7 Reasons I Pay Down My Mortgage In Place Of A Bond Allocation

This should be an interesting topic! Everyone has a different philosophy for how they choose to invest. Some people choose to never invest at all.

My opinion is fairly balanced, but I have my quirks. It is important to get a perspective of my investment beliefs and profile before I share my reasons for paying down my mortgage over investing in bonds.

Investor Profile
  • 100% Equities, no bond allocation, diversified across 4,000+ companies.
  • Married dual income no kids.
  • 27 & 28 (Long time horizon and married a cougar.)
  • Never want to retire yet aggressively pursuing financial independence.
  • Believe in taking market returns via low cost index funds.
  • Plan to be 100% equities until 40 when I will reevaluate.
  • Currently own a home with a very affordable mortgage.
  • Large emergency fund in place in case of job loss.
  • Only debt is mortgage.
  • Plan to be a lifelong home owner with the goal of having my home paid off.
  • Not seeking to arbitrage my mortgage in hopes of better market returns.

I could go on and on but that would be boring. Now that you have a better understanding of my personal position lets dive in!

1) After tax money is being evaluated here.

Tax advantaged accounts are to big of a win to pass up. Everyone should take advantage of the 401(k), HSA, and IRA.

After this space is taken up investors start to experience a tax drag when investing extra dollars. If you are investing in a taxable account, you must pay taxes on income and distributions. If you own real estate, you must hide the income via depreciation and other tactics and recapture it later.

When paying off the mortgage however there are no tax consequences allowing you to avoid the dreaded tax drag.

2) I enjoy the balance of a guaranteed return alongside aggressive investing.

The stock market has been on a tear and it has been good for aggressive investors. Yet we all know that there will eventually be a correction.

When it will happen is anyone’s guess. Regardless we took out a mortgage on this home that must be repaid.

Watching the balance move down and locking in a guaranteed return is very rewarding when paired with an aggressive portfolio.

3) Liquidity is not a concern.

Most people think paying down a mortgage is a sin because of liquidity issues. This is not a big worry in my opinion because of a well-capitalized emergency fund and no other debt.

I can live for CHEAP if needed and would do what I must do in a bear market.

4) My home is affordable.

Many make the mistake of over extending themselves when they initially purchase a home. This sets them up for failure if they face financial troubles in the future.

Our home is very affordable and extremely conservative. We were lucky to buy when we did, and our mortgage is much lower then comparable rents in our area.

If the market corrected hard we would not be in a crisis to come up with the monthly payment.

5) Interest rate on the mortgage is greater then bond rates.

Simple arithmetic here. Understanding that bonds are measured with total return I feel confident that my mortgage will be a better return for the next 5 years.

6) We will no longer itemize with the high standard deduction of $24,000.

The tax break argument doesn’t come into play with the new standard deduction. Our interest is not that high because we don’t have a massive loan.

7) I value flexibility and seek it early in life.

Everyone has a different reason to pursue financial independence. My number one reason is flexibility. Life gets me excited when I am living on my terms.

Having one of my biggest expenses taken care of with a paid off home will give me the flexibility to take on new challenges. When you’re not stressing over paying the rent/mortgage life can become more simplified.

Conclusion

There are my seven reasons I choose to pay down my mortgage in lieu of bond investing. Make sure to let me know your thoughts in the comments.

What Are Your Thoughts?
  1. Am I a mad man for not having a bond allocation?
  2. Do you think paying off a mortgage is foolish?
  3. What is a quirky investment philosophy you follow?

Spread The Wealth!

44 Comments on “7 Reasons I Pay Down My Mortgage In Place Of A Bond Allocation”

  1. Fantastic post. I made a Debt or Invest post yesterday and will be sharing my plan next week. I love your logic. 100% equities. Taking advantage of tax advantaged accounts. Paying off the mortgage over investing in bonds. You certainly don’t have the most aggressive approach but that’s okay.

    1. Thanks Jason, I look forward to reading your post.

      It is not the most aggressive that is for sure. Mathematically I understand the benefit of leverage and it has made many fabulously wealthy. However, we all invest for our own reasons I know mine and the targets I am aiming for to get the most out of life. Therefore lots of leveraged risk is not in my plan.

