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Check Out the Latest Dave Ramsey Poll

By JLP | March 7, 2007

I found this interesting. Below is a snapshot of a recent poll on DaveRamsey.com:

Dave Ramsey Mortgage Poll

81% of the pollsters think a 15-year mortgage is the best choice?

Being that it is on the Dave Ramsey website, these results don’t really surprise me. And, I suppose if you are looking at just the amount of interest paid, then yes, the 15-year mortgage wins. However, I think this is an awfully simplistic way to look at things because it totally leaves out the opporunity cost of going with the 15-year mortgage.

Remember the old saying that the A. L. Williams Insurance sales guys used to say, “Buy term and invest the difference?” Well, I have a saying when it comes to mortgages:

If the rates are right,…

“Go long and invest the difference.”

According to my conservative numbers, you’ll come out about $90,000 ahead over 30 years. To compute that number, I used the following numbers:

6.08% APR for 15-year fixed mortgage (found on HSH Associates)
6.30% APR for 30-year fixed mortgage (found on HSH Associates)
8.00% Annual ROR on investments
3.00% Annual appreciation on the house

Then, I simply plugged the numbers into my Mortgage Comparison XL Calculator, and came up with the following:

Mortgage Comparison Snapshot

Oh, and my results don’t even take into account the tax-deductibility of mortgage interest. So is a 15-year mortgage really a better deal?

Topics: Calculators, Dave Ramsey, Financial Math Basics, Mortgages | 55 Comments »


55 Responses to “Check Out the Latest Dave Ramsey Poll”

  1. Gaming The Credit System Says:
    March 7th, 2007 at 1:40 pm

    Very nice! I had always suspected that a 30-year mortgage really wasn’t as bad a deal as they say, but I had never worked out the numbers. Your calculator also appears to leave out inflation, which even at very modest rates makes the 30-year look even better.

  2. Paul Says:
    March 7th, 2007 at 1:49 pm

    I also wonder how many people who advocate 15 year mortgages also carry high interests credit card debt or even car loans. It doesn’t do any good to pay off the mortgage earlier if you have to incur other debts as a result.

  3. Gaming The Credit System Says:
    March 7th, 2007 at 2:02 pm

    Hmmm, now that I think about it, I think I’m wrong about inflation.

    I was basing my assumption that “inflation is bad for the 15-year mortgage” on the simple thought that “Ok, yes you’ll pay $150k more for the mortgage, but that’s $150k in 15-years-from-now dollars, not $150k in today’s dollars.” Yes, it’s just a simple thought, but you’ve already stepped past such simplicity with your calculator (because you include alternative savings). As far as I can tell (maybe I’m doing it wrong), taking inflation into account just lowers the future value of both plans, and it hits the 30-year mortgage plan harder because the 30-year mortgage plan ends up being bigger, so inflation reduces the difference between the two.

    Inflation-discounted FV of savings under 15-year plan: $435,515

    Inflation-discounted FV of savings under 30-year plan: $506,894

    New delta in net worth: $71,378 (less than $96,209 in current calculations)

    That was assuming 1% inflation per year over 30 years. So the 30-year values are all divided by (1.01)^30. I guess you could maybe also take it into account by simply lowering all the interest rates by 1%? Maybe that’d be a more exact calculation.

    Anyway, all of this is to say “Don’t pay attention to my previous comment!” :)

  4. tinyhands Says:
    March 7th, 2007 at 2:05 pm

    The Dave Ramsey Disciples (Ramseyites?) have made it clear that they’re not interested in the math. They say you can’t put a price on the “peace of mind” of living debt free.

    I’m not one of them however, and $100 grand is more than enough peace of mind for me and my heirs.

  5. Morgan Goeller Says:
    March 7th, 2007 at 2:33 pm

    Hmmmm … I like the numbers, but they don’t tell the whole story. Specifically, I think your calculations are not incorporating three key concepts: taxes, risk, and quality of life.

    1. The return on investment is taxable as regular income, which would probably reduce that 8.0% return on the 30 year side. I would guess it would be more like 5.5% or 6% after taxes. Dave recommends having a 15 year mortgage once you have no debt and are able to save 15% in a 401K or Roth IRA, so let’s compare apples to apples.

    2. There is no consideration for the risk involved in having a mortgage, or any other debt obligation for that matter. It is very difficult to default on a mortgage once it is already paid off. Plug the beta (http://www.valuepro.net/approach/equity/equity.shtml) into the equation and the 30 year becomes less attractive.

    3. If a 30-year mortgage is the best, then wouldn’t it make even more sense to have a 40 or a 50 year mortgage? Probably, but most people have a visceral reaction against that, and for good reason. Or, ask the person with the paid off house if they would borrow against their house to invest in the stock market. Almost no one would take you up on that offer. There is an emotional weight to debt that often we don’t think about.

    Consider if you would live your life differently without a mortgage. Would you have a different job or different priorities? Would you live your life closer to family, start your own business, or just try something new? When you are 80 years old, would you rather be 90K richer (by your optimistic calculations) or have 15 years of freedom?

    Morgan

    Disclaimer: I am currently a volunteer coordinator (not an employee) for Dave Ramsey’s Financial Peace University. I don’t agree with him on everything, but I have seen his teaching bring dramatic improvements in the lives of ordinary people.

  6. Morgan Goeller Says:
    March 7th, 2007 at 2:41 pm

    One more thing … you are assuming that after 15 years the person with the paid off mortgage doesn’t do anything with their extra cash flow. I would argue that this person then has 15 years to save $1696 a month to invest.

    Assuming that was in a taxable account, that would leave you with an extra $517,529, assuming an 8%. I think I would rather have less risk, greater peace of mind, and an extra $500K in the bank.

    Don’t do it Dave’s way or Suze’s way or anyone else’s way. Understand how things work and then do it your way!

  7. Miguel Says:
    March 7th, 2007 at 2:43 pm

    I like Morgan’s thinking on this. Also, I think the question ignores one critical fact of human nature: Most people do not have the discipline to invest the difference. My mom is a perfect example. She has a 15 yr mortgage. At first, when she refinanced into a 15 year, I was skeptical, but years later, now that I see how much equity she has created and how quickly, I am a believer. I also know for a fact, that the extra money she would get by having a 30-year mortgage would not be saved, it would be spent.

    I on the other hand have a jumbo 30-year mortgage for a couple of reasons: (a) It made it much less financially stressful to trade up to a bigger home, (b) My income is highly variable, so I did not want to commit to a higher payment, and (c) I have no intention of carrying this debt for 30 years, I expect to pay it off within 15 yrs anyhow, but on a lumpy schedule.

  8. JLP Says:
    March 7th, 2007 at 2:46 pm

    Morgan,

    You can’t assume that the investment returns are taxed. Depending on the difference, one could fully-fund Roth IRAs.

    As far as the risk goes,aren’t you subject to significant risk the first 15 years?

    Quality of life? I think I would have a better quality of life with an extra $90,000 or so sitting in the bank.

    I operate under the principle that if you can get an interest rate that is lower than the expected rate of return you can get elsewhere, then it is best to go as long as you can and invest the difference.

    I’m not about to say my way is the best way for everyone.

  9. JLP Says:
    March 7th, 2007 at 2:46 pm

    Morgan,

    Actually, I DO assume they invest the payment after 15 years.

  10. JLP Says:
    March 7th, 2007 at 2:52 pm

    Miguel,

    Don’t people have to have discipline to afford the higher note? I mean, if people are sitting in the mortgage lenders office and they say, “your payments will be $1,696 with the 15-year mortgage or $1,238 with the 30-year mortgage.” My guess is most people will say, “let’s go with the 30-year.”

    In other words, people who go with the 15-year already have some sort of self-discipline. Therefore, those same people could conceivably go with the 30-year and invest the difference.

  11. Morgan Goeller Says:
    March 7th, 2007 at 3:22 pm

    JLP — thanks for the clarification, I did miss the assumption about saving for the second 15 years =)

    I believe that you would be subject to about equal risk the first 15 years of buying your house, regardless of how long you financed it for. However, there is demonstrably more risk in the second 15 or 25 or 35 years when you have a mortgage vs. not having one. It seems like you haven’t really explored this part of the model, it might be worth running the numbers for and seeing for yourself.

    BTW, have you looked at longer time periods to see how much better off you would be with your assumptions? Without a beta I would think that the numbers would be with you, although I don’t think there would be many takers on that offer.

    Overall, this is a worthwhile discussion to have, and you make good points. I appreciate your opinion, however I would recommend heading in a different direction.

    Good luck!

  12. JLP Says:
    March 7th, 2007 at 3:30 pm

    Morgan,

    You can run the numbers yourself using the Mortage Comparison Calculator. It has a slot for a 40 and 50-year mortgage.

  13. Miguel Says:
    March 7th, 2007 at 3:32 pm

    JLP – your logic is absolutely sound – no question. The problem is that people (most people I know, including myself) do not always behave rationally when it comes to PF.

    I think one of the main benefits of housing, as a financial building block is that it forces people to build equity in a way that seems very tangible and compelling. I cannot tell you how many people I know who don’t put money into their 401K’s or only make minimal contributions because they don’t think they can afford to – these same people will buy new cars, lavish gifts upon their children, order daily soy mocha lattes, etc.

    Logical? No. Common? Yes.

    I’m not talking about the 0.01% of the population that reads PF blogs for fun and amusement. The other 99.9% won’t invest the difference – it will get dribbled away in everyday expenditures.

    At least, when it comes to making the housing payment, most people are diligent about that.

  14. Chris Thomas Says:
    March 7th, 2007 at 3:39 pm

    Are you factoring in risk at all? There is certainly some level of risk involved in the investments and much less risk involved with having a paid-for home in half the time. You also have to consider what I like to call the “total package” factor. Dave’s plan has you already investing 15% of your gross income and paying off your home agressively. He doesn’t want you to pay off your home in 15 years; He wants you to pay it off in 12 years, or 10 or 7 or 4!!! Add those extra years of investing the $1700 house payment monthly and it’s probably a different picture. Digest the entire plan, not just bits and pieces, and you’ll end up ahead of the family in that right column. Good conversation you have going on here.

  15. Miguel Says:
    March 7th, 2007 at 3:39 pm

    Ahhh…. reread your comment and see the point: “people who go with the 15-year already have some sort of self-discipline”. If my Mom is any example, I would have to disagree – she went with the 15 year precisely because she does not have the discipline to save the difference.

  16. Chris Thomas Says:
    March 7th, 2007 at 3:47 pm

    Awww crap. I did that “read the post and respond” thing again without fully digesting the comments. My bad. Liked what Morgan had to say (I’m biased) and I would also add this: Risk is not greater over the first 15 years to either family, and might actually be a little lower for the family working Dave’s plan. Why? I go back to something a wise man previously referred to as the “total package” factor. That family already had 3-6 months worth of expenses set aside for emergencies, thus lowering their risk. Again, love the conversation here. Good stuff.

  17. JLP Says:
    March 7th, 2007 at 3:52 pm

    Chris,

    What about the risk of having a higher payment for 15 years? Isn’t that “risky?” I realize I’m being nitpicky here but the risk of investing in the stock market over a 30-year period is relatively low.

    By looking at net worth, I am “digesting the entire plan.”

    Finally, this is all a function of the spread between interest rates and return on the stock market. The wider the spread, the more advantageous it is to stretch out the mortgage and invest the difference. If mortgage rates were at 9%, then, it would be wiser to pay off the mortgage.

  18. Gaming The Credit System Says:
    March 7th, 2007 at 3:55 pm

    Morgan et al: One thing that seems to be left out of the discussion so far is that after 15 years, you have more than enough in savings to pay off the mortgage immediately if you so desire. Look at the numbers: $158k in the bank, $143k owed on the house. I really don’t see how there’s a “risk” in having a mortgage that you could pay off immediately if you wanted to.

    This is the main thrust of the whole argument. Instead of putting that extra payment into the house, put it into an investment that’s earning higher interest than the mortgage. At 15 years, by definition you’ll already have more than enough to pay off the mortgage.

    BTW Morgan, Miguel, Chris and other Dave Ramsey fans: I’d like to know your response to a blog post I made last weekend about Dave Ramsey’s ideas about credit cards.

  19. Chris Thomas Says:
    March 7th, 2007 at 3:57 pm

    The emergency fund probably lowers the risk for the Family A over the first 15 years to the level of the Family B, perhaps even lower. By “digesting the entire plan” I’m talking about not paying off your loan in 15 years but doing it quicker than that, as is suggested in the plan. That allows you to be investing that $1700 monthly house payment at a much earlier date than your calculations are set at. I’m being nitpicky as well, but you started it! ;)

  20. JLP Says:
    March 7th, 2007 at 4:09 pm

    I swear I have some of the most thoughtful commenters!

    I think one has to manage debt wisely just like they do everything else. One also has to keep their emotions in check. Just because “people don’t have self-discipline,…” isn’t really an excuse. The whole point of what I’m trying to do here is to get people to understand the math behind our daily decisions, not to continue to cave in to their emotions.

    Finally, Chris, you are assuming people have an emergency fund, which I didn’t not assume in my illustration. However, if you assume the couple with the 15-year mortage has an e-fund, then we also have to assume that the couple with the 30-year mortgage also has an e-fund.

  21. Gaming The Credit System Says:
    March 7th, 2007 at 4:22 pm

    And yet another nit to pick with the 15-year mortgage: flexibility. If you take the 30-year mortgage, you can always choose to pay it off in 15 years. Or 10 years. Or 5 years. You can always make extra payments (unless you have a sub-prime loan with a prepayment penalty). But you don’t have to. You can take that money and do something else with it.

    If you start off doing what JLP is suggesting (invest the difference) and then the stock market tanks, or you just start to get a queasy stomach, then guess what? You can take that cash and apply it to your mortgage just as if it were a 15-year mortgage. But what if you get a 15-year mortgage and, a couple of years down the road, you realize that JLP is right and you’d rather invest that money in the stock market? You’re screwed! You’re already tied into a higher mortgage payment, and you’d have to refinance in order to get out of it.

    In summary: You are losing flexibility by doing the 15-year mortgage. A loss of flexibility is universally bad, in my book. That’s why the banks make the interest rate lower in order to entice you into the 15-year loan. If it were 2 or 3 percent lower, that might be enough for me to do it, but just a quarter percent or so is not worth the loss in flexibility to me.

    And now that you guys mention it, I haven’t really looked into 50-year mortgages, but I don’t know of any reason why not to. The same arguments apply. At Wells Fargo, the interest rate difference between a 30-year and a 50-year is 1/8th of a percent. I guess I’d have to look at this and compare the cash flow of the two. Just playing around a bit with JLP’s Mortgage Comparison XL Calculator (TM – LOL), the payment difference (using Wells Fargo’s rates) is $125 a month between a 30-year and a 50-year mortgage ($200k mortgage). This is quite a bit less than the $446 per month difference between a 15-year and a 30-year mortgage. I guess the final calculation and decision would need to look at how $446 per month fits into my life versus $125. For example, could I “find” $125/month to invest, starting today? Yes. Could I “find” $446/month to invest? Probably not.

  22. Chris Thomas Says:
    March 7th, 2007 at 4:23 pm

    You don’t have to assume that both have an e-fund. One is clearly making a choice that lends itself to being pro-Dave and the other is not. I won’t even mention our negative savings rate. The loan type is just another piece of evidence you have to consider in that assumption. If you were to show me two people, one who owns their car outright and the other who leases their ride, and you were to tell me that one of them is pro-Dave, it’s highly likely that I’ll pick the Ramsey fan correctly. I’ll probably also be able to you which has an emergecy fund and which doesn’t 8 out of ten times. How about that for some math?

  23. Gaming The Credit System Says:
    March 7th, 2007 at 4:52 pm

    Chris, part of the scientific process (in which we’re engaging here) is to isolate the variables. Here, everything is held constant between the two cases (interest rates, appreciation, etc.) except for the type of mortgage. This is the goal, to figure out which type of mortgage makes the most sense.

    Also, the “emergency fund” argument goes the other direction if you assume that there’s no emergency fund there at the beginning. The people with the 30-year mortgage will amass an emergency fund at the rate of $458 a month, while the 15-year mortgagers will have to scramble to come up with it.

    I can see your point of “you have to look at the whole system”, and I do kind of agree with it, but that’s not what we’re doing here. We’re strictly comparing two mortgages. And I think that *any* system worth following (whether Dave Ramsey’s or otherwise) will incorporate an emergency fund. I think we can all agree that it’s pretty stupid to enter into any sort of mortgage without an emergency fund that can take care of at least several months’ worth of payments.

  24. LivingAlmostLarge Says:
    March 7th, 2007 at 5:32 pm

    First, a 15 year fixed is a lot more inflexible than a 30 year mortgage. You can always pay a 30 year fixed in 15 years if you choose. But if you are disabled or died you are stuck with the higher payment.

    Second, I’d love to advocate something for JPL to mull over and any other DR fans. If you are saving 15% to retirement, I bet you are not maxing out your retirement accounts. Right now for a married couple you can be saving 15.5K and $4k into 401k and Roth IRA annually per person. That means you can be saving $39k/year! To make that 15% of your income you need to be earning $260k/year.

    If you are earning less than $260k/year why are you not maxing out your retirement options? With a Roth IRA and 401k the tax breaks are far more than current mortgage rates. I would max out the retirement options before paying off my mortgage.

    And that $458/month if going into a 401k or Roth IRA is NOT taxed annual so the earnings are compounding without taxation. So you the 15 year mortgage person will never catch up with me the 30 year person. Why?

    Because another variable is the fact that you will have more money to invest in 15 years, but you may have too much money to invest into only retirement vehicles. Thus you will be forced to invest into taxable accounts.

    One major caveat is that you cannot go back in time to invest into a 401k or Roth IRA. You are losing a major opportunity.

    Thus I think if you assumed that the person with a 30 year fixed is investing the $458/month into a retirement account is by far coming out ahead. I advocate keeping a mortgage because of the tax break of a 401k versus paying it off. You get an immediate return of 10% minimally(I’m in the 28% bracket), versus your tax deductible mortgage of 6% (if using 10% bracket it’s 5.5%). So how can you compare 10% versus 5.5%? And then add in compounding interest in a retirement account?

    Now onto the tax break. I WOULD NEVER keep a mortgage for the tax break, unless it’s a 401k tax break. I plan on paying off my mortgage when I have all my retirement accounts maxed out (already happening), all ESPP options maxed out (also happening), and college fully funded. Then I’ll put it onto the mortgage. But until then I’m taking advantage of my tax break on the mortgage and tax break on retirement accounts.

    Another point is that people forget even with a paid for mortgage you have property taxes. I’d rather have a large pot of money in addition to paying off the house because there is always maintenance and property taxes.

    So if there are ongoing costs of a house, why would you pick a mortgage which causes you to have a smaller pot when you retire?

    And you talk about risk. Well the risk is this, a paid for house can also decline in value. A job loss and a need to move precipitiously could force you to accept less on a house you already “paid” off. A disability could cause you to tap the house equity instead of a pot of money.

    Also DR fans talk about risk. Well unless your 15% is not invested in the stock market you are in the same boat I am. If the market goes down your 15% retirement is going down with me. And if it goes up then we all make money. But don’t forget that to help mitigate risk diversification is key. So how is having a paid for home and a smaller pot of money more diversified than having more money and a fixed rate mortgage?

    In some ways a paid for home is more risk because you have all your “egg” in one basket. Namely a home. What if a hurrricane hits? You can’t pull our equity to do build a new home, but if you have more money in a investment account you can.

    I think that people who think 15 year mortgages are better haven’t looked at all the downsides of owning a home. Owning a home is not necessarily a key to wealth, it’s just one componenet. And even with a paid for home it’s easy to get into trouble. Compare apples to apples, such that if my stocks go down so will yours. If your house appreciates so will mine whether we have a 15 year or 30 year mortgage.

  25. Miguel Says:
    March 7th, 2007 at 6:23 pm

    Hey, just for the record, I am not a DR fan, never even heard of the guy until I started reading about it hear on this blog. I do like the fact that he seems to get that most people, especially those most in need, simply do not follow strict logic. And I think everyone can agree, that there is usually no magic bullet for most PF issues – you have to look at each situation and the dozens of variables on a case-by-case basis.

    So, like I said, I get the logic of the 30-year, invest the difference. And in fact, thinking about it, you could say that I am employing that very strategy myself. In my tax bracket (and being subject to AMT), my mortgage is extraordinarily cheap capital, which makes no sense for me to be in any hurry to pay it off when I can max out retirement funds and other invmnts. In the meantime, I am close to having accumulated enough invmt funds to conceivably pay-off my mortgage if I really wanted to. I also agree with the flexibility arguement – would rather choose myself when to pay down the mortgage than have an a higher payment to meet.

    But, I’m not typical – very far from it. And I think for the typical, average income home-owner, building home equity is the one thing they tend to do right, even when all else might be wrong. My mom being a prime example, she would have never accumulated as much in additional savings, as she has in home equity if the money was in her hands.

  26. Jake Says:
    March 7th, 2007 at 7:37 pm

    How does moving figure in to the equation? Americans move about every five years. I haven’t had a mortgage yet, but it my understanding that with a 30-year mortgage very little of the capital is paid down initially compared to a 15-year mortgage. If this is the case doesn’t that help the 15-year mortgage scenario? Please correct me if I’m wrong.

  27. Miguel Says:
    March 7th, 2007 at 8:06 pm

    Thinking about this further, the 30yr mortgage logic taken to the extreme suggests that the best way to go is to never pay down the mortgage, as long as the after-tax cost of debt is appreciably lower than the potential long-term investment gains. In others – a slug of perpertual debt leverage in your personal capital structure boosts your personal ROI, as long is it doesn’t create too risk.

    By this logic, the best option would be an interest-only, 50-year mortgage. I’m not saying good or bad, just making the observation. It’s a thought.

    And I think this partly explains why high NW individuals still often carry a certain amount of debt even though they don’t “need” it.

  28. Miguel Says:
    March 7th, 2007 at 8:07 pm

    Should read – In other WORDS – a slug of perpertual debt leverage in your personal capital structure boosts your personal ROI, as long is it doesn’t create too risk.

    Sorry – typing too fast.

  29. JLP Says:
    March 7th, 2007 at 8:14 pm

    Several people have mentioned the 50-year mortgage. Remember, that the further you go out, the more expensive the loan. The more expensive the loan, the less attractive the “go long and invest the difference” plan becomes.

  30. Daniel Says:
    March 7th, 2007 at 9:42 pm

    I wish I’d done these calculations before refinancing 3 years ago, JLP! Went from a 30-year mortgage (8.125%) with MI to a 15-year (4.875%) w/o MI, thinking that it was the best deal — payments were the same and I’d gain equity quicker. Then I met the woman I later married with a house of her own (5.125% — don’t we have cute pet names for each other?) and started renting out the spare home. Turns out the rent doesn’t quite cover the mortgage, even though the equity on paper looks good. But it means we both feel locked into our jobs, when a 30-year refinance would have given us a touch more flexibility to frolic in the park during the day or take work sabbaticals.

    I subconsciously had a Dave Ramsey mindset, but would do it differently after seeing the numbers side-by-side.

  31. WearyTraveler Says:
    March 7th, 2007 at 9:59 pm

    This thread has made me think…
    I have an emergency fund (big enough? – who knows…)
    I have an IRA and 401K (big enough? – who knows…)
    I have an Ameriprise Brokerage account (big enough? – who knows, especially after last week)
    I also have about $100K in Home Equity debt at 5-6%.

    History: I saw my father work all his life, paying for and dying in, a house that the bank still owned.
    I made it my quest _not_ to have debt. That way, If I lost my job, decided to quit (and become a blogger) or whatever, I could still have a home. My solution was to pay off my mortgage ASAP. I’m still making at least 2-3 times the mortgage payment each month and investing about 25% of my salary in IRA, 401K and brokerage accounts.

    However, thinking about it, it does make sense to pay minimum (or 2x maybe) mortgage and invest the rest (yes – I have the discipline).
    But I know that if I ever get laid off, my next job won’t have near the paycheck that I take home now.

    I want to be debt free, eventually…

    Who knows… It’s gotten me to think about keeping the debt and investing the difference. I can always pay off (or down) the mortgage out of investments if I really need to.

    “People sleep peaceably in their beds at night only because rough men stand ready to do violence on their behalf.”
    – GEORGE ORWELL

  32. plonkee Says:
    March 8th, 2007 at 2:57 am

    JLP I like your idea about trying to get people to understand (and presumably act on) the maths instead of their emotions. Reading this has got me thinking that instead of paying a little extra on my mortgage, I could just put it in savings as I can get a tax-free savings account with a higher rate of interest than my mortgage.

    Its a bit early for me to run the numbers myself, does the rate of inflation on the house make any difference other than to the net worth?
    I mean if the rate of house inflation was more like 5% and the rate of return on savings was more like 6%, would that be likely to make any difference to the conclusions?

  33. KMC Says:
    March 8th, 2007 at 9:23 am

    If I understand WearyTraveler’s comment right, we have much the same mindset. I make some financial decisions FULLY KNOWING that they are technically, mathematically irrational.

    I once got a car loan (I know, I know) with a rate of 0.9%. Any savings account will beat that. But I paid off the car loan as fast as I could. I know I lost money but more importantly for me, the car was paid for. I was debt free.

    My thinking is the same on my house. Yes, on paper and using these assumptions, the correct thing to do is what JLP and others are suggesting (to the tune of $90K). And $90K is a lot of money. Still, for me, the piece of mind I will have being debt-free is worth it. You have to do what’s right for you.

    Incidentally, I don’t have a 15 year, but do pay extra each month on my 30 year note.

  34. eR0CK Says:
    March 8th, 2007 at 9:26 am

    Wow … now see, this is what I was referring to earlier today about enjoying a blogs comments … this post is awesome!

  35. Rob Says:
    March 8th, 2007 at 2:06 pm

    Jake – Someone hwo plans to move has even more of an incentive to get a 3 or 5 year ARM because the interest rate is lower and you will be moving anyway before the rate adjusts (and this doesn’t even factor in that rates might not go up or may just as easily go down – nobody knows which way rates are going to go).

    Miguel – Wouldn’t it be just as easy for your mom to set up an automatic withdrawal to an investment account as it is to pay the mortgage every month? That doesn’t take much discipline.

    I guess ultimately everyone has a price they will pay for “peace of mind”. I guess mine just doesn’t run into the 5 or 6 figures. And remember, an ostrich that sticks its head in the sand has peace of mind too. That doesn’t necessarily make it a good choice.

  36. AllFinancialMatters » Blog Archive » A Follow-up to the Dave Ramsey Mortgage Post - This is Interesting! Says:
    March 8th, 2007 at 7:17 pm

    [...] Chris, an employee of Dave Ramsey and a blogger at Pour Out, left this comment on yesterday’s Dave Ramsey post about mortgages (I truncated Chris’ comment in order to emphasize what I want to talk about): He [Dave] doesn’t want you to pay off your home in 15 years; He wants you to pay it off in 12 years, or 10 or 7 or 4!!! Add those extra years of investing the $1700 house payment monthly and it’s probably a different picture. Digest the entire plan, not just bits and pieces, and you’ll end up ahead of the family in that right column. Good conversation you have going on here. [...]

  37. Jeff Says:
    March 17th, 2007 at 10:24 pm

    Here’s a another slant on the proposition… Several folks have mentioned that they like the “flexibility” of the 30 year loan because the lower payments allow the ability to spend on other needs or investing towards the 90k the author of this thread is suggesting. What if you did both? How, you ask? The only way to get the lower payments to allow for the investing and still get the 15 year loan is to buy less house. Hmm, interesting… Maybe a value of the 15 year loan principle is to get the buyer to purchase less home in the first place. Less home leads to lower property tax, lower home insurance, lower heating and cooling costs, less furnature expense, lower maintainance costs… Wow, that really starts to add up. I have not run the numbers but I could imagine that you would not have to reduce the home price that significantly to make up the $450/mo difference between the 15 and 30 years mortgages once you take into account reductions in home costs (property tax, utilities, etc). Then you could invest the $450/mo with the 15 year plan as well… so at the 15 year mark you would have the same amount of savings as the 30 year mortgage folks and a paid-for house! In other words, perhaps the danger of the 30 year mortgage is that you are drawn into a bigger home than you really need and by the time you pay the home costs (taxes, utilities, etc) over the 30 years you loose more than the $90k you made on the interest…

  38. Third Joker Says:
    April 12th, 2007 at 7:22 pm

    In almost every case, you can have your house paid off more quickly by taking a longer term loan and investing the difference in payment…not to mention the flexibility that you lose by storing cash in your home equity…not to mention the RISK that you take by storing cash in your home equity…not to mention the potential tax arbitrage ramifications…the list goes on and on…

    Houses are for housing people, NOT cash.

  39. Brad Says:
    April 13th, 2007 at 4:36 pm

    The problem with all the “have more to frolic with now” ideas is that they are now focused, not for the long run. Few people would really invest the difference, and investment returns can go down in a heartbeat. If that happened, the “30 year bargain” may leave you stuck.

    The problem with a lot of this is that few have lived through a significant downturn and they think we really are at the “end of history” with “all new rules”. I have quite a ways to go, but I would much rather have the peace of a paid for house than I would some “ready cash” that could easily get spent on other things, even if it was in an IRA.

    I don’t want to be the slave of the lender all my life. :)

    Brad

  40. Chris Says:
    April 14th, 2007 at 8:04 am

    Here’s something that is not factored but should be considered. Most people trade houses every 5-7 years. Assuming it’s 7, the amount of interest paid during a 7 year loan amoritized at 30 years is around 80% of the payments. You will make $77,580.37 in payments over 7 years, of which $62,630.75 goes to pay interest. (150,000 loan at 6.25% interest). With a 15 year loan, it’s more like 51%. That’s a huge equity difference that will be returned to invest in the next home.

    Your math is correct assuming someone will stay put for 30 years.

  41. richard Says:
    April 19th, 2007 at 8:21 am

    Daves approach is not a solution. You can take the return you get for tax. Apply it to the principal mortgage on a 30 year paid off 15 years guaranteed. I fell sorry for those who take his advice you have rights as a consumer. If I offer you $100 and make you pay back $150 45 days later you would not of taken it anyway. I dont get to do that but the CC companys do. It is all a sham tricking young people.

  42. Ben Says:
    April 26th, 2007 at 7:42 pm

    I refinanced from a 30 to a 15 a few years back, when rates were really low and that action took 10 years off my mortgage.

    I’m of two minds about that decision.

    The 15 year payment was a bit of a stretch back then, but doable. It’s not really a problem now. I like that I’m about 1/3 paid off on my house, and I like that I could be free and clear by age 44 if I just keep making payments.

    I don’t like the fact that I feel married to this house because of all the progress I’ve made on paying it down.

    I wasn’t disciplined enough then to keep the 30 year and make extra payments on it, though I am now, and would certainly appreciate the extra cash flow to invest at this point.

    I’ll probably start making extra payments on the 15 year now, and try to get it paid off in less than 15 years, but still intend to set aside money each month to invest. And, naturally, I’m already contributing enough to my 401k to get the company match, so I’m ok there.

    I dunno. Given my prior lack of financial discipline, it was probably the smartest move I could have made at the time. I’ve got much more to show for the money I’ve spent than I would have otherwise.

  43. AllFinancialMatters » Blog Archive » More on Mortgages Says:
    May 8th, 2007 at 3:03 pm

    [...] Check Out the Latest Dave Ramsey Poll [...]

  44. broknowrchlatr Says:
    May 8th, 2007 at 4:00 pm

    Since this post hasn’t had activity in over a week, I thought I’d chime in. I went through all these calculations when I refinanced a couple years ago. I could have gotten 4.875% @ 15 years or 5.25% @ 30 years. I took the former because I planed to move in 8 years or so and would need a substancial down payment to afford the house I want without PMI. Thus, had I taken the 30 year, I would have had to look at a short term investment that I could call back within 8 years. With looking at a short time phrame, the likely investment option would be to put the money in bonds or CDs. Witht he rates above, I couldn’t gaurantee that I could beat the return of the 15 year mortgage payments by investing other ways.

    In my next/final home, I’ll be much more likely to go 30 year, or more.

  45. AllFinancialMatters » Blog Archive » The Top 5 Reasons to Pay Off Your Mortgage? Says:
    May 16th, 2007 at 9:34 am

    [...] Check Out This Dave Ramsey Poll on Mortgages [...]

  46. scientificcalculators.check4cheap.com » Blog Archive Says:
    September 15th, 2007 at 10:20 am

    [...] AllFinancialMatters » Blog Archive » Check Out the Latest Dave 45 Responses to “Check Out the Latest Dave Ramsey Poll Chris, part of the scientific process (in which we’re engaging here and being subject to AMT), my mortgage is extraordinarily cheap [...]

  47. Robbie Roberts Says:
    September 22nd, 2007 at 12:01 am

    Interesting thread. Your math does not take into consideration risk and thousands of broke people with ARM’s and scores of lenders who were greedy are demonstrating this fact. When my 15 year fixed-rate mortgage is paid off and your ARM has put you in a tenuous financial position, we’ll see how good your math works in daily life.

  48. Another Point of View Says:
    September 26th, 2007 at 12:02 pm

    Here is another point of view that doesn’t seem to be considered yet: I treat my mortgage as a bond (which it is). I am getting a GUARANTEED Rate of Return on my 5.0% fixed 15-year mortgage — which has ZERO risk (on the investment). This allows me to invest in my 401k and IRA more aggressively because I treat my mortgage (and pension plan at 1-year T-Bill rates) as the bond portion of my portfolio.

    The Mortgage Comparison given in the table above is flawed in that it is only looking at a small portion of my overall investment strategy. If it took into account the more aggressive investments in the 401k and IRA (due to treating the mortgage as a bond), then one could have a higher ROR on the investments with less risk.

    Also, if you are taking on a 30-year (or ARM or any other “bad” mortgage), and you are also investing in Stocks, then you ARE financing your stock investments with your house as collateral, period.

    I am a Dave Ramsey fan, and I also took significant math classes in college, and I am also a pessimist. Dave’s plan may not make much mathematical sense (as you have pointed out), but it makes “real-world” sense, in that it is designed for when the “real-world” bites you in the ass :)

    Carrying ZERO debt, having emergency funds, etc.. all are designed to prevent someone from being financially ruined when the bad things happen in your life (and they will — Murphy’s law).

  49. LOL Says:
    February 4th, 2009 at 12:04 pm

    So it’s almost been two years since this blog entry was made. Ironically March 2007 was the peak for the national average house prices. Since then the average house price has lost 25% (*1) and the S&P 500 is down 40% (*2).

    Looks like those loony “