The Cabin Mortgage Payoff
Editor: I’d like to introduce you to The Graying Saver. He’s chasing financial independence (FI) and early retirement as well. BUT he’s not willing to give up his beautiful looking North Carolina cabin (a second home) in order to do so. There’s still a mortgage on this property and he has to decide between using his extra savings to pay down the mortgage or invest.
I think you will appreciate his story.
Tell us about the yourself.
My wife and I are in our mid-40’s and have one son who is 12. We live in Raleigh, NC and also own a cabin in the NC mountains. We’ve been on the path to FIRE since August of 2016.
How much debt did you start with and how did you accumulate it?
Once we discovered the concept of FIRE (Financially Independent; Retire Early) we realized that the mortgage on our cabin was the one thing really standing in the way of making quick progress towards our goals. At the time the balance on the cabin was $157k. In February of 2017 we set a goal of trying to pay the cabin off in 5 years or less.
Did you have one or multiple sources of debt?
The cabin was the main source. No car loans, no credit card, no student loans. We have a mortgage on our primary home but we aren’t in a rush to pay that off.
What was the interest rate?
I think the original interest rate on the cabin mortgage was around 4.25%.
Did you look into refinancing or consolidating the loans?
When we decided we wanted to try and pay off the cabin early the first thing we did was refinance the loan.
If so, what was the result and why?
We were able to refinance the loan to a 20 year mortgage at a rate of 3.87%. Our monthly payment increased by $9 and we only needed to bring something like $600 to closing, which was mainly to cover the appraisal fees. We used a company called Aim Loan for the refinance – our 2nd with them – and I can’t recommend them enough. Everything was done online and they presented us with several loan options. Another key outcome of refinancing with AIM was that they have online loan servicing, which makes it very easy to make additional payments whenever we can. With our original lender we would’ve had to write and mail additional checks each time we wanted to make an additional payment. That would’ve been very inconvenient and something of a hurdle to get over each time.
How much did you have available monthly to use for debt or investments?
This varies somewhat, but it’s typically between $1k and $2.5k.
What investment(s) did you consider when you evaluated your debt/invest decision?
We had opened up a taxable investment account just prior to deciding to payoff the cabin. The plan with that account was to throw extra income there at the end of each month.
What type of account(s) would the investments be held?
We were putting money into a taxable account with Vanguard in a low-fee index fund.
Why a taxable account? Are you maxing out all available retirement plans?
I have a 403(b) and my wife has a 401(K) and neither of us are maxing these out, but both of these are our supplemental retirement accounts. We also each have other retirement plans through our employers. Mine is a defined contribution and my wife’s is a defined benefit, i.e. a pension.
If you are not maxing out your retirement accounts, why would you put additional savings in a taxable account?
We were putting some money in a taxable account because we were concerned about having enough funds to span the 5-7 year period between when we hope to retire and when we can access funds in the 403(b) and 401(k) – when we turn 59.5. Does that make sense? I’ve since learned a little more about Roth conversion ladders but I’m no expert there and haven’t looked at that option as closely as I will over the next couple years.
Once the cabin is paid off we’ll be investing the excess cash flow, but we’ll need to reassess our situation at that time and see what type of investment(s) makes the most sense.
Did you consider the tax deductibility of interest or the tax burden on investments in your decision?
Not really. The mortgage interest paid on the cabin is obviously tax deductible (for now) but that benefit wasn’t a key factor in our decision making.
Did you choose to pay off debt, invest or some combination of the two?
We decided that we would try to pay off the cabin mortgage and continue to contribute to retirement plans through our employers. In fact we both received small raises in July and we simply increased our retirement account contributions by the amount of the raises.
What were the three key factors drove this decision?
- Even if we chose to invest additional income instead of using it to pay off the cabin we would still have to make that cabin mortgage payment every month. So by applying additional principal to the cabin mortgage each month it’s kind of like we’re leveraging that payment we’re having to make anyway. We’re rapidly getting to the point where more of the regular mortgage payment is going towards principal instead of interest and escrow.
- Using an online investment calculator I determined that based on our retirement account balances and our contribution rates that we would likely hit or exceed our invested assets target of $1M by the time my wife can retire with the maximum available pension from her employer – in about 8 years. So even with taking on the new goal of paying off the cabin we are still on track to reach our other financial goals.
- We could’ve continued to invest our additional income instead of applying it to the cabin mortgage and after 5 years we may have had more than enough to pay off the cabin, but 5 years is not a very long time horizon when thinking about investing in stocks. To me this approach smacked a bit of trying to be a market timer, which is not a game I’m willing to play. Over a 5 year time period I was much more comfortable with trying to pay off the cabin mortgage directly instead of trying to pay it off through stock market gains.
If you chose to pay off debt, did you give up a 401(k) match or similar “free money” opportunity to accomplish your goal?
We did not give up any match or similar “free money” and even if we had the opportunity to do so I would not have taken that approach. Free money is free money and I think it would be crazy to not take advantage of that kind of opportunity. Our employers contribute a set percentage of income to our retirement plans. There’s no way for us to change that percentage up or down.
What has kept you motivated to accomplish this long term goal?
The best thing I’ve found for staying motivated to accomplish all of our financial goals is to make monthly charts and to tape them up on my bathroom mirror so I see them every day. I picked up this practice from reading “Your Money or Your Life” and it has been a huge help to sustaining our progress. The charts remind me not only of where we are currently on the path to our goals, but more importantly where we’ve been and how far we’ve come. I have a chart for invested assets, net worth, monthly income vs. expenses, and cabin payoff. I wrote about making these charts in a post on the 10 mostly non-financial things I’ve done over the last year to increase my happiness.
Where are you now with your payoff plan?
We are 10 months into our 5-year (or less) plan to pay off the cabin and so far we’ve brought the balance down by more than 20%, so we’re slightly ahead of schedule. I track this on my blog as well here.
Looking back, would you do anything differently?
We bought our mountain property in 2007. 10 years ago. I sometimes wish I’d known then what I know now about the possibility of achieving financial independence and retiring early. If we had started down the path to FIRE then we’d be there by now. But I didn’t know such a thing existed then and owning a cabin had always been a dream. It is now a dream that has come true. I like to remind myself that we only ever live in the present. I then ask myself if I am presently happy, and the answer is an unequivocal yes.
What is your next financial related goal?
Once the cabin is paid off we plan to save and invest the funds we were applying to the cabin mortgage in the hopes that we’ll be able to reach financial independence even quicker than planned. Here’s hoping (and planning) for the best.
Is there anything else you want to add to this story that I did not ask?
Just want to add my thanks for the opportunity to share a little bit about our debt vs. investing decisions. Much appreciated!
Editor: Big thanks to The Graying Saver for sharing his story. As you read in the first pay off debt or invest interview here, I choose to pay the minimum on my mortgage and invest the difference. That move is right for me. The Graying Saver is in a different place. He’s 8 years from a pension and focused on eliminating the monthly payment from his mortgage. While we make different choices, the beauty is that each of our decisions work for us. Remember that personal finance is personal and everybody’s circumstances are different.
To read more about his journey, check out his site The Graying Saver.
Do you choose to pay off debt or invest with your savings?