  2. What’s up DM? Obviously personal finance is personal…blah blah blah…

    But I’m taking it upon myself again to act as your friendly neighborhood devil’s advocate. I’ll take your reasons in order and then answer your questions.

    1) Counterpoint: Regular ol’ taxable bonds can do their thing in your tax deferred accounts and if you’re still short on a bond allocation for some reason, you can always buy Municipal Bonds in your taxable accounts. You don’t have to pay capital gains taxes on interest distributions from munis.

    2) Paying down mortgage principal IS NOT A GUARANTEED RETURN. I will continue to shout this from whatever soapbox or rooftop I can find in the PF blogosphere. You are making a highly concentrated investment in a real asset. The value of that asset may go up or down. Just because you eliminate future interest does not guarantee anything about your future total return.

    3) I have to admit I don’t get your point with this. I would argue that any money you *invest* should be money you won’t be relying on to live or whatever anytime soon. Making extra principal payments is no different. But you must realize that some investments are more liquid than others…and real estate is very illiquid. Just because you don’t happen to care about it (or have plenty of other liquid investments) doesn’t mean that it’s “not a concern”. Maybe it’s “a concern that you can live with”?

    4) Congratulations. However I don’t see how this relates to the debate of mortgage principal vs bonds as an investment. Like the house is a good value but bonds are overvalued after a 30 year bull market? I don’t get this one either. I declare listicle shenanigans to get the total to 7.

    5) Unless your loan is from 2005 this probably isn’t true, and in that case you should refinance. Granted “risk free” bonds like treasuries are probably going to yield less than your interest rate, but there are plenty of bonds with 5%+ yields, which even if they aren’t tax exempt should give your mortgage rate a run for its money.

    6) The interest rate deduction was never a good reason to not pay down your loan principal. Never forget the first law of tax: “It is better to have more money than less.”

    7) Not having a mortgage payment provides you significant financial flexibility, I will grant you that. But after paying off your mortgage you now have a significant amount of your net worth tied up in a single asset…and you live in it. I’m assuming your house isn’t a mobile home…so your geographical flexibility is now limited. Want to move? You have to liquidate a relatively illiquid asset which is expensive and time consuming. Or you could always rent it out…but then again you could have rented it out when you still owed money on it…and then your tenants are paying down the principal…which is WAY better.

    And now your questions:

    1) Yes and it has nothing to do with your mortgage. It’s about diversity. Bonds are a different asset class than equities. Diversity is healthy for any portfolio. I think everyone should have SOME bonds.
    2) No it’s not foolish. For the same reason investing in bonds is not foolish. Real estate is yet another asset class separate from both bonds and equities. Diversity is healthy for any portfolio.
    3) I like to pick individual stocks, which apparently is extremely quirky these days.

    1. Hey there CFW! Thanks for the thought provoking comment I do appreciate it.

      I have to disagree with you on the guaranteed return piece. I agree with you that there is no guaranteed return in the value of the real estate itself. This piece of the risk equation must be taken into account at the purchase. Regardless of if the housing market for this piece of real estate goes up down or sideways I signed a mortgage contract that must be repaid.

      Where I disagree with you is that there is a real guaranteed return of the mortgage note rate every time I pay off a piece early. If I toss 25k at the mortgage this year I will guarantee that I do not have to pay interest on that amount in the future. Nor will I have to pay any taxes for earning this guaranteed rate.

      The risk is already on from when I took ownership of the asset. It is lowering leverage that appeals to me.

      The piece of the pie that goes to the mortgage pay down is significantly lower then what is allocated to other liquid assets. Shelter is a fundamental of life and I plan to knock out a fixed cost that I can control.

      I understand why people leverage into perpetuity and never pay off mortgages I just am not one of them…

      Nothing feels better then controlling my expenses.

      1. Okay let’s forget about whether the house appreciates or not, since you’ve stated that you’re not motivated by that portion of your total return. Fine.

