Dave Ramsey Says Pay Off Your Home Mortgage Early. Really?

While I certainly don't disagree with paying off your home early, I think it's worth looking at some of the reasons why you might not want to do that. You could be missing opportunity costs. Most of you know that you can tax deduct the interest from your mortgage if you itemize, depending on your situation. If you're disciplined enough to invest those savings, you can be amassing a small fortune, and over time perhaps a large fortune.

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Hello everyone, welcome back to We're Talking Money. I'm Phil Clark, thanks for tuning in. We got a really good show today, and we're talking about a subject that a lot of people grapple with, and that is: should you pay off your mortgage early? Now some experts, like Dave Ramsey, for example, now where does that take us in your situation?

It says I would pay off my house today. I'd pay off my house today. Today, by close of business today, write a check. Okay. Okay.

They put this at the top of the financial priority list, and maybe that's where it belongs, but there's implications when you make decisions to pay off a home mortgage. Let's take a look at the pros and the cons. We're going to start with the pros.

And so the first one is financial freedom. Now, paying off a home early, getting rid of that almost albatross-like thing of a mortgage, can give someone a lot of financial security. In the end, that is extra money that you can now apply towards your financial goals or simply enjoy.

So next, saving interest. When you pay off a mortgage early, you can save tens of thousands of dollars in interest payments. A lot of people don't think about that, but when you consider the length of a mortgage, say 15 to 30 years, that interest adds up over time. And if you have a higher interest rate on your mortgage, say 5% or more, this is especially true.

Now let's round out the pros with one that you might not think about, and that is reducing stress. Simply paying off a home, having that clear deed, that can feel like a huge burden has been lifted. And if it reduces stress, that just might mean longer life and a much more enjoyable retirement one day.

While I certainly don't disagree with paying off your home early, I think it's worth looking at some of the reasons why you might not want to do that. The first one is opportunity cost. Everyone says pay off the home early, get out of that debt, and probably in a lot of cases it makes sense. But when you pay off debt early, like a home mortgage that may already have a very low interest rate, you could be missing opportunity cost. What if you could invest those dollars and pick up a higher return? Would it make more sense to do that, or pay it off early?

For example, I recently watched a video from Dave Ramsey.

I'm easily making 12% of my money, easily.

Dave says, say that it is easy to beat the S&P 500, even refers to double-digit returns. Now if that's the case, why would you pay extra on your mortgage to hurry up and pay it off? Let's say, to Dave's point, that you could get 12% and your mortgage only cost you 4%. Why would you give up the 8% spread?

I own several such funds. I pick funds that have beat the S&P, that have done better than the stock market. Well, over the last 40 years, my four mutual funds have averaged 13.04%. The S&P has averaged 11.8%, so I beat it.

Don't get me wrong, I'm not saying to avoid paying off that home early simply so you can invest more and hopefully make some money on that deal. What I am saying is that Dave Ramsey, if he truly believes in what he's saying as it relates to great investment performance, why isn't he recommending this? Might be something to think about.

Next on the con list is liquidity. So this is one of those reasons why you might not pay off the home early, and instead you might want to be saving some money so that you have plenty on the sidelines. Let's say that your original mortgage was, say, 4%, and 10 years later you find yourself, after working really hard, making lots of extra payments, you're debt free. No more mortgage payment. But in another year, let's say a financial emergency strikes and you need equity from that home. Paying off that mortgage early probably means you weren't saving very much.

Let's hope that mortgage rates are not a lot higher, like they are today. Home equity lines are as much as N9 10, I've seen them at 11% lately. You would never want to put yourself in that position where borrowing from all of that equity that you work so hard to accomplish is now going to call cost you double, maybe triple what your mortgage rate would have been. If you just took all those extra payments, invested, earned a good rate of return, it's possible that it would have been much better to invest those payments instead of paying off the mortgage.

And lastly on our con list is tax benefits. Why is this important? Well, most of you know that you can tax deduct the interest from your mortgage if you itemize, depending on your situation. Those tax deductions can save you a lot of outflow, which normally would be going to Uncle Sam. If you're disciplined enough to invest those savings, you can be amassing a small fortune, and over time perhaps a large fortune, by investing those tax savings. But you won't get them if you pay off the mortgage early.

This isn't for everyone. It depends on your goals, your objectives, what you're trying to accomplish. If you need help with these things, reach out to us. We're at OmniStarFinancialGroup.com, or talk to your tax professional and make sure that these kinds of strategies make sense for you.

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