. I go into more detail below.
Before You Payoff a Mortgage Early
We will assume you have an emergency fund, your high interest debt like credit cards is paid off, and you are fully maxing out all retirement savings account opportunities.
This means you are contributing the max to your IRA, your spouse’s IRA if you have one, and your 401K, TSP, or equivalent vehicle. You should not bother paying off a mortgage if you have not done these basic things first.
In the end, I’m partial to keeping the mortgage. I feel like the evidence is strongly stacked against keeping it.
It’s a little ironic, because I paid off my primary residence in 6 ½ years. I also have 20 paid-off single family homes.
Yeah, that’s a little psycho.
This certainly qualifies me, however, to make a fair judgement on the subject.
Since I’m partial to keeping the mortgage, I’ll explore the pros of keeping the mortgage first.
This post was originally published on August 8, 2018. I updated, lengthened, and added a table of contents to it.
Investing in rental property with VA Loan is a tricky subject. There are many rules that dictate how a VA should be used. Investing with a VA loan, even in multi-family, is possible. I will show you how to do it so you can get rental income.
The VA doesn’t say you can use the VA loan for investing, but if you understand the rules, and buy properties as you move from assignment to assignment in the military, it is possible.
You can’t just buy a home and make it a rental property without living in it first. There is an occupancy rule I’ll be discussing.
You can, however, buy a house at your current assignment using your VA benefit, live in it for a short period of time, turn it into a rental property when you leave, and buy a house at your next assignment with a VA loan repeating the entire process.
Another possibility for investing with a VA loan is buying a 2, 3, or 4-plex using your VA benefit and living in one of the units for a short period of time. When you move on to your next assignment, you’ll be able to turn the entire property into an rental property legally.
Let’s start digging into the details!
The first thing we need to understand is the occupancy rule.
The TSP Loan program lets you borrow money from your own TSP account while you are either in the armed forces or employed by the federal government.
HOW IT WORKS
When you borrow the money, it comes out of your actual TSP account. It can be any amount between $1,000 and $50,000, not to exceed your contributions and earnings from those contributions. It does not include any agency contributions (blended retirement system or BRS) or earnings from agency contributions.
As you are repaying this loan, it is repaid with interest through payroll deductions back into your own TSP account. This means that this large amount of money will not be growing tax advantaged in your TSP account during the time period you have borrowed it. You lose the opportunity for that growth. More on this later.
Keep in mind, even though you are paying interest, it’s a low, low rate and you pay it back to yourself, so it’s not really a cost to you. The interest, however, is not tax-deductible.
LOAN ELIGIBILITY
To be eligible for a TSP loan, the following must apply:
Employed by uniformed services or federal government
In pay status
Only have one outstanding general purpose loan and one outstanding residential loan from any one TSP account at a time
Have at least $1,000 in your TSP account not counting agency contributions and earnings
Have not repaid a TSP loan of the same type within the past 60 days
Not had a taxable distribution of a loan within the past 12 months unless it was the result of your separation from Federal service
Maybe you’ve made some of these mistakes military members make.
I made a few of these mistakes myself, but I’m still here today doing relatively well.
Let’s see how you measure up.
1. GOING INTO DEBT
I want to use a few other phrases to signify what kind of mistakes get military members or families in trouble.
It’s living large when you haven’t made that money yet.
Spending money you haven’t earned. Otherwise known as… Keeping up with the Jones’s.
The funny thing is, the Jones’s are going into debt to keep up with you too!
Here are some things that will really put you into debt:
Buying or renting much more house than you need…
I see it time and time again in the military. A married couple with one newborn buying a 4000 sq ft property. Not sure what they will do with 6 bedrooms and 4 baths!
You want to be well off? Get the smallest property that will fit your needs. (Awww, that’s no fun!)
Having a new house custom built…
But it’s so nice to have a big house built to your specifications. You deserve it!
Big houses need lots of things to fill them up. They just don’t look right without expensive furniture and nice cars. They are also expensive to heat and cool. Good luck!
New or expensive cars…
Whatever you do, don’t buy a new car. On top of that, don’t ever fall for that crap where you think you are getting some special benefit through military car sales. You are still overpaying and getting KILLED on depreciation the day you put the first mile on it.
I like buying used cars with one previous owner and low mileage. Ideally, you pay cash for it.
Vacationing while overseas…
You are stationed in Germany, and there are LOTS of 4 days weekends, so you are hitting a different country on each one. You are in Japan, and it’s the perfect gateway to Southeast Asia. Everybody will be filling their Facebook and Instagram feeds with travel while stationed overseas.
Don’t overdo it. Take advantage of existing geography and vacation in areas around you that you. Try to drive there instead of flying, and try to Airbnb instead of hotels.
I did some research before writing this post. I’m always horrified whenever I realize the amount of advice at the top positions in google search results that is bad. The subject of paying off debt is no exception to this rule.
More on that later.
Every blogger writes an obligatory post on how they cut corners to payoff debt. This is my attempt at that. This is an updated post. Originally, this was my third blog post. It’s now reformatted.
Another thing about this research I did. The stuff that tends to hold a lot of the top positions is easy Band-Aid solutions to paying off debt that doesn’t involve actually solving your problem.
It’s usually a matter of taking out a new loan or opening up a new credit card to transfer debt from one location to another. You might save money on interest, but you aren’t fixing your problem.
These are ways to payoff debt without earning any money. All your doing is replacing old debt with new.
The debt is still there!
The debt payoff hacks I talk about actually work. They involve lifestyle changes and changes in thinking that enable you to payoff the debt you owe.
Nothing else will work.
It’s just clickbait.
Any success I’ve had with paying off debt is 99% attributable to my wife. She is Chinese and grew up in Taiwan. She has no formal training in investments or finance. She has never read a personal finance book in her life. But she came from a family and, to a certain extent, a society that frowns on debt.
The military has some unique debt traps that are easy to fall into.
Buying New Cars
One is this whole military car sales thing.
“Let me go talk to my manager!”
You’ve seen them lurking around the BX preying on new enlistees just getting started out in life.
They try to sell you a new car when you are overseas. They’ll tell you it’s an amazing deal because you are in the military. They sometimes try to sell it as a military benefit.
It is simply not true. A military benefit is when the US government subsidizes the cost.
Here are examples of actual military benefits:
Commissary
BX
Medical and dental care
Space-A Travel
Tax-free housing
Montgomery GI bill
Here’s an example of what is not a military benefit:
This week I did a guest post on one of the most popular military financial independence websites. This website was started by Doug Nordman. He retired from the Navy in 2002 and hasn’t worked since. He currently lives in Hawaii and surfs often when he’s not traveling the world. Not a bad life. What he … Read more
“Let me go talk to my manager!”