        Don’t forget about inflation. It is constantly eroding the future purchasing power of today’s dollars. This mechanism is also constantly reducing the future burden of today’s debt.

        When you lower your loan balance by an extra $25K you are using today’s dollars to eliminate tomorrow’s debt. While you will have eliminated a fixed amount of nominal dollars of future interest (what you’re calling a “guaranteed return”) there is no telling how much those dollars will be worth when they would have been due in 20 years.

        What will inflation be over the next 20 years? 2%? 5%? 12%? Nobody knows.

        If it’s low then your real return (in terms of interest saved) will be closer to the “guaranteed” return you’re projecting. If it’s high, then all those early payments will not look as attractive in hindsight.

        Now granted…real property is a good store of value which can be a fantastic hedge against inflation…but we’re ignoring the value of the underlying asset right?

        It’s worth noting again that I’m not against using excess savings to pay down one’s mortgage early. I think it’s a perfectly fine investment in a lot of cases. It has both financial value AND psychological value as you point out.

        Like I said, my primary goal is to stir the pot, by which I mean calling to task age-old financial axioms that we accept as gospel. Maybe I’m picking nits, but let’s be careful to fully acknowledge all the different variables involved when we use the term “returns”.

        “Eliminating a fixed quantity of future interest expenses”? Yup. Can’t argue with that.

        “Guaranteed returns”? Nope. Don’t buy it.

        1. You are tough! I like it though.

          My number one driver of buying my house is to have a cheap living arrangement and enjoy life while I am grinding. It has set me up to enjoy a nice space and I like lots of others got lucky and it has shot up in value.

          Once we get into inflation we are really splitting hairs. I pay it down to deleverage. For me I see if I have no house payment I can take more risk personally and I value that. Most people will always carry the mortgage and live in fear and keep the J-O-B to make payments.

          I see your points but I do think it is a relatively safe move in the environment we are in today.

  3. BTW I’m sure you knew already but for those just tuning in…do not take the above to indicate that I didn’t enjoy the post. Just trying to stir the pot.

    Keep up the excellent work!

    1. Thanks for stirring the pot CFW!

      The market in which you invest is the one caveat to your comments on real estate returns. You are correct about a home being a potential long term illiquid asset if you live in a flat or declining real estate market.

      However, if you follow the old adage of location, location, location and invest well in a home, the returns are not guaranteed but chances of success increase exponentially.

      We have experienced above average market returns with four homes over the years – bull or bear market.

      Thanks for a great post DM!

      1. Glad the pot stirring didn’t raise too many hackles.

        Liquidity and price appreciation are two totally different things. A house is still an illiquid asset no matter how hot or cold the market may be.

        Every asset category will have successful and unsuccessful investment strategies. Almost nothing offers truly guaranteed returns.

  4. You’re not alone here. I’m in my mid 20s and have never owned a bond!

    With interest rates so low, I think you would be crazy to own bonds right now.

    “Interest rate on the mortgage is greater then bond rates.”-Good point. Paying down the mortgage is a guaranteed return (saving on interest)! 🙂

    1. Bonds serve their purpose and I will add them eventually. Most people can’t handle the swings that a 100% equity portfolio will give investors. I can stomach a slice in half of my portfolio as I have no plans on drawing anything from it for a long time.

      “Buy the ticket, take the ride.”

      I plan on the roller coaster coming and have my plan to stay the course and prosper from taking the associated risks necessary.

  5. DM, I’m debt averse and chose to do the same by taking the sure thing, paying down the mortgage first. You are not mad, although many professionals would advise against it and tell you to keep the mortgage and deploy the funds elsewhere. I just never bought in to that theory. Tom

    1. Tom, many of those same professionals are not aligned with clients as you know. They reap the rewards of growing the assets under management.

      Being debt averse provides me with security and higher cash flow.

      I am all about it!

    1. Thanks for reading. The peace of mind is certainly a nice reward.

      The extra cash flow and not having to stress about a large monthly bill that most people are programmed to pay forever is really amazing.

