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

By: 5 Pain Free Tips for Paying Your Mortgage Off Early | FaceColony.com

5 Pain Free Tips for Paying Your Mortgage Off Early | FaceColony.com — Fri, 26 Aug 2011 20:27:46 +0000

[...] OK? Now, assuming Paul and Shirley have met these guidelines, here are five pain free ways for them to pay off their mortgage early. [...]

By: Mike

Mike — Sun, 08 May 2011 18:00:09 +0000

I think Dave Ramsey’s advice is great. So many people waste away their money and don’t even notice it.
His plan keeps you focused.
Right now, I am on step 6, trying to pay off my $86,000 mortage by age 30, less than 5 years after I got it.
And yes, I am also in the stock market.
It’s a tough challenge, but blogging about it has helped me stay focused!

By: Book Review: Control Your Cash

Book Review: Control Your Cash — Wed, 17 Nov 2010 09:52:13 +0000

[...] Whether keeping those credit cards at bay, purchasing a car, investing for retirement or buying a house, the readers is reminded that the way to thrive is to buy assets and sell [...]

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.