Maybe even Dave doesn’t understand the sleight of hand here. I couldn’t say–he seems awfully ill-informed on some aspects of personal finance (such as Roth IRAs verus Traditional). But by Dave’s own logic in this statement you should never invest a single dollar in retirement or anything else as long as you owe on your mortgage. There is absolutely no difference between the scenario above and funding your 401(k) at work when you have a mortgage. I absolutely could have paid off my mortgage by now if I had paid on the house rather than saved for retirment over the last ten years. Either Dave’s challenge to this caller was B.S., or the “baby steps” which have you invest 15% of income for retirement before attacking the mortgage, are seriously out of whack. The Baby Step gospel is, in fact, that you should prefer some level of investment to paying off mortgage debt.

Honestly, a lot of the quotations in this post just remind me how much I hate Dave Ramsey’s obfuscations and half-truths. Most of his examples boil down to “all other things being equal, it’s better not to have a mortgage than to have one.” Well, thanks for that insight. Of course, all other things are never equal. Not ever. If you want to own a home, and you have a pile of money, you can choose to pay cash or get a mortgage and put the money to some other use. To pay cash is to give up any other use for that money. That’s what so annoying about his ridiculous examples where I own a house with a mortgage and he owns the house next door free and clear. And that puts him in a better financial situation? Well, stop the presses! Of course he’s in a better situation–he just gave himself an extra hundred thousand dollars of net worth! How about he owns his home, but I have a hundred grand in a savings account. That’s an honest comparison.

The one other thing that kills me is that Dave hardly ever explores the real issue about shelter: whether you should rent or own. He’s a real estate salesman, and I think it’s permanently poisoned his bloodstream on this question. For Dave, renting is for military families or people saving up a down payment. Here’s a better rule of thumb than anything I’ve ever heard Dave Ramsey say about housing: if the price of a house is more than what it would cost to rent a comparable property for fifteen years (180 rent checks), do not buy.

I think you should always take out a thirty year mortage and pay it as fast as you can, but remember that in inflationary times, you repay a mortgage with ever cheaper dollars and it may make sense to do just that.

Also, if you are serious about refinancing, check with your current lender – many have quick/simple ways to refinance if you stick with them. Hudson City (my lender) for example, has a one page form you complete and mail in with a 0.6% fee – no reappraisal/title/icome verification/docs. You get your rate right off their website, mail it in, and you’re done. We’ve done it twice since buying our home – first knocking about 1.5% off our 30 year rate, then two years later switching to the 15 year mortgage. Both times the fee was easily covered within months by the interest saved.

Later, you say that it’s a bad idea to get a 30-year mortgage instead of a 15-year mortgage, because “something will come up.”

I tend to think those two apply in equal measure. If you’re the sort of person with the discipline to put a no-longer-required mortgage payment into savings, then you’re the sort of person with the discipline required to put down double payments on your 30-year mortgage. On the other hand, if you’re not that sort of person, then the sooner your mortgage is paid off, the sooner you will find unproductive uses for your money, because “something will come up.”

Second, the “myth of the interest deduction” is not a myth. This dovetails with the “Rent or Own” decision.

There are a couple ways to look at houses, but there are two that I think are worth focusing on. One is as a place to live. The other is as an asset which appreciates.

You have to live somewhere. Let’s assume that place is your house. Now, there’s a price that another owner could charge you to live in your house. That would be your rent. In theory, it would have to be enough to cover principle, interest, taxes and insurance (PITI) plus maintenance costs. Let’s say this is $1100/month. You get to live there, so you get something for your trouble, but this is the worst case. You’re shelling out money and have to work to earn it.

If, on the other hand, you own the house outright, instead of you paying your landlord $1100/month, you pay yourself $1100 a month. You DO NOT save this money, you just pay it to yourself…you pay $1100 in month in rent and are the proud owner of an asset that earns a stream of income of $1100/mo and they cancel each other out.

Imagine, instead, that you have a mortgage. In this case, you are paying a mortgage servicer (maybe your bank) $1100/mo (assuming that they have some kind of escrow for taxes an insurance). So in this case, you pay $1100/mo, but for the first bunch of years on the mortgage, the government credits you a large amount for this. So you are spending $1100/month, but the government is giving you a tax deduction for some of your housing costs. This is because you LIVE IN THE HOUSE. Your landlord can’t live in your house, so he can’t get a homestead exemption, so you can save money this way (whether this advantage gets competed away or lost because unlike a landlord, you’re not a savvy negotiator, seems uncertain, but unlikely in a market as irregular as housing). Even if you don’t have any other assets, you are now living in an $1100/mo house but only paying, say, $850/month.

If you have the assets to own the house outright, but opt to get a mortgage instead, then, assuming you can put these assets to use, you should STILL HAVE A MORTGAGE. This is because you can take those assets, buy an essentially identical house, earn $1100/mo from those assets, pay the bank $1100, and get a deduction from the gov’t of ~$250.