  6. Great summary of your position and thorough list of points – nicely done, DM! I enjoyed reading.

    I don’t think you’re crazy. We’re also primarily long equities – not 100% – but we the vast majority of out net worth is in equities. I’m assuming you mean your investment portfolio is 100% equities – not your entire net worth.

    The portion of our net worth that is in bonds is primarily allocated toward our tiered emergency fund. We’re getting a better bang than holding in just cash / savings accounts, so that’s our current main use for bonds.

    We’re still renting, but I’m extremely debt adverse and would be trying to pay down the mortgage as soon as possible as well.

    1. Thanks Mike!

      That is right my investment portfolio is 100%.

      I like the idea of the tiered emergency fund. I have a feeling I will do something similar when I down shift from a W-2 income.

      Most likely I will hoard to much cash and then stay aggressive with my portfolio.

  7. I totally get the psychological aspect of paying the mortgage off early. And since you’ve got your other bases covered (e.g., retirement fund, emergency fund no other high interest debts), that sounds like a plan. Plus I don’t know where you’re at with the mortgage but of course in first half of it’s life we are paying a lot more in interest per the amortization schedule anyway but again that may not apply since your mortgage amount is not that high.

    1. The amortization schedule is one of the coolest parts of the journey! It is amazing how fast early principal payments start to make a difference. With each normal payment the amount to principal creeps up and is starting to become significant over a year in itself.

      It was a good feeling to see the annual statement from 2017 and see how much more went to principal instead of interest. Banks truly do run the world due to debt.

  8. It sounds like a good plan at your stage in life. I did the same when I was your age.
    Now that I’m a bit older, I have 20% in bond and don’t plan to pay down the mortgage.
    Good going.

  9. Hi DM, I hated being in debt so I payed off the mortgage. I am an old guy now (gen X) but I have been 100% equities up to a few years ago when I added a bit of fixed income to my portfolio. Real estate helps to have diversification in your investments but having a large part of your net worth in one asset, on one street, and in one city might not be for everybody.

    1. There is concentrated risk for sure thanks for sharing Steve.

      Question for you for my learning perspective are you drawing on your portfolio at this time?

  10. Yes, bonds still have a place in my portfolio. So does real estate and we allocate a little extra to our mortgage payment. Why not do both? You might enjoy a bond allocation in a major correction.

    But I agree, its not very exciting collecting on bonds in the current environment, even if you buy tax free ones.

    1. I don’t do both right now because I would rather take the risk of being aggressively invested in stocks at this point of my life.

      My goal for investing is to have benefits well ahead of when I start to draw from the “big portfolio”. A payed off home will provide me with a lot of flexibility.

      The only point of investing I see is to better my life significantly and I see the path with the mortgage pay down.

  11. I believe in keeping it as simple as possible so from a standpoint of where your money is tied up then yes equities, bonds, house, rent producing land, etc. spread out the risk. Your house is affordable and you need a roof so yes I say pay it down. We have had our mortgage paid off for 6 years now and it is a great sleep at night feeling.

    1. That is great Bob congratulations!

      I agree with you and start to realize more and more that simplicity is key to success and happiness.

  12. Lol to your “married a cougar” part! Really?? one year difference is nothing! hah…

    I am on board with you there. I’ll be 100% equities for quite some time.

    In terms of your home, it was an excellent choice for choosing something that’s affordable. Always a good idea to have a cushion to fall back on.

    Although our place is too expensive, we still went for something relatively affordable compared to everyone else (we can’t help it, but our city housing is too expensive IMO).

    With that said, we chose to rent out our other unit to cover most of our mortgage. I guess that’s what most ppl call house hacking? It’s helps a $hit load! But even if no one rents our place, we made sure that we can still afford that mortgage! As you already know, we’re also looking to pay down our mortgage as well.

    If they call you foolish, then I guess I’m one of them too. hah!

    1. Haha I am glad you liked that. She got embarrassed from that one! It was just her birthday and mine comes up only 3 months later so every year she is a cougar for a bit.

      Great job on the house hack! I think that is one of the best ways for younger people like us to create an affordable living arrangement in booming metro areas. I am pretty jealous of it actually I missed the wave that would make the numbers work for it her in Denver.

