Updated on 07.13.09

The Total Money Makeover: Pay Off the Home Mortgage

Trent Hamm

This is the tenth of twelve parts of a “book club” reading and discussion of Dave Ramsey’s The Total Money Makeover, where this book on debt reduction is teased apart and looked at in detail. This entry covers the eleventh chapter, finishing on page 202. The next entry, covering the twelfth chapter, will appear on Wednesday.

ttmmThis is a stage that I see us approaching as time goes on. We’re not quite there yet, but we’re close. Right now, I’m trying to knock out my final student loan (it’s a doozy), and then start focusing on my home mortgage.

Our home mortgage payment is just shy of $1,100 – that doesn’t include homeowners’ insurance and taxes, so when we get the house paid off, we now have $1,100 more a month to spend on whatever we choose.

I, for one, would roll that extra amount directly into savings. I’d simply change the automatic payment to be an automatic transfer into a savings account of some sort – perhaps an index fund. Then I just keep living life as normal until one day that account is full of cash for something great. For us, that “something great” is our long-dreamed-of house in the country, with a small barn out back, a big garden, and a chicken coop.

Is It A Crazy Goal?
My parents recently finished off their home mortgage after paying on it for thirty years. They’re pretty much debt free at this point for the first time in their marriage. So, for me, I have a great example in front of me that you can get rid of all of your debt. However, many people don’t have that example and it seems like an impossible goal. On page 186:

Anytime I speak about paying off mortgages, people give me that special look. They think I’m crazy for two reasons. One, most people have lost their hope, and they don’t really believe there is any chance for them. Two, most people believe all the mortgage myths that have been spread.

The “hope” factor is something I see popping up over and over again whenever I talk to people about money. Many people I talk to view their mortgage as simply a fact of life. If they were ever in a position that their mortgage became really easy to pay, it wouldn’t be time to double-up on the payments – no, no, it would be time to upgrade their homes.

I think this points to a prevalent mindset out there when it comes to debt. Many people simply view debt as a way to leverage the lifestyle they want now. It comes from a lack of patience – people don’t want to live in a small apartment watching their savings grow slowly when they could just get this loan and be in that house now – even if it costs them hundreds of thousands of dollars.

I think patience is one of the biggest tools a young professional can have when it comes to his/her money. Just wait for a while – you’ll be way better off over the long run.

The Tax Deduction Myth
Owning a mortgage just to get a tax deduction is something of a fool’s game, as outlined on page 187:

If you have a home with a payment of around $900, and the interest portion is $830 per month, you have paid around $10,000 in interest that year, which creates a tax deduction. If, instead, you have a debt-free home, you would, in fact, lose the tax deduction, so they myth says to keep your home mortgaged because of tax advantages. […] If you do not have a $10,000 tax deduction and you are in a 30 percent tax bracket, you will have to pay $3,000 in taxes […] According to the myth, we should send $10,000 in interest to the bank so that we don’t have to send $3,000 in taxes to the IRS.

All the tax deduction does is lower the effective interest rate you’re paying on your home loan a little bit.

In fact, Dave doesn’t even make the case as well as he could. If you’re using your mortgage interest on your tax return, that means you’re foregoing your standard deductions because you have other things to deduct. So, take our situation – we have two adults in our home. Our standard deduction in 2009 is $11,400. If we choose to itemize our taxes (which we’d have to do to deduct our home interest), we have to have more than $11,400 in interest on our home mortgage (or other deductible expenses) to beat what we would already get.

So, if your only significant deductible expense is your home mortgage – and your mortgage isn’t gigantic – you’re not actually gaining much of anything at all in terms of taxes.

The Risk of Having a Mortgage
Another disadvantage of holding on to a mortgage is the risk – if something goes wrong in your life, it’s a lot better to not have a mortgage payment than it is to have one. On page 189:

If I own the home next to you and have no debt, and you (because of your investment adviser guy) borrowed $100,000 on your home, who has taken more risk? When the economy moves south, when there is war or rumors of war, when you get sick or have a car wreck or are downsized, you will run into major problems with a $100,000 mortgage that I will never have. So debt causes risk to increase.

I think this is a vital, overlooked point. Having a mortgage – or any debt – is a type of risk. You’re gambling that your future will be stable, no different than putting cash down at the roulette wheel. With a mortgage, your life is simply more at risk than it was before.

I have two young children at home. Risk stares me in the face every day. I encourage our children to push their limits a little, but I still stand very close by when my three year old grabs onto playground gymnastics rings and hangs there. Having a mortgage is something like telling my three year old to grab the rings for the first time while I stand far away. Sure, he might hold the rings for a while and then drop without a problem, but my distance increases the chance of a hurt elbow or a broken arm.

The risk of owning a fat mortgage is much like the risk of putting your child on a bike for the first time and shoving them down the sidewalk. Sure, they might ride like the wind, but they might also fall flat on the pavement. Instead, it’s better to do a bit of planning (like saving for a home) and then let go when they’re ready (like when you have enough saved up for a house). No broken bones, no broken lives.

Thirty Years Versus Fifteen Years
Many people advised me to get a thirty year mortgage instead of a fifteen year mortgage, arguing that I could make an extra payment each month and get the same speed benefit of a fifteen year without the risk of the larger minimum payments. That’s a bad idea because something will often come up, as is spelled out on page 190:

A big part of being strong financially is that you know where you are weak and take action to make sure you don’t fall prey to the weakness. And we ALL are weak. Sick children, bad transmissions, prom dresses, high heat bills, and dog vaccinations come up, and you won’t make the extra payment. Then we extend the lie by saying, “Oh, I will next month.”

A higher minimum payment is actually a good idea, because it forces us to work with what we have left over. A lower minimum payment means that we just have more to work with – if that extra payment isn’t required, it’s easier to argue that something else is more important for the moment.

With expenses like prom dresses, heat bills, bad transmissions, and dog vaccinations, you can always find ways to make it work. If you have a decent emergency fund, it shouldn’t be too tough at all.

What do you get in exchange for these little sacrifices? Your mortgage goes away in half the time. You find yourself free of that load much, much faster. Plus, the interest rate on a fifteen year loan is lower, meaning your payments won’t actually be anywhere close to double what they would be for a thirty year mortgage.

Home Equity Loans Make Poor Emergency Funds
One common question I get from readers is whether or not they should take out a home equity loan to deal with some problem in their lives. My feeling is that if you’re in that situation, you need to rethink about your emergency fund. Sure, the home equity loan might be the right solution for right now, but if you’re living your life in such a way that it has to be used, you might want to rethink how you’re managing your money.

On page 197, Dave dips his toes into this idea:

Even a conservative person who doesn’t have credit card debt and pays cash for vacations can make the mistake of the HEL by setting up a loan or a “line of credit” just for emergencies. That seems reasonable until you have walked through an emergency or two, and you realize very plainly that an emergency is the last time you need to be borrowing money. If you have a car wreck or lose your job and then borrow $30,000 against your home to live in while you make a comeback, you will likely lose your home. Most HELs are renewable annually, meaning they requalify you for the loan once a year.

