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I know that with my title, I probably attracted every Dave Ramsey disciple on this forum, but I want to have an intelligent dialogue. I find that most Ramseyites just mindlessly regurgitate what they hear/read from him without a consideration for the fact that there is not a one-size-fits-all approach to personal finance. Dave's approach is fine (I have actually followed parts of it and recommended it to others), but its just that - one approach. So having laid that foundation, let me ask my question.
Let's hypothetically say that I have a $150k mortgage and I have $150k in non-retirement investments (individual stock and mutual funds) and no other debt. The mortgage is at a very low interest rate (4.375%). I have six months of living expenses in cash and am approximately ten years away from retirement. Convince me why I should (or should not) pay my house off. Under what circumstances would your advice change?
p.s. Ramseyites can actually respond, I'd just like to have a little more in-depth analysis than "just follow the baby steps" or "if you had a paid off mortgage you'd have piles and piles of cash."
A lot of it depends on your future plans. Are you planning on being carried feet-first out of this house? Or do you plan on moving when the kids graduate?
If it's the first, I'd accelerate paying off the house, if not all at once. If it's the second, particularly with today's interest rates, I'd be more keen to save my money. Of course, this assumes that your house didn't depreciate a great deal during the Great Housing Bust. In any even, I'd want to not be under water after I had sold the thing.
If you hadn't paid down the $65K the bank probably wouldn't have allowed the short sale. So you would be looking at foreclosure, which would have left you on the hook for the difference between the mortgage balance and whatever the bank sold the house for (which would have probably been much less than $47K after the foreclosure) and ruined your credit for 7 years. Or, if you had kept the $65K in savings or other investments, you could have put that money toward the balance at the closing which would have left you in the exact same position you wound up in.
Not saying Dave Ramsey is right in every circumstance, but it's hardly his fault that you lost $80K in equity in your home.
I was going to say the same thing. Unless the alternative was to walk away and the state is nonrecourse, he would have on the hook for that anyways.
One other thing. In today's economy I'm more about capital preservation than than anything. If you have enough money lying around to pay off your house, I would rather have a goodly portion of that act as a reserve in case something awful happens. Because if you're out of a job or have medical expenses, a paid-off house won't be much consolation.
I was once a Dave Ramsey groupie. But no longer. You see, living just outside Detroit in Eastpointe, I was caught in the middle of the housing bust with a $130k house now worth about $40k, which was a price not seen since the 1960s. I had prepaid down $65k of the house's principal balance, putting every extra penny I earned into prepaying the mortgage. I lost it all. I was able to make the house shine and sell it for $47k, but it was still a short sale so it ruined my credit for 2 years. You see, to the credit bureaus, the guy who gets an extra job and prepays tens of thousands of $ down on his mortgage but still can't keep above water is no better than the next door neighbor who maxes out his home equity, uses the extra money to buy new cars and put a down payment on his dream home, then walks from the house owing the full amount. They both do a short sale, and both have the same bad credit. Why didn't I stay in the house? Gangs were starting to roam the streets. I was surrounded by 3 abandoned and decaying houses. Eastpointe was turning into Detroit. No place to raise kids. Dave Ramsey sucks. He cost me at least $100k, when you add the updates I put into that house and the hundreds of hours of my own labor, combined with the $65k of principal I had paid off ahead of time. Dave Ramsey's advice essentially took every cent of my disposable income over 4 years and flushed it down the toilet. I want those years of my life back, thank you very much.
The excellent post above is a warning about what can go wrong, and about the potential danger of buying any home at any time. I paid off my townhouse early, based on the following assumptions, which I concede are not certainties, and on the following condition (#3), which is a fact.
1. I am retired and plan to die here. It is the perfect size and location for me, and unless they carry me out feet first I just can't see living anywhere else. If I have a stroke and am partially paralyzed, all bets are off.
2. I am betting that the neighborhood will not deteriorate. In the ten years I have owned my townhouse and lived here, it has held steady or improved. Many Chinese, apparently with plenty of money, are moving into this area, and the city enforces its anti-blight regulations strictly. Of course, given enough time, that could change.
3. I did not sacrifice my strong emergency cushion to pay off the mortgage. I am easily able to continue paying my property taxes, HOA fees, insurance, and interior repairs. My income stream in retirement is very secure.
I haven't heard Dave Ramsey either, but I've heard of him.
I would not pay off the house. I would much prefer to have the liquid assets than spend them to pay off a debt on my house. Even if you lose your job and in essence, your regular cash-flow, your $150K in assets will become part of your safety net. Even if you own your house free & clear, you still have taxes, utilities, maintenance, insurance, etc. You need money for those and with no job and only 6 mos of savings left in the current economy, you may well exhaust them before finding work. I've been out of work for 9 months now. Beginning to look like I'm retired I think. Not my choice but at least I'm financially prepared for it. Just not the schedule I had planned.
I would say refi to a 15 year term paying less in percentage as well as using the bi-monthly system to pay on the mortgage. This way you essentially save over 100k in bank interest and own your home in a very reasonable time frame, while seeing what the market holds in that next 10 years. Things may get better, the value of your home may increase and all the more reasons to stay in it. THEN, of course once your home is paid off, take that money and invest it in stocks or Roths. It may be too late for the Roth option for you, but hey, I took a stab at it
Agree. 30 year mortgages are a huge was in interest.
I don't regret paying my house off, am glad i did because thru these tough times. I still have a roof over my head even if i had to work at walmart to pay taxes,food,utilities and transportation.the best of all i can still travel. Our biggest expenses is our homes whether you buying or renting, so i choose to pay myself < rent>. Just recently started to listen dave ramsey.i had my home paid-off before i heard of him. I listen to suze orman. You just have to find out, what works for you.
Your answer lies here ... If your house was already paid off would you then borrow 150,00 and mortgage the house that was paid off to invest that 150,000 in non-retirement investments (individual stock and mutual funds) ?
If the answer is yes tehn do NOT pay off the house
If the answer is no then pay off the house
Your answer lies here ... If your house was already paid off would you then borrow 150,00 and mortgage the house that was paid off to invest that 150,000 in non-retirement investments (individual stock and mutual funds) ?
If the answer is yes tehn do NOT pay off the house
If the answer is no then pay off the house
I don't know who Dave is but I understood the poster's logic.
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A lot depends on assumptions about the future.
