Pay off rental/primary res to become financially independent?

[Keith O.]

Hello Everyone, 

I'm about to turn 35, single/not married, no kids, and am currently living in my basement and renting the rest of the house out (which I am totally content with ..have no desire to live in a big empty house alone). I owe $315k on the house, interest rate of 5.5%, and have 20 years left until it's paid off. My mortgage payment is $2,750 a month + $400 in utilities (avg.). I'm currently getting $3,200.00 in rental income per month on the house. I also own a small office building that's fully paid off and rented out for $1,300.00 a month. I have $625k sitting in the bank (plus $300k in a retirement account) and no other debt. My thoughts are to go ahead and pay my house off, which will grant me financial independence. This is my primary goal ..kind of hitting the reset button on life. I'm no longer working (ran a business for 10 years and am done!) ..not saying I'll never work again, but would like to become financially independent first, so I can take my time figuring the rest of my life out. I understand that I could go out and start buying more houses right now to maximize rental income etc. but I don't want to manage anything else or at least not in the foreseeable future, but I'll still have $300k to work with if I change my mind after paying my house off. I'm young, healthy, and just want to enjoy a simple and stress free lifestyle. My CPA is totally against me paying off my house because I'll lose the tax write-off (I'm assuming) which I understand, but If doing so grants me financial independence, even if I have to pay some additional taxes every year, then so be it. I'll also be able to save about $10k a year after the house is paid off. I just don't see where I can go wrong here. I know there's a million ways to skin a cat and it comes down to personal preference, but my CPA seems so adamant about not paying my house off that it has me second guessing doing so. I could understand him or anyone else saying 'that's stupid, don't pay your house off' if I was the only one living in it, but it's generating $3,200.00 and month in rental income with the possibility of even more if/when I move out of the basement. I'd much rather have steady and reliable rental income financing my financial independence rather than trying to invest $315k into stocks and bonds to get the same outcome. I guess you could call this a 'no plan' plan. Any thoughts or other point of views ??? Anyone else doing anything like this ..kind of just living a low income / financially independent life? Thanks! If it makes any difference, I also own another house that's fully paid off, but currently does not generate any income ..a close 70yr old relative lives in it rent free, she does pay property taxes, insurance, and utilities. etc., so nothing is really coming out of my pocket, but that will be another source of income when the inevitable happens. I just don't see myself ever looking back and saying 'why did I pay my house off!?' ..what do you guys think? Thanks!

[Brian Schmelzlen]

My advice to clients is to not let taxes control their life decisions.  It does not make sense to pay mortgage interest just so that you can get a percentage of that mortgage interest back through your tax deductions.  That is especially true with the tax law change that went into effect this year; the standard deduction nearly doubled, so the taxes you save by itemizing might be much less than they were in the past (in other words, because you are getting a larger benefit through the larger standard deduction the "cost" of not having the mortgage interest deduction might be less).

I can see an argument for there being better uses for your money than to pay off a mortgage with a 5.5% interest rate (if you can make an investment that pays at least 6% for example), but if your quality of life will improve because you paid off your debt and are now "financially independent" then that is what you should do.