Think of it this way. You’re using your home equity loan as an emergency fund. You lose your job, so you take out $30,000 to live on – it’s fine, since you have tons of equity in your home, right? Well, the end of the year comes and you still don’t have a job. The bank says, “Sorry, we’re not renewing your loan,” and they call in the $30,000. You don’t have it. They repossess your house. Any equity you built up is gone.

An emergency fund needs to be cash, period. If it’s not liquid or it puts you at risk to get it, then it’s not an emergency fund.

Our local credit union has hinted to us that we should have a home equity line of credit. I have torn up every single offer they have sent to us. I’m not interested in that kind of risk.

Paying Cash for a Home Is Impossible
I agree with Dave that it is indeed possible to pay for your home with cash. So why don’t people ever do it? It’s not easy. It’s a lot harder to go this way than it is to just go get a mortgage. On page 198:

Paying cash for a home is possible, very possible. What’s hard to find is people willing to pay the price in sacrificed lifestyle.

I think the problem is that many people view their home as more than just living quarters. They view it as a status symbol – they need a house they can show off to family and friends. It’s more impressive to live in a house than an apartment, isn’t it? So, if you back up and think about it, you pay hundreds of thousands of dollars in interest, home maintenance, and other costs – not to mention time – in order to impress others.

Again, the only people impressed with such things are people that you never speak to, who don’t matter in your life. They look at you and admire your home, but they don’t build a relationship with you. The people you build lasting relationships with like you, not your house.

We chose to buy a home with a mortgage. I don’t regret it, but if I had to do it all over again, I would have looked intensely for a great rental situation instead (since we originally lived in an apartment too small for two toddlers and two adults – we had to move) and kept saving.

Do you have any other thoughts on this chapter of The Total Money Makeover? Please share them in the comments – and feel free to respond to any of my impressions as well. After all, a good book club is all about discussion!

On Wednesday, we’ll tackle the twelfth chapter – Build Wealth Like Crazy.

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  1. Baker @ ManVsDebt says:

    Wow, I have never thought about the standard deduction point that you brought up.

    I prepared taxes this year for individuals and small businesses and I cannot understate how many of the people who itemized ONLY could do so from the mortgage interest. Most had very little other itemized deductions.

    I’m kind of embarrassed I didn’t make that correlation earlier and it’s a great point to bring up when discussing the issue in DEPTH.

    Secondly, it’s awesome to see that if you had to do it all over again you would rent and continue to plow into savings.

    This is the mindset that my wife and me are committed to at this point. Ultimately, we’d love to do some long-term travel (another reason why a home is a LIABILITY and not an ASSET), but even if travel isn’t in the cards, I’d much rather rent, focus on student loans and then savings.

    Great breakdown of the part of the book. Loved it.

  2. Ben says:

    Hey! Thanks for the article, I love coming to this site and finding logical money making/saving advice, and this was full of good advice. I do want to point out that this site is catered to people who are more responsible with money than most and when looking into mortgages Dave Ramsey and I disagree. He’s talked about this a couple times that I know of on his radio show, but you can make more interest through safe investing than you pay the bank on your mortgage. Ramsey has said on his show that this is true, but in reality the majority of people are not going to put the extra payments in interest bearing accounts, but here at thesimpledollar.com I’d like to think that there are enough people who are disciplined enough to find this to be a viable and lucrative option.

    Thanks for the post, I’ll dig out my book and re-read it with you guys! I love the motivation!

  3. ClaireTN says:

    If you have the discipline to do it, taking out a 30-year mortgage and paying it off in 15 is a great idea. It’s a matter of knowing yourself well enough to know whether you will do it or fall prey to the temptation to use that money elsewhere. We have a 30, but have been paying extra on it every month since we got it four years ago, and are considering paying it off even earlier.

    Here’s a link to the calculator we used to figure out how much we needed to add to each payment: http://www.finance.cch.com/sohoApplets/MortgagePayoff.html.

  4. Kathryn says:

    I agree with the standard deduction thing. I hadn’t thought it out entirely, but we have done best with standard deduction in the past.

    I didn’t buy my home to impress anyone. After renting for 15 years & seeing all that money down the drain, it simply makes more sense to me to own the home – and my payment is less than rent was.

    However, the home we bought is modest. It was built in ’77 & is in relatively good condition. It is not perfect. There is a long list of things we would like to do for it, but it is functional & i’m content to wait until we have money & time to do most of that work ourselves.

    One of the programs i watch on TV is that of first time home buyers & i’m amazed at the things they will say. They walk into a beautiful home that has “dated” but perfectly functional kitchen & bathrooms & say, “Oh, this has to go!” Remodeling kitchen & bathrooms to be “updated” seems to me to be a new form of dressing in name-brand clothes. I’m kind of blown away from the expectations of these folks.

    One thing that you seem to be over looking is that even tho a mortgage is a risk, if you are renting you are paying someone else’s mortgage for them. If i had bought a townhouse all those years ago & been putting that money toward paying a mortgage, i would be at least 15 years toward paying it off. I didn’t have any extra for savings – yes i know your principles, but believe me, just making the rent payment every month was about all i could do. It is water under the bridge now, but that is a lot of money gone.

    One other thing that you are over looking is that property tends to go up in price over time. So, if you buy now you “lock in” a price that you might not be able to get with cash later. Yes, home prices got out of control there for a while, but prices do tend to go up steadily. If i had bought when i was finishing college instead of renting that place, i would have locked in a 1993 price. Instead, without saving anything thru those years, i was looking at prices for 2005, & the cost of those houses had gone up more than 100% in the intervening years.

    I have not made good choices with money since i was out of college. I’m trying to make them now. But buying a home, even with a mortgage is a very good choice for us.

  5. NYC reader says:

    Trent questions whether he’d buy or rent if he had to make the decision today. Part of the equation that he doesn’t bring up is the imputed value of rent in the mortgage payment. In other words, part of that $1100/month also represents the value of the house providing shelter. How much would it cost to rent an equivalent living space? The difference between the cost to rent vs. the cost to own is the amount that Trent could otherwise save or invest.

    It’s likely that if Trent and his wife had chosen to rent, they would have rented an apartment which was not equivalent; it would have been smaller, would not have had amenities such as a backyard, a washer/dryer, etc.

    Some of those amenities have frugal and/or timesaving benefits (and time = money!) that are not being accounted for. Having a child in cloth diapers is not feasible when one has to travel to use a public laundromat. Using a laundromat (or hiring a diaper service) is not inexpensive. Having a backyard garden to grow organic vegetables saves money and provides a hobby and source of pleasure. It’s unlikely Trent would have had a separate space for his office in an apartment, and he might have had to rent office space to get work done without distraction.

