The Biggest Downside To Paying Off Your Mortgage

The Biggest Downside To Paying Off Your Mortgage

If you’re focused on paying off your mortgage, good for you. It’s generally always good to pay down debt. However, I’d also like to share with you the biggest downside to paying off your mortgage that may surprise you.

It’s been five years since I paid off my rental property mortgage I first took on in 2003. The satisfying feeling of paying off the debt has completely worn off. The positive feeling actually wore off just one year later.

Perhaps the reason why the feeling was so ephemeral was because there was no congratulations card or fancy French Laundry dinner celebration. The only thing that changed was an extra $1,308 in cash flow, which goes straight to savings.

Before taking on this mortgage, I experienced an eerily similar feeling of ambivalence in my early 20s. After working for 60+ hours a week from 2009 – 2001, while saving 100% of every bonus and 50% of each paycheck, I started thinking: what’s the point of it all? 

Maybe I was experiencing a quarter life crisis back then. What I did know was that my enthusiasm for working in finance faded after September 11 happened.

In 2003, I was *this* close to leaving San Francisco for Honolulu until I found a 2/2 condo overlooking a park in Pacific Heights for $580,000. Once I took out the $464,000 mortgage, my motivation to work hard shot through the roof!

Suddenly, my paycheck felt meaningful because if I stopped paying, I’d lose my $116,000 down payment and trash my credit score.

The Biggest Downside To Paying Off Your Mortgage

The biggest downside to paying off your mortgage is the complete loss of motivation to take risks and work hard. Once you have a small mortgage or no mortgage, you no longer have as much fire to improve your finances. You may start slacking off in your career or entrepreneurial endeavors. A mortgage keeps keeps you hungry.

Without debt, life is easy. And when life is easy, why would anyone but the craziest of people bother to take risks? It’s totally irrational to work hard if there’s no financial burden. Forget about trying to start your own huge business or get promoted when you can just enjoy life now.

When I made a new year’s resolution back in 2015 to pay off the rest of my ~$100,000 mortgage, I unleashed an inner money-making beast.

Instead of continuing to consult part-time for 25 hours a week at a startup, I got motivated to look for more consulting work. I ended up taking on two more consulting jobs for a total of 60 hours a week for three months.

All three companies were fascinating to work for. And making some extra money in order to pay off the mortgage was a significant motivator.

Took Things Down A Notch

As soon as I wrote the final mortgage check in 2015, my whole attitude changed. First, I stopped looking for more consulting work even though two out of the three contracts ended. Second, I decided to go on a 3.5 week trip to Asia to live life like a digital nomad.

I then spent several days up in Yosemite to see if bears poop in the woods. Then I went to New York City for two weeks to watch the US Open and see some friends! Once I paid off my mortgage, I began to completely slack off!

There was little motivation to try and maximize cash flow, despite at the time, still being $50,000 away from my $200,000 a year passive income target.

Sure, not having to consult anymore meant less stress and a healthier lifestyle. But it’s not like I was stressed or unhappy working those hours in the first place. Instead, I was pretty thrilled to be able to do what I wanted to do while making a very healthy income. Something new was happening every day.

The biggest downside to paying off your mortgage is really the loss of motivation to try new things. Only when your back is against the wall will you do everything possible to change. Having a mortgage is like an implicit back stop to not slack off.

The Biggest Downside To Paying Off Your Mortgage - the last mortgage payment
My last mortgage payment on 5/12/2015. Balance was $464,000 in June 2003

More Reasons Not To Pay Off Your Mortgage

Here are some other reasons to not pay off your mortgage.

1) You lose your mortgage interest deduction. 

The mortgage interest is treated like a business expense for rental property and a tax deduction if its your primary residence. The higher your tax bracket, the more valuable the interest expense. For those in the 32% Federal tax bracket or higher, you get better value keeping your mortgage.

2) You lose a low borrowing cost.

Interest rates are at all-time lows post global pandemic. Therefore, it makes more sense to hold onto a low fixed mortgage rate for as long as possible.

My mortgage had an interest rate of 3.375% a year. That was pretty cheap for a rental property, given rental property mortgages are generally 25 – 50 bps higher. However, if I had held onto the mortgage today and refinanced it or let it float, the rate would be 2.5% or less.

The excess capital could have been used to buy tech stocks that have done phenomenally well since 2015.

3) You tie up capital in an illiquid asset.

Unless you have a very diversified net worth, having a lot of capital tied up in a property can be bad. Your property could blow over in the next storm, or burn down in a fire. If you are underinsured, you will pay dearly as insurance companies make it difficult for you to receive full benefits from a claim. Too much capital tied up in your home is also one of the biggest downsides of paying off your mortgage.

Most Americans have a majority of their net worth tied up in the home. When the housing market collapsed, so did the net worths of millions. Hence, it may be best to have as little equity as possible or simply sell.

4) You decrease your financial returns.

If you put 20% down, a 4% appreciation on the property means a 20% cash on cash return thanks to leverage, e.g. $100,000 down payment on a $500,000 house that appreciates by $20,000 = $120,000 equity, a 20% increase.

If you’ve paid off the other $400,000 in mortgage early, the the return falls all the way down to 4%. Of course, you could have invested the $400,000 in some risky asset that blows up as well.

5) You might start being less efficient with your time.

Instead of consulting for lots more money, I decided to spend my time discovering what it was like being an Uber driver. After all expenses, I was only making $22-$25 an hour driving. But if I had found another consulting contract, I could have easily made 10X that amount.

If I focused on growing ONIG Financial Blog, perhaps I could made 20X that amount. When it comes to making money, less debt can make you less disciplined. But I drove because I was curious and fascinated with people’s stories. Some of these stories ended up on here.

Come Up With A Mortgage Pay Down Plan

If you love the feeling of progress, think twice about rapidly paying down your mortgage. If you only have one mortgage, be especially careful. Thankfully, I’ve got two more mortgages: a vacation property and a rental property. I’ve now got to re-create that sense of urgency to pay them off. It’s hard when the rent is multiple times higher than the cost.

The reality is, I’m still super-motivated to continue building wealth because I now have two young children. Each child is like a mortgage telling me to keep working harder and not mess things up. In fact, my son the other day said the sweetest thing, “Daddy, thank you for working so hard to buy this house!” Once I heard those words, my motivation went through the roof!

So much more is at stake now. Paying off debt feels even more meaningful once you become a parent.

Ideally, it’s good to have $0 debt by the time you retire or no longer have a desire to make more money. After inputting various realistic expenses in my free retirement planning calculator, I’ve calculated that I can pay off all debt using current and anticipated cash flow in under 10 years.

I’d like to think I’ll be as active at 53 as I am today. However, chances are high that I won’t be as motivated. I’m already suffering from arthritic thumbs from typing too much on my iPhone.

Figure out when you plan to retire and divide your debt by the number of years left you plan to work. Now come up with a plan to be debt free by your retirement date. You’ll be glad you did!


Refinance your mortgage now. Largely due to the global pandemic, mortgage rates of all types are at all-time lows. Refinance your mortgage with Credible, one of the largest mortgage lending marketplaces where lenders compete for your business. You’ll get real quotes from pre-vetted, qualified lenders in under three minutes. Credible is the easiest way to compare rates and lenders all in one place.

Average Mortgage Rates - The Biggest Downside To Paying Off Your Mortgage

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Fundrise Due Diligence Funnel
Less than 5% of the real estate deals shown gets through the Fundrise funnel

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