Comments on: Dave Ramsey’s Baby Step 6: Pay Off the House Early

By: joeplemon

joeplemon — Sat, 16 Jan 2010 22:00:54 +0000

Laura,

I too had thought of how DR ignored the advantage of a tax deduction on mortgage interest. I can’t say I blame you for being perplexed at his reasoning. There is, of course, the risk factor…you don’t have any guarantee of what your investment will bring while you do have a guarantee that paying off a loan will “earn” whatever the rate of the loan is (less the deduction you no longer have). This being said, why doesn’t Dave lay all the cards on the table and point out the risk factor? I can’t answer that one.

Thanks for reading and challenging my thinking. I appreciate it!

By: Laura

Laura — Sat, 16 Jan 2010 21:27:55 +0000

“The first is that taxes or capital gains will eat up much of what you plan on making. For example, if you are paying 4% interest on your mortgage and you can make 8% with an investment, you aren’t really clearing that 4% difference.”

Ok, I have to comment on this. In Ramsey’s first objection to not paying extra on a mortgage, he mentions the the tax advantage some folks cite as the reason to not pay a mortgage is faulty. Ok, I agree with that. But in the second objection, he completley ignores the tax deduction of the interest. In the paragraph I quoted above, he mentions the capital gains tax on the investment, but completely ignores the tax deduction on the mortage interest. Assuming a 25% tax bracket, the difference between the two strategies in his example would be a gain of 3% if money is invested instead of paid on the mortgage (gain of 8% on investment becomes 6% cleared, and the 4% mortgage interest becomes 3% after tax deduction). So what makes this a bad idea? It’s this type of over-simplification on Dave Ramsey’s part that bugs me on a consistent basis.

By: joeplemon

joeplemon — Sat, 16 Jan 2010 19:42:09 +0000

Steven and Debra,
Well stated! We are each responsible for our own decisions, so the challenge is not to go by some formula, but to think through our goals, dreams and values and plan accordingly. Great living is being able to, as you said, “focus our energies, talents, abilities in harmony with our core values”.

I like that phrase! I might even “borrow” it sometime.

By: Steven and Debra

Steven and Debra — Sat, 16 Jan 2010 19:23:55 +0000

We agree that there is no magic potion one-size-fits-all solution to managing risk. The solutions are as varied and practical as the situations they are applied to. The end-game, at least in our view, is to smooth out the ups and downs of a sometimes volitile world so we can focus our energies, talents, and abilities in harmony with our core values.
Steven and Debra´s last blog ..Government False-flag Operations and Operation Northwoods

By: joeplemon

joeplemon — Sat, 16 Jan 2010 18:57:51 +0000

Laura,
I really don’t think that DR would find you all that disagreeable. You are thinking through your personal finance situation, which he would certainly applaud. And he, like you, is all about minimizing risk, so I doubt that he would quibble about a one year emergency fund. He qualifies the size of the emergency fund by the number of income streams and volatility of income. Two working partners in diverse jobs is less risky than one income. Three or four income streams is even less risky.

About the 15 year fixed…Dave qualifies the size of the loan by recommending that your payments are not more than 25% of your take home pay. So, rather than try to squeeze a 30 year down to a 15 year, he is saying to buy less house. Certainly he would agree to not consider a mortgage unless it has a no pre-payment penalty.

By: Laura

Laura — Sat, 16 Jan 2010 18:29:00 +0000

Absolutely a fully funded emergency fund should be in place before making the effort to pay off a mortgage. Although I disagree with Dave Ramsey’s recommendation to have a 3-6 month emergency fund, especially in this economy. With jobs painfully difficult to get, I’d consider a one year emergency fund as more realistic/safe.

I also don’t agree with Ramsey’s recommendation for a 15 year fixed. Even though the interest rate will be slightly higher for a 30 year fixed, the homeowner is obligated to the higher payment of a 15 year mortgage. Should hard times happen, this threatens the home more. I would only consider a mortgage with no pre-payment penalty, so it’s easy enough to turn a 30 year mortgage in to a 15, 10, or 5 year mortgage by paying extra on the principle each month.

Actually there’s a lot of Ramsey’s advice I disagree with, but that’s another story.

By: joeplemon

joeplemon — Sat, 16 Jan 2010 17:05:17 +0000

Steven and Debra,
I totally agree with your statement, “the debate is not whether being fully paid is good or not, but rather how best to achieve it”. Having a paid for home, for example, with no emergency fund, is not being wise. Dave Ramsey does not recommend paying off a home mortgage until a fully funded emergency fund is in place, retirement investments are in order and kids’ college funding is established. Once at that point, paying off one’s home completely is sweet.

By: Steven and Debra

Steven and Debra — Sat, 16 Jan 2010 15:00:22 +0000

Having a home fully paid for is a worthy goal and can give some peace of mind with the economic uncertainties we face. Our personal preference is to be either fully mortgaged or fully paid. That area in between fully mortgaged and fully paid is what we call no-mans-land. The advantages of paying more toward principle each month are outweighed, in our opinion, by the unavailability of those funds if needed for an emergency due to the non-liquid nature of the asset. Banks are less likely to approve meaningful HELOC in a declining real estate market. So that means our extra principle payment is unavailable for use in an emergency. In our view, the debate is not whether being fully paid is good or not, but rather how best to achieve it. Laura raises an additional concern. Various jurisdictions are on the hunt for more revenue as tax revenue streams decline. Real estate is a fixed and tempting target for those tempted to kill the goose that laid the golden egg. The best thing to revive the depressed real estate market and boost tax revenues would be to lower real estate taxes drastically to reflect more realistic appraisals. If they don’t do this many more jurisdictions will find themselves in the position of Detroit where they end up seizing, holding, and maintaining properties that bring in zero tax revenue.
Steven and Debra´s last blog ..Government False-flag Operations and Operation Northwoods

By: Joe Plemon

Joe Plemon — Mon, 23 Nov 2009 17:31:08 +0000

Laura,
It seems that you are doing well financially (two paid for houses) without using the Ramsey plan. Congratulations!

About property taxes…ugghh. You are absolutely correct in saying that we must pay them or we could lose the property. I try to be philosophical and consider the school systems and highways and bridges that my property taxes go for, but, well, that doesn’t keep me from becoming disgruntled.

Thanks for stopping by and commenting. I appreciate hearing from you.

By: Laura

Laura — Mon, 23 Nov 2009 14:42:07 +0000

I’ve never followed the Ramsey plan (although I’m well aware of the ‘baby steps’ plan). In the late 90s and early 2000s, when the stocket market was doing poorly, instead of investing I sent all extra $$ to our mortgage companies. I paid off the mortgages on both our houses. To my dismay, the grass didn’t feel any better under my feet. Why? Because one never owns one’s home outright. We still owe property taxes on them every year, and if we don’t pay them, guess what? We lose the houses. Then there’s the issue of property insurance. Between the two, we pay about $22k per year. So don’t fall for the myth that you can own your home outright, it’s just not true.