    Of course, the real estate market varies radically from one location to another. $1100/month wouldn’t even pay for rent on a studio apartment in NYC. If I were dropped in the middle of Iowa and planned to stay there, I might buy a house simply because it is so much less expensive than any rental or mortgage I’ve ever paid.

    The tax deduction that most people claim is not worth the extra money shelled out for the mortgage (don’t forget that the property taxes are also deductible, in addition to the mortgage interest).

    The best reason that most people have for choosing to buy vs. renting is that they are not disciplined enough to save on their own, and the mortgage is a form of forced savings. The difference between imputed cost of rental vs. the total cost of ownership (mortgage plus property taxes) is likely to be spent, not saved, by the typical person.

    That works as long as property values go up, and the equity built up in the home continues to increase, AND the person is willing to sell the house to recoup the profits. If the person is not saving/investing in addition to paying the mortgage, they fall prey to the notion that a home equity line of credit is the key to “tapping in” to their forced savings in the form of home equity.

    A house is shelter, period. Any appreciation in value due to rising markets is gravy. Using the house as an ATM to tap built-up equity or the appreciated valuation is a fool’s game. Sadly, we’ve seen lots of people get burned in that game recently as the economy has soured, people have lost jobs, and real estate prices have fallen.

    One point in favor of the mortgage is that a fixed rate mortgage payment is an inflation hedge (although the property taxes will likely increase over the years). The cost of a rental will increase every time the lease is renewed, while the mortgage payment remains constant.

    [I used the Bureau of Labor Statistics inflation calculator for these numbers]

    If a person bought a house in 1995 with an $1100/month fixed rate mortgage payment, that would equate to a $1556/month payment in 2009. Conversely, an $1100/month payment in 2009 dollars equates to $777 month/payment in 1995. Keep in mind that this has been a 15 year period of extremely low inflation, the difference between the values would ordinarily be much higher during periods of more typical inflation conditions.

    The inflation hedge implicit in the fixed mortgage payment offsets much of the risk that changing financial circumstances present to one’s ability to pay the mortgage.

    Let’s assume a person took out a mortgage in 1995 with an $1100/month payment. If her/his financial circumstances changed for the worse in 2009, the budgetary hit is equivalent to only $777, because the value of that $1100/month payment has decreased over time due to inflation. As long as the person has not engaged in “lifestyle creep,” where s/he has taken on additional (unnecessary) expenses, the mortgage is not an excessive risk. But if the person now drives a financed or leased BMW instead of a paid-off Toyota, and has a house filled with of lots of electronic gear and furniture all charged to credit cards, that lifestyle creep will sink her/him.

  6. spaces says:

    And more on the tax deduction myth, is that, as a fully amortized debt, such as a mortgage, is paid off over time, the interest component is less and less with each payment. The $900 / $830 example is from the early years of a mortgage. At year 10, it should look more like $900 / $700. At year 15, more like $900 / $575. And so on, bringing the home mortgage interest deduction closer and closer to the standard deduction.

    Unless you refinance with a new loan, of course!

  7. Warren says:

    We paid off our mortgage (five years ago) after thirteen years in our current house. I questioned the wisdom of paying it off due to low mortgage rates at the time and a roaring bull market, but it sure feels good now to not have this hanging over us in the current economy. We have always had almost no debt (other than mortgage) and at 47 we were debt free and stuffing money away for retirement. Now if the market ever comes back….

  8. anne says:

    wow- thank you!!

    i love, Love, LOVE the point about the standard deduction v itemized, once the mortgage interest is gone

  9. Diane says:

    Excellent points, NYC Reader, and ones that many people don’t understand.
    If I lose my job, I’d rather have 100+K in the bank and a reasonable (thanks to inflation) mortgage payment than a paid-off house and little cash. A great explanation can be found in the first chapter of Ric Edelman’s “Ordinary People, Extraordinary Wealth”. I found it while cruising the new books section of the library one day right after I’d been to the bank and paid an extra $100 principal along with my mortgage payment. I’ll never do that again. My goal now: save enough in my own accounts so that I have enough to pay off the mortgage, if and when I choose to. I don’t want to be house poor in my old age.
    Finally, regarding “Call[ing] in” a HELOC – it doesn’t work that way. When a HELOC is closed (not “called in”) by the bank, it simply means you can’t borrow any more against it. It does not change the repayment terms of the HELOC as long as you continue to make payments. They are similar to a credit card in this respect. If the bank lowers your credit limit, they can’t demand that you pay your account down to the new limit.
    A HELOC, just like a credit card, can be a good tool if used wisely. It is not automatically a recipe for disaster.

  10. Nick Wright says:

    I like your point about people buying houses as status symbols instead of places to live.

    Five years ago, my wife and I purchased a house for $7,000 on a contract for deed. We finished paying it off last year.

    It was in decent enough shape when we bought it, but I let it sit for a number of years while I was elsewhere working and it is in quite bad shape now. But it’s ours. All the money we don’t spend paying for a place to live we now spend traveling and doing things we want to do, it’s great.

  11. Katie says:

    The decision between buying and renting should also take into account the housing market in one’s local area. Our area is heavy with renters (it’s a college town). When we bought our house, we took our monthly housing expense down by a third. The square footage of the house we rented was identical to the one we bought, and the house we bought was in better shape and in a nicer neighborhood.

    That said, when you own you commit yourself to all kinds of maintenance that you wouldn’t pay as a renter.

  12. JoeTaxpayer says:

    In 2009, for a couple, married, filing joint, the Standard Deduction is $11,400.
    I don’t know if I am bragging or complaining to say that when I combine our state income tax and property tax, we blow right through that. I don’t have a mortgage ‘for’ the tax write-off, but I see my 5.24% rate as really costing 3-3/4 or so.
    With inflation son to return, perhaps with a vengeance, wouldn’t TIPs make more sense long term than to pay off the mortgage?
    Last – do we not believe the market will return at least 5%/yr over the next ten years or so? Are we in lie for another lost decade?

  13. Sara says:

    I’ve been thinking about refinancing my 30-year mortgage to a 15-year. With current interest rates, it would be about $175/month more than my current payment. Alternatively, I’ve always loved the idea of paying off the mortgage 7 years early just by making an extra payment each year. But so many people have said that’s stupid because of the relatively low interest rate of a mortgage — I’d be better off investing the extra money.

    I think the best argument against paying off a mortgage early is missed here, and that is that if you have a financial emergency, you are better off having extra money in savings than being closer to paying off your mortgage. If I refinance to a 15-year mortgage and pay an extra $175/month for the next 5 years, that’s over $10,000 (not to mention the ~$3000 I would pay in closing costs) I’m not putting into savings. If I lose my job at that point, not only will I have less money to get me through a period of unemployment, but I will also have higher expenses due to my higher mortgage payment. And I will still have 10 years left on my mortgage.