      Did not have the capital when we wanted to get a duplex 4 years ago. We did a house hack by renting out a room to some people until we decided we wanted our space back. It was really helpful when getting our footing after making the purchase. No matter how you slice and dice it when you first get your foot into real estate it is intimidating and a lot of money.

      Kudos to you on your plan.

  13. Oh gosh you are young! I was wondering how old you were since you write so to the point and clear and seem very wise. One year is not a cougar by the way haha! But I bet you make sure to point that out to your wife regularly, that she is robbing the cradle 😉

    No bonds is a good idea especially since you’re young.

    I was initially thinking 25% bonds allocation but it is going lower and lower and will be aiming for 10-15% or less.

    Paying down the mortgage is a great idea and a great feeling.

    1. First of all thank you for the complement on my writing! My mind is more tuned for numbers and math. Writing has always been challenging for me.

      Blogging is secretly to challenge myself at becoming better over time at this (that is a secret just between us).

      She loved the cougar comment haha! I let her know every year after she has her birthday ahead of me 🙂

      When are you targeting using the funds in your portfolio? I can see the appeal of dampening volatility when money is going to start coming out.

      I do love paying down the mortgage it is oddly rewarding.

  14. Couldn’t agree more! We’re on a track to pay off our mortgage. One less cloud hanging over us, so to speak. I giggle a little when I read “never want to retire” in the profile. Yeah, because you’re still in your late 20s and have some spunk left in you. Give it another ten years… 🙂

    1. Haha oh man I hope you are wrong on this one! It is such an important goal of mine to stay engaged for life in rewarding projects.

      I can totally see getting burn out in the corporate world though. I would be lying if I said that everything is always rosy.

      Forcing myself through tough situations has taught me a great amount of resiliency and that is priceless.

  15. Interesting article, we have a VERY similar investor profile. I think the guaranteed nature of your mortgage interest rates make it tempting, especially when you think about longer-term return. Equities are booming right now, but 10 year returns will likely revert to around 4% with a degree of uncertainty. Given your emergency fund, tax efficient investments and aggressive allocation, long time frame and your goals, it is around personal preferences.
    I personally only have 2.2% of my investments in Bonds, however I’m not overpaying my mortgage at this point. Something to consider though!

    1. The hard part is no one knows the future for investment returns. I enjoy the control I have over being able to take care of a fixed cost.

      Once that line item is removed then the investment portfolio will not need to produce as much.

      I am curious on the 2.2% allocation? Very specific what was your reasoning there?

  16. Nice post! I have this constant debate in my head regarding paying down the mortgage vs investing more. Our mortgage interest rate is pretty low but I really should get more aggressive in chiseling it down. We were actively doing that but then we moved, have a different loan setup now, and started throwing more money towards investments.

    Always some excuse I guess!

    1. If you are disciplined enough to actually be investing over paying it down that is fantastic.

      The reality is most people move often and reset mortgages and consistently upgrade homes so it turns into a hamster wheel.

      It is about doing whatever is best for your plan and improves your life!

  17. Great points in #3 & #4!

    So I personally don’t think it’s a bad thing to pay down the mortgage provided, as you mentioned, you don’t over extend and you have liquidity available in other forms.

    My investment quirk- I hate allocating to a decimal percentage for instance 17.8% goes to XYZ fund. To me it should either be 17% or 18%, strange I know.

    1. Liquidity is huge! I am young so I could be more risky but I love the idea of knocking out my living expense early in life.

      I can only imagine what its like to have low costs and be able to take more risks in work/business/life.

  18. Are you a mad man for not having a bond allocation? Maybe; only time will tell. But you’re definitely not foolish for paying off your mortgage – unless you have a crystal ball, you don’t know the future. If you even come to a situation where you can’t invest fully at all, no harm is really done. But if you suddenly can’t pay your mortgage? That’s a situation no one wants to be in!

    1. Agreed Joe!

      I am happy with investing the allocation I do in equities at this point in my life. If I knock out the mortgage then I can take more risk and live differently then a large portion of my competitors.

SPEAK UP!