So, you now earn $250 a month from your living arrangement, rather than $0 (when you own the house outright).

There are problems with owning a house. You don’t like maintenance; it’s hard to pick up and move; there is risk associated with owning an asset. You have to deal with maintenance when renting: you can always pay for maintenance when you own as well. If you don’t like housekeeping, I’d recommend buying less house and using some money to keep it up. There is risk with every asset: ESPECIALLY a house you own outright. For a lot of people, their biggest asset is their house, and to fail to spread the risk seems unconscionable. In any case, you should have house insurance, and having a mortgage keeps the option of lapsing on that out of the offing.

Not being able to move is big. If you’re not going to stay in one place for very long, you probably shouldn’t own a house, unless you can handle renting it out (most people can’t).

If you are going to live in one place for the foreseeable future, you should definitely own a house. Owning a house gives you the rights to any appreciation without very much investment (although it’s a very illiquid asset).

As for whether or not people itemize deductions, young homeowners with cheap houses are not going to get much from the interest deduction–it’s awfully regressive. Still, most people in those situations can’t buy a house outright, so it’s a mortgage v. rent decision, which should be easy. You can pay your own mortgage or someone else’s. It’s up to you.

By the time most people can seriously consider owning a house outright, they’re going to be itemizing anyway.

And it is NOT the same as putting your future on a roulette wheel, because roulette wheels are rigged to fail. On average, a mortgage is a GOOD idea, not a bad one. Owning anything of value is like putting your well-being on a roulette wheel. Having kids, believing in things, welcoming meaningful relationships into your life: all these things bring risk and require faith. Fortunately, the world we live in is one that rewards faith more often than not, at least in the eyes of this particular atheist.

I ran the numbers a few weeks back, and as of June, 2009, we came out $15-$17K ahead by going with the shorter term/lower interest rate mortgage instead of keeping the old loan and adding that extra $100/month to the mutual fund instead, if you looked at where the mutual fund ended up over that timer period and how much more of the mortgage loan balance we paid off over that time period.

Another nice thing: if we had to sell the house, we could massively underprice anyone else on the block and get it under contract quickly. What we owe on the house now is less than what vacant lots are currently selling for in our development, even with prices 25% lower than the peak of the market.

I know that if I lost my job, to keep my house would take a monthly amount of $220 for maintenance and $106 for my power bill. Unemployment, even at Florida’s paltry rates, would be enough to keep a roof over my head. During this downturn, it is an enormous comfort to know that if I pay condo fees and taxes, no one can take my house because I don’t owe anything on it. I never paid enough interest to itemize my taxes so that was a nonstarter. I am just grateful that I don’t have a mortgage.
Also, by not having a mortgage, it’s easier to fully fund an emergency fund (more to save every month and a lower monthly expenses)

I know that I’m in the minority; I actually only know of one other couple who have paid off their house.

However, it would take 10 years for us to save up enough money to pay cash for a house in our area. In addition, the monthly rent for a the house we just bought would equal or exceed our new mortgage. Finally, our itemized deduction will be three times the standard deduction, which is a major tax reduction we would not be seeing if we didn’t have a mortgage.

When I retire, I’ll be very happy to pay only maintenance and taxes for my housing. My income will be quite a bit lower, but without that big chunk of rent, I’ll be able to live decently. For me, that was the whole point of owning a house.

If you can double the amount you pay toward the mortgage (assuming a standard 30 year fixed), you can typically get it paid off in about 9 years. This isn’t unreasonable given the size of many debt snowballs. For example, Trent’s $1100, doubled to $2200 a month, saved for a year is $26,400. So on top of the tens of thousand in interest you’re saving, that’s a fair chunk of change that can be freed up to use for investing in other things for the next twenty plus years if you can pay off the mortgage when you’re in your forties.

I believe this is where Dave R. feels you can really begin to live like no one else. Without debt burden, and with this kind of income stream ontop of meeting all obligations and budget items, there is real potential to get ahead financially.

Until you have an ample emergency fund for your individual circumstances, increasing liquidity is more important. Once you do have that emergency fund, then increasing net worth is more important.

At today’s inflation rate and rate of return on savings, adding money to an emergency fund will slightly decrease inflation-adjusted net worth over time. Think of that as the fee you must pay to have adequate liquidity to meet emergencies.

Conversely, at today’s inflation rate and mortgage interest rates, paying down your mortgage will increase your net worth, but only if you can hold on to your home and not take on higher rate debt in case of an emergency – hence the need for liquid emergency funds.

For me, the tipping point was two years’ living expenses in emergency funds. Since I reached that point, I’ve been hammering away at the mortgage with any available extra money. A dual-income family where both have good disability insurance policies would probably be fine with one year’s expenses. I can’t imagine having only three or six months’ expenses and prepaying my mortgage instead of building up my EF. That is way too risky for me!