    Still, at this point, I’ve saved up enough money to cover almost 2 years’ worth of my current living expenses (excluding retirement savings), so perhaps I have enough of a cushion that I could refinance to a 15-year mortgage without much worry.

  14. Sandy says:

    When we were 7 years into our 30 yr mortgage, I sat down and thought…hmmmm, another 23 years of this payment to go? As it was, such a small amount was actually going toward principal, that I got out a trusty calculator and did some calculating. I figured that we could throw some money on it,( a CD was coming due shortly, and we had sufficient EF so we didn’t need the cash) and boom, there would be alot more going toward principal from that point forward. Also, if we added 1-2 principal payments per month (a couple extra hundred)it would go down faster (and the principle payment would go up even faster). I further thought…hmmm, if we were really aggresive NOW, as opposed to in 10 years or so, it would really start to kick in, and the results would really work faster.
    That was 2 years ago next month, and we are down to an amount that we could pay off, if we took about 50% out of our EF. We’d still have enough for about 6 month of living expenses. So that’s what I’m kind of thinking about now…maybe pay off 1/2 of the remainder of the loan, or something like that.
    It feels awesome to think that even if we do nothing more at this point, it’ll be paid off in 2 1/2 years instead of having 21 more years of payments.
    To me, it’s also like putting money from one of my pockets to another of my pockets, rather than handing the majority of my money over to a bank, with a couple of coins left for me.

  15. For those with more liquid capital, I would suggest not paying off the mortgage if it is already below the max $1million in mortgage indebtedness.

    It’s simple accounting and your comfort level really. If you have $100,000 cash in the bank and a $100,000 mortgage with 20 years left. Just keep the cash, and pay it off over the 20 years if you don’t plan to retire for 20 years. You never know when you’ll need the money. If you sink that cash into your house, and your house disappears, then what? Don’t co-mingle different asset classes.

    Debt keeps a lot of people honest actually. And that’s why I enjoy leverage it.

  16. JoeTaxpayer says:

    Sara – I don’t think Dave suggests forgoing the emergency account to hack away at the mortgage. You are right, money paid to the mortgage is money you can’t easily get back if needed, so it’s a balancing act.
    $3000 in closing costs? Shop around. You are likely to find close to a no point no closing which would make the refi a no-brainer. I do like the idea of grabbing the 15 and even then, make additional principal payments.

  17. JoeTaxpayer – You make a great point about mortgage and inflation. If we are going to have blockbuster inflation, then it behooves us to take on AS MUCH DEBT AS HUMANLY possible! A super inflated dollar tomorrow to pay off a fixed rate loan is such a no brainer

    Having a mortgage is like shorting a bond for that exact same amount. Inflation goes up, rates go up, the value of your debt instrument goes down……. and you win.

  18. Mark says:

    Depending on your age and risk appetite it should also be remembered that paying off a mortgage early may make you worse off. If you are happy to invest the funds being used to pay off the mortgage in stocks then over a 15 to 30 year period you would expect the return on the stocks over that period to exceed the interest rate on the mortgage. Obviously there is a risk factor here that you have to be comfortable with but as others have mentioned it may be better to have the surplus funds invested outside the mortgage rather than locked up in the house equity.

  19. km says:

    When the housing crisis began, one story on the news really hit me. A woman who was 28 years into her mortgage lost her home because she lost her job & couldn’t make payments. With the mortgage my only debt now, I’ve been thinking a lot lately about building the emergency fund vs. early mortgage payoff. A month ago I built a spreadsheet with various senarios comparing savings vs. payoff. I’m still debating between two options. The one I’m leaning more towards is to build my emergency fund to an amount equal to my mortgage and then freeze it and use the former savings amount to pay extra on the house. Payoff would be in 12 years. The second option has better numbers. I would freeze my emergency fund and use the money I would have added to it to pay extra on the mortgage now. The mortgage would be paid off in 7 years and a significant amount of interest money would be saved. Savings would resume after the payoff. However, I would have a lot less cushion if life problems happened – health issues, replacing an older car, home maintenance, job loss, etc. What other factors should I look at to help move me off the fence for this choice?

  20. Nelson says:

    “Having a mortgage – or any debt – is a type of risk. You’re gambling that your future will be stable, no different than putting cash down at the roulette wheel. ”

    Are you serious? I’ll agree with the arugment that a mortgage does increase risk (even though life insurance can very easily be used to hedge that risk if someone is adverse to it) but comparing it to a roulette table? That’s just so wrong.

    Ramsey’s advice for saving up and paying for a house in cash is just as bad. Sure, it’s possible. It’s just so incredibly unrealistic. And that’s why I hate the advice so much. It tells people that they have to scrimp and save for their entire lives, that they can’t enjoy any of the luxuries that our society has in excess, just so they can get ahead. Rather than explaining to people that, when used right, mortgage debt can be a powerful tool towards building wealth, it’s labeled as some sort of evil to be avoided at all costs. Don’t get a mortgage! It’s your ticket to the poorhouse! At best that’s just bad advice and at worst it’s immoral, considering the supposed knowledge of the source.

    Someone should dig up a statistic of how many millionaires never got into debt. I’m going to guess that number is pretty close to zero. Yes, leverage increases risk. It also increases return.
    That’s the trade off.

    People still need to save in addition to paying their mortgage. Home equity shouldn’t just be viewed as money just sitting there for someone to spend. That’s wealth. Ultimately a lot of people make the decision that stuff is more important. And that’s too bad.

    But giving people advice to save up and buy a house in cash and comparing a mortgage to gambling? Just as bad.

  21. Daina says:

    I’m loving this series!

    We bought with a mortgage because it seemed to make the most sense at the time — there are not a lot of rental options where we live (a small town), and many rentals actually cost more per month than our bargain of a house. Part of me wonders if we should have looked harder at rental options… we had to make our move in a hurry! But we are paying down our mortgage fast now, and that’s a good feeling. And we do love owning our own place.

  22. KC says:

    I love the idea of owning my home outright, but I’m not willing to sacrifice my generous savings to do it. I could pay down a quarter of my principle right now, but my savings would dwindle down to about 3 mos living expenses and I’m not comfortable with that little amount of money. I have a low interest rate (5.35%) and wouldn’t be able to borrow money at that rate for anything else. So by having a mortgage and ample savings I’m able to pay cash for anything else I need – thus having only one debt – my mortgage.

    That being said the one thing I have taken away from the recent recession is that if you own your home outright no one can take it from you (unless you can’t afford the taxes on it). So if you own your home you can lose your job, but still keep your home. It almost makes you bullet-proof and that’s a nice feeling.

  23. Sarah says:

    It seems to me that two of your points contradict each other, Trent.

    On the one hand, you argue that you should effectively minimize your monthly mortgage payments by saving up and reducing the size of the mortgage you take out, because you don’t like the risk of future disaster implicit in a larger mortgage payment. Okay, that’s reasonable.

    But on the other hand, you say that you should take out a fifteen-year mortgage rather than a thirty-year mortgage because the higher payment forces you to pay off the loan faster (whereas with a thirty-year you might skip “extra” payments, etc.). This is also a reasonable point…except that it means that you’re opting for a *larger* mandatory monthly mortgage payment each month, in contradiction to your first argument.

  24. AmandaLP says:

    While I agree that paying cash for a house is possible, I do not always think it is a good idea.

    First, as pointed out above, prices for real estate, at least historically, have gone up. Secondly, if one is planning on staying in the same location, at some point the crossover of cost makes it cheaper to be in a mortgage situation than just rent.

  25. shalom says:

    I agree that paying off your mortgage early can be a smart idea, especially now, when even “high interest” CDs have interests rates much lower than mortgage interest rates.

    We recently did the math to see whether we’d be better off financially by paying off the mortgage or by holding on to our savings. We have enough savings to pay off our mortgage and still have 6 months of living expenses saved.

    Ultimately, we decided to hold on to our savings. (We are, however, going to keep making relatively small prepayments from each paycheck.)

    The reason we decided against paying off the mortgage now, even though it would save us a good bit of money, is that we live in a small town whose economy revolves around a large corporation whose headquarters is here. I am the sole “breadwinner” and I work for that corporation.

    If I were laid off, in this recession it could take a long time for me to find a job, and we’d almost surely have to move for it. If my employer were acquired, I doubt the headquarters would stay here and so my job would be terminated or moved. All those headquarter employees would need to move, just like us, so there would be a whole, whole lot of nice houses for sale in this little town, with very few buyers. It would probably take a long time for us to sell our house, and probably it would be at a reduced price.

    For these reasons, we decided that it was risky to pay off our mortgage now. So while I mostly agree with the advice, I think there are situations, like ours, where it doesn’t work.

  26. ChrisD says:

    Paying cash for a home is possible, very possible. What’s hard to find is people willing to pay the price in sacrificed lifestyle.

    I think this argument is exaggerated. Once your deposit is large enough that the mortgage payments are the same or smaller than the rent, then you should buy. There is no point paying rent for years when the same money could go towards your home.

    Re people deciding whether to pay off the mortgage or keep savings. I think with the current instability and lack of credit, keeping cash handy for now is sensible, even if it does cost you in terms of continued interest payments.
    Re reducing mortgage from 30-15 years. Is there any middle ground? Say to 25 years? Mine is very flexible once I made a lump sum payment that reduced the monthly rate, and then changed it from 17 years to 15 years, bringing the monthly payment to just below what it was before.

  27. Pennie says:

    When DH and I debated wether to accelerate/pay off our 30 year mortgage early, we asked for input from several sources: our accountant, our parents, select friends, blogs. The opinions received were very emotional, and all over the board.

    Eventually we went with a decision that just “felt” right to us rather than one that met some sort of IRS litmus test or someone else’s spreadsheet results.

    It took 14 years of discipline (though we still enjoyed life–key I believe) before we were able to make that last mortgage payment in 2003. Being debt-free in this troubling economy has been a MAJOR stress reducer for us, just knowing that no matter what happens we still have our home.

    I’ve never regretted it. I am 49, DH is 54. Being free of this debt allows us to save more, travel more, have more choice, and most importantly, work less!

  28. I agree with the buying choice – why send money down the drain of a rent when you can acquire a home where you get more freedom than in any apartment? There’s property tax, but you will never pay a interest sum that is even close to a rent.

  29. deRuiter says:

    A sufficient emergency account’s the first priority. After that, if you have a mortgage, please get an amortization schedule free off the Internet. The longer your loan, the more puny and pitiful the amount of principal vs the amount of interest THE FIRST HALF OF THE LOAN. If you’ve got a loan for $150,000 @ 5.5% for 30 years, at the beginning of the loan, the principal is $164. and interest is $687. If you can save an extra $164. that month, and send it to the mortgage holder, you will save (not have to pay the bank) $687. and shorten your mortgage by one month. At the beginning of the loan, every penny invested in prepayment brings you an ENORMOUS BENEFIT IN SHORTENING THE TERM OF THE MORTGAGE AND SAVING MASSIVE AMOUNTS OF INTEREST. After the loan is half paid off, this balance shifts. Where can you invest $164. and get (not have to spend) $687. which is AFTER TAX MONEY. We paid off a 20 year mortgage in eleven years, saving thousands of dollars. We used “extra” money for prepayments. We took on small jobs for money, ran errands for people for money, clipped coupons and put that towards the monthly prepayment, shopped for nice stuff at yard sales, conserved everywhere without feeling deprived. We could have gone out to eat at fancy places instead of having a vegetable garden and cooking at home, bought things from “new stores” instead of yard sales (sending my dollars overseas in the process to foreign workers), but we chose to conserve and prepay. We have peace of mind because there’s no mortgage, have that money every month to invest, to travel overseas (with ff miles), AND WE STILL CONTINUE THE THRIFTY LIFESTYLE. Why give money to banks who haven’t shown fiscal responsibility themselves? IF EACH FAMILY IN AMERICA SPENT RESPONSIBLY, PAID AND PREPAID ON THEIR MORTGAGE, FOLLOWED TRENT’S IDEAS ABOUT SPENDING WISELY, AND ENJOYING LIFE, our government might still be in bad shape fiscally, but the citizens would not. It’s amazing what a lift emotionally it is to send in that $164. and say to each other, “One less month and we don’t have to earn that $687. (actually closer to $900.+ before taxes) to give to some bank! KEEP THE AMORTIZATION SCHEDULE POSTED PROMINENTLY AND MARK EACH PREPAYMENT IN RED! It’s inspiring! Your home doesn’t have to be a drain on you. If you’ve got a garage, clean it out and rent it to someone else to store THEIR useless junk, use their rent to prepay on your mortgage. Have a yard sale and sell your excess to prepay the mortgage. Got an extra room? Rent it to a tenant and use their money to prepay the loan. GET CREATIVE AND KNOCK OUT THAT MORTGAGE.

  30. Jennifer says:

    Paying cash for a house is definitely possible…I did it 3 years ago for my present home. I was lucky enough to sell a previous home when the real estate market was at it’s peak and had made up my mind that I wasn’t taking out another mortgage. Owning a home outright is far better than any tax deduction!

  31. My husband and I took a 20-year mortgage instead of a 30 year so that the house will be paid off by the time he retires. The people who keep paying a mortgage for the tax savings are insane. I would much rather pay 3K in taxes as opposed to 10K in a mortgage because the other 7 K is in MY bank account not the bank’s balance sheet. I paid off my previous home and having no mortgage was the best thing I ever did–that 1500 a month can go right into savings or investments or just pile up in a bank somewhere. Having a paid-off house gives you lots of choices and takes a lot of pressure off–you know you will have a roof over your head.

  32. Evaluise says:

    deRuiter, how fascinating – couldn’t believe it and ran the numbers of my mortgage, and it really is true! If I take the amount that went to principal last month and make an additional payment of this size (well, rounded upwards a bit perhaps) it saves me one full month and the full amount of the interest I paid last month. Even in the stage where I am with my mortgage with roughly 2/3 principal and 1/3 interest this is a really good investment, and furthermore it’s a safe investment as we’re planning to stay here.

    I’m really grateful for your comment, deRuiter, because this was not at all clear to me before. I really have to hurry up to get my fully funded emergency fund finished so I can profit from this fascinating mathematical phenomenon!

  33. Cookie says:

    I’m all for paying down a mortgage. Can anyone point me in the direction of a good amortization calculator? The ones I have found are dependant on the amount and terms of the original mortgage and we are several years in with several irregular prepayments. I am not sure how to adjust for these factors.

  34. Catherine says:

    I’m in the UK, so a lot of the detail around tax deductions doesn’t apply here. But do you not have offset mortgages in the US ? I have 50% of my mortgage offset – that is I hold that amount in savings with the bank. I forego (taxable) interest on those savings, which are offset against my mortgage – so in effect I am only paying interest charges on half my mortgage. However, if I lost my job, I still have access to those savings – so it has the benefits and interest savings of making overpayments, but with the safety net of being able to get those “overpayments” back at any time.

  35. k.sol says:

    A co-worker once told me that people who understand math earn compounding interest instead of paying it. When we bought our first house 14 years ago, my husband paid cash, and some of his friends thought he was crazy for doing so. Yes, we did still have an adequate EF — and keep in mind, your EF doesn’t need to be as large without a mortgage payment or rent to cover. It was an incredibly good decision for us, and it’s allowed us to save much more than we would have been able to. It also made it easier when we sold that house to move to a different city — there was no long period of trying to get “our price” out of it, because we weren’t shackled by a mortgage we had to pay off. I’ll admit, the lifestyle choices he made to get there are not what most people are willing or able to do. The biggest thing, though, is that we bought a lot less home than we could “afford.” I can’t tell you what a feeling of security it is to know that as long as we can come up with our property tax payment, we keep our house. Debt-free truly is the way to go.

  36. Rosa says:

    @Cookie #24 – call your mortgage company. They should be able to provide you an amortization schedule of your actual current loan, at the set payment. Then you can plug it into a mortgage calculator (or use Quicken) to compare different payment options.

    There’s a really interesting history of American suburbia by Delores Hayden, called Building Suburbia. She’s an architect, but the book talks a lot about the evolution of financing – for a long time it was so hard to get a mortgage, people would buy “curbstone” lots or build just the garage, and then live in a tent or the garage while they built their house, as they got time and cash. You see that in our city neighborhood – people would buy a lot and build a very tiny house, or a horse barn, and live in that while they got it together to build a house. So the idea of a “starter house” is pretty central to how Americans think, it’s just gotten really inflated by easy credit availability.

  37. The problem really comes when a person buys a house. If you make $75,000 per year, but you take on a $300,000 loan, accelerating the payment is going to be very tough, even after you’ve been in the house for a few years.

    You might be able to do that if your income rises over the years, but most people fall for the real estate marketing hype and trade up when their incomes rise significantly.

    Of the people I’ve known who have paid off their mortgages early, I’ve noticed two common traits…

    1) They buy modest homes in relation to income (the $75k income above, but with a $150,000 loan)

    2) They stay in the same house for many years, rather than trading up every 5-7 years.

    In truth, if you plan on paying off early, you need to be thinking about the mechanics of how that will happen on the day you sign the contract to buy. I doubt most people do.

  38. Charlotte says:

    @ #2 Kathryn, I too watch that program, plus a few other house-buying programs. If the house doesn’t have granite counter tops, then it goes far down on the list. I’m also amazed at how many people go beyond their budgets when buying.

    @ #24 Cookie, yes, your mortgage company will provide you with an amortization schedule — usually, but not always, free.

    With houses I’ve bought, I always get an amortization schedule. The first month, I pay the full payment and then add several months’ principal to the payment. I draw a line through all those payments. The next month, I do the same. Because the principal is so low at the beginning, I’ve usually paid more than a year’s worth of payments in the first three months. I never allow myself to go a single month without making at least one extra principal payment.

    I have always bought less than I could afford (qualify for), but usually more than I “need.” I paid cash for my current house — and don’t miss not having granite counter tops at all.

  39. Andy says:

    I have a $72K mortgage on a $120K house, and also a $30K money market account emergency fund. Should I transfer money from my emergency fund to pay off part of my mortgage?

  40. Kelly says:

    #27 Kevin is correct. We recently paid off a twenty-five year mortgage , our three cars at 3 , 5 and 10 years old are paid for and we have no debt.
    We have a modest home of 1,600 sq. Ft. . We live in a modest neighborhood . Our home is appraised at double what we paid for it, even after the present decline in the market.
    I would have liked a larger home in a fancier neighborhood , but we made our choices about how much we could afford without sacrificing the quality of our family life .
    We have almost finished putting our son through college . He will have an engineering degree and very little debt when he graduates.
    Our home is modest enough that taxes, insurance and maintenance are not prohibitive. We have no regrets about living within our means .
    We have a paid for home , transportation , a well educated son, savings , investments and retirement and it is very nice to realize you owe know one money .

  41. kitty says:

    A few points.
    1. Regarding risk — there is risk in both the decision to make additional payments as well as the decision not to. Your point – that not having a mortgage is safer works if you have enough money to pay off everything immediately or very quickly and still have enough cash left for a serious emergency that requries an expense larger than a normal emergency fund. Until your mortgage is completely paid off, your extra payments reduce the money you have in a bank but do nothing in terms of reducing your monthly expenses. As some of the posters above mentioned, if you lose your job while you still have your mortgage payments, 100K in your equity isn’t going to be as helpful as 100K in the bank.

    2. Tax deduction may be a myth for some people but not for others. If you live in a state with low income and property taxes and don’t make a lot of money, than it is likely you will not be able to deduct everything. If you live in a state with high income and property taxes like for example New York or California than it’s likely you’d get more than standard deduction on income and property taxes alone – as Joe Taxpayer said (#8). Maybe even just income taxes. It seems to me that there are two groups of people: those who list tax deduction as a benefit and those who tell it is a myth. The first group assumes that everyone can deduct all of the mortgage. The second group, assumes that only the rich can deduct all of the mortgage. Newsflash – there are people who can deduct all of the mortgage AND there are people who are not rich but who can deduct all of the mortgage nevertheless. This depends on individual circumstances.

    3. Mortgage as an inflation hedge. I don’t think it matters that we had 10 years of low inflation. This is in the past, much like a high inflation of early 80s. We have to think about the future. The government is spending and printing money. Yes, most of the money disappear in the black hole of losses, but the government debt is still huge. I don’t know about inflation – this will depend on economy, but I think there is a good probability that long term interest rates will go up. For how long do you think the world will be willing to lend to the US government at today’s ridiculously low rates? When the interest rates go up, you’ll be able to get higher interest on regular CD than what you are paying on your mortgage.

    4. One point often discussed about the mortgage is rate of return. Yes, if you pay off the mortgage early, you get a guaranteed rate of return. Let’s say it is 5%. But for some reason people only use current rate on CDs or stock market returns as alternatives. Then they say that the former is too low and the latter is too risky. What is often missed is not only that 30 years is a long time during which CD rates can easily go up, but also the fact that there are alternative investments that give you higher rate of return than CDs and at less risk than stocks. For example, just a couple of months ago I bought a couple of issues of AAA and AA municipal bonds with yield-to-maturity of 5.5%. Now, a small part of this return is because I bought at a discount. But, a large part of this is 5% and 5.25% in tax free interest. Now, if you are in a situation where most or all of your mortgage is deductible, 5% in tax free income while paying 5% tax deductible interest doesn’t sound too bad, does it?

    5. Age is an important factor as well: nobody really wants a mortgage in retirement.

    Paying off or not paying off mortgage is an investment decision. As any investment decisions what is right for one person may not be right for another. I think way too many people believe that what is right for them is right for everyone. This is not the case.

    BTW — I paid off my mortgage, but not via pre-payment. When I had mortgage, I only paid the principal. This allowed me to save more money, so when the timing was right, I “upgraded” and moved from a one bedroom condo to a townhouse. Since I had cash to give over 20% downpayment on a new place, the bank approved me for the mortgage on the new place without prior sell condition. This was convenient for me since at that time the real estate market was depressed and I would’ve had to take a loss if I were to sell. Now, I realize that banks normally allow “prior sell or rent” clause, but this way I didn’t have to rush: I could remodel the new place while still living in old place, I could’ve also be more flexible with the lease — I agreed on 6 months lease for my tenants because I liked them. If all of my money had been locked up in the equity in my first place, I wouldn’t have had this flexibility. As is – not only I had enough money for the downpayment, I also had enough money to carry mortgage on two places. My tenants ended up staying for 4.5 years paying my mortgage on the old place for me; after I refinanced, I even had income and with depreciation my cash flow was great. After they moved out, I was able to sell my old place with enough money cleared to pay off the mortgage on my new place in one payment. So now I have a paid off home without ever having to make a single extra payment.

    Incidentally, yes it is possible to buy for cash, especially for older people. But… even if it is possible, it doesn’t always make the best financial sense. I mentioned before that I have fairly rich friends who aren’t rushing repaying the mortgage and who took a mortgage on a vacation home while having more than enough to pay cash — as a hedge against future inflation. I think if I were to upgrade now, I’d take a mortgage, even though I can afford to pay the difference in cash because I don’t believe these low long term rates are going to be there for long. Would it be the right decision? I don’t know. But then any investment decision has risks.

  42. Elderly librarian says:

    RE: new homebuyers on tv who are looking down their noses at places without granite countertops, etc. I don’t really care what house the buyers select– I just enjoy looking at the houses and their decorations. Maybe the major purpose of these shows is to sell houses and all the items that go into them. I don’t think these shows are any different from other tv shows. They are there to entertain.

  43. If you don’t give to charity, which I guess you don’t, then the standard deduction should be better.

  44. Doug says:

    Andy (#21) – No, you should not transfer your savings. That savings is your emergency fund. Never ever touch the 3-6 months expenses unless it is an emergency!

    You should be investing in your retirement (15% of your pay). You should be saving (maxing out) for your kids college fund(s). After these are addressed, you should pay extra on the mortgage. If you don’t have kids, then you skip that part.

  45. Mary W says:

    Andy (#29) – I agree with Doug, no way should you touch your emergency fund to prepay your mortgage. Pay extra every month if you have other things (retirement, EF, college) covered.

  46. Andy (29)–I have to agree with the above comments, don’t use your savings to pay down the mortgage.

    Here’s one of the problems if you do: If your mortgage loan is fixed rate, you’ll reduce the loan principal, of course, but your payment will remain the same. So not only are your savings gone, but you’ll be left with the same payment.

    True you’ll reduce the remaining loan term considerably, but until it’s paid off completely, you’ll have only two options should you need liquidity–borrow back the equity, or sell the house.

    You seem like you’re conservative and a strong saver. If you continue saving until your savings pass your mortgage balance, then it might be a good time to look at paying down so you don’t weaken your liquidity. But it looks like you’re in a solid position doing what you’ve been.

  47. Moom says:

    #25 Catherine: I’ve never heard of an offset mortgage and I grew up in Britain and have lived in the US and now in Australia. It sounds an interesting concept…

    Regarding mortgages and debt in general – they’re not a problem if the amount of debt is reasonable relative to the opportunities to generate income to service the debt.

  48. Jane says:

    What about a solution in between? Why doesn’t Ramsey encourage people to strive for 50% down or another number higher than 20%? It’s not an all or nothing proposition. If you’re saving for a home right now and you have, say, 75% already, you should buy your home NOW. If you wait 6 months to a year, home prices might have rebound. Take advantage of the struggling market. You can always aggressively pay down the mortgage once you buy.

  49. DivaJean says:

    I am all about getting the mortgage paid off early. The simple math makes sense to get it over and done with as soon as possible.

    We are a family of 6 on my income alone ($54K/yr). We bought a ranch style home w/ 3 bedrooms for just over $100K about 6 years ago. We put 20% down and owe only $30K on our 15 year mortgage- thanks to my adding just $100 to the principal every month and making an extra payment in sheer principal every December (hubby & me consider it our Xmas present to each other).

  50. Golfing Girl says:

    We refinanced for a 15 year mortgage last year. It saved us $90K over the 30 year option and we still make an extra $100 payment each month. After we have our 3-6 month emergency fund established (end of this year??) our hope is to take that $900 of savings we’ve been putting into the EF and throw it onto the mortgage instead (for a total of an extra $1000 payment each month). The hope is to have the house paid for by the time our daughter reaches middle school so I can drive her to an out of zone school (our middle school choices are not acceptable).

    This will also allow me to leave the rat race and do what I love–teach golf full time. Without that house payment, a seasonal income shouldn’t be as much of a problem.

  51. Golfing Girl says:

    P.S. Before I get slammed, we already put aside 25% into retirement and a small amount into a 529 plan, so we’re not sacrificing that to pay off the mortgage.

  52. AnnJo says:

    I think it helps to realize that there are two different ways of looking at whether to prepay a mortgage with some “extra” dollars at hand or put that money in savings, one from a liquidity standpoint and one from a net worth standpoint.

    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!

  53. getagrip says:

    Keep in mind that Ramsey suggests paying down the mortgage after you’ve established a 3-6 month emergency fund, have paid down all other debt, have a solid budget for other items (to include vacations/car repairs/etc.), and are putting 15% of salary towards retirement. So basically this is the last step before you begin investing beyond retirement.

    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.

  54. Evita says:

    I bought my house (smallish but very well located) at age 45 and paid off the mortgage in 12 years (in Canada, there is no tax deduction for mortage interest payments). Now I realize that in my area, a small appartment rents for more than my then mortgage. If I did not have my house, I would be giving $800+ a month FOREVER to some landlord. For most people, it would be very difficult to rent and save for a house at the same time.

    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.

  55. Aryn says:

    This is where Dave Ramsey falls apart for me. Yes, my husband and I could easily afford to pay cash for a house in the middle of the country.

    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.

  56. Amy says:

    I’m just throwing in my two cents. I bought a tiny condo in November of 1997 and paid it off in September of 2005. I didn’t deplete my savings but over those 8 years, I sent my “normal” extra principal payments, but I also sent all extra money (bonuses, extra paychecks, tax refunds, birthday money, Upromise payouts (yes, really!) rebate checks, etc.) For me, it was the best decision ever.

    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.

  57. Jill says:

    Bought our house in May, 2001- borrowed $119,000 for 30 years at 7%. When there was a brief blip of low interest rates in spring, 2003, we ended up refinancing to a 15 year note at 4.875%. Cost about another $100/month.

    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.

  58. Liko says:

    Ramsey is so right about a lot of things! I use to flush away $15,000 in interst to the banks to save $3750 when I “owned” my condo. I’m so glad I sold it. It was eating up half my take home income. Now I temporaryly rent a cheap apt. I stash $15,000 in a 401k which lets me keep my money and I still save $3750 in taxes on top of it. In addition, I only got two more years and I’m buying a house in cash baby! Yes, renting cheap sucks, but it’s temporary if you live on a budget and a plan.

  59. Jason says:

    Trent, I agree with you on a lot of things, but there are a few problems here. First, there’s an inconsistency. You say that you would like to pay off your mortgage so that you could the roll the money into savings.

    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.

  60. Brent says:

    I’ve been thinking about and struggling with conclusions about savings and the mortgage. Many of these conclusions that Ramsey and you make assume things like being farther along in life, using less discipline in finances and spending extra money. I don’t have any issues saving money. for a 25 year old who spends the same amount regardless of income is it really better to pay off a 5.375% mortgage than to invest in an index fund? Pre-paying a mortgage while a very stable return is a very long-term illiquid investment. One thing we all are sure on is that none of this matters unless you have a healthy emergency fund.

  61. Howard says:

    Sara (#9) – you shouldn’t really care too much about the $3000 cost to refinance to the 15 year mortgage because 1) the points are deductible when amortized over the 15 years (or until/whenever you sell or refinance again) and 2) you’re going to easily cover that $3000 in saved interest in the first year. You will save tens or possibly hundreds of thousands of dollars in interest you would pay by going 30 years.

    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.

  62. Liko says:

    #46 Brent, I heard a Dave Ramsey caller point out the same thing about investing in the market instead of paying off the house, then Dave asked the caller, “If your home was paid off, would borrow on it to invest in the market?” The caller thought about it and then answered, “no”.

  63. Lance says:

    Here in CA we thought we were geniuses when we took out our 15 year mortgage and paid it bi-weekly. All we succeeded in doing was sending money to the bank and prolonging the period where our mortgage was not underwater. It is now underwater by more than $100,000 and our income is down by 25% but we are still obligated to make a huge payment.

    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.

  64. Kevin says:

    I’m surprised Dave Ramsey consistently advocates directing extra cash at your mortgage rather than investing, particularly since he always assumes an outrageously optimistic 12% rate of return when he does discuss investments. With mortgage rates at historic lows, and with his crazy-high assumed rate of return, how can he still justify making extra mortgage payments instead of investing the cash?

  65. Pizpo says:

    We are currently at the stage of no debt except mortgage. We live way below our means and had enough cash to pay off balance (approx. $100k). We decided to invest the $100k instead. We are earning at least half of our mortgage in interest every month on our investment so we should be getting ahead pretty quickly now. If we had paid off mortgage, the real return would have been much lower. There is no one-size-fits-all answer to this question. Just be smart and cautious without forgetting about your long term goals.

  66. Iowa Steve says:

    So enjoyed reading the comments and banter. Its not so much a right or wrong – but understanding how it works. I tend to be a math geek – but its not just about the math. We are in our early 30’s – 2 kids – and 3 monthly pmts from owning our home and being completely debt free – This should free up 3 to 4k per month – if you have some margin in your financial life – you’ll be able to makes some mistakes and have some fun along the way… being debt free will allow us to have the ability to send kids to private school, vacation more and make family memories, retire earlier potentially – and not feel like we are enslaved to debt… so right or wrong – debt free is going to feel pretty good I’d think??

  67. Craig says:

    “Then Dave asked the caller, “If your home was paid off, would borrow on it to invest in the market?” The caller thought about it and then answered, “no”.

    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.

  68. TJ says:

    I think a lot of people making comments about Dave Ramsey have never read his books or listened to his show! :)
    Ramsey recommends paying off the mortgage last. By the time you get here you’re out of consumer debt, have 3-6 month emergency fund, saving 15% of household income into retirement and are saving for kids college…then look to pay extra on the house.
    Also, Ramsey doesn’t say ONLY pay cash – that’s what he does – he doesn’t borrow money (and would encourage others to do the same).
    Ramsey usually says, save for a downpayment and don’t take out a mortgage that is more than 25% of your takehome pay on 15-year mortgage. Which is pretty conservative but allows you enough cash to enjoy other parts of your life.
    Calm down people….do what works for you!

  69. Renee says:

    Good article Trent. We’ve used a combination of Dave Ramsey and John Commuta’s plans for financial independence. I read your articles at least weekly in part to keep motivated. We paid off the mortgage last month, it took us about six years. We’re 31 years old and feel like we’ve got the world by the tail. Of course, life can always throw curve balls, but we’re prepared. It’s awesome to think we could support our very comfortable lifestyle on minimum wage jobs if need be. Our vote is for paying off the mortgage!

  70. Leslie says:

    We paid off our home over 10 years ago. Everyone told us we were crazy including financial professionals, real estate people, and even some next of kin. The truth is it’s not about the money you save in interest payments as much as it is the renewed freedom to take a job you love for a little less money because you don’t need to pay a 2,000 a month mortgage. Of course, you still have maintenance and property taxes which can be saved for in an interest bearing savings account. Hello, ING! This isn’t the right decision for everyone but it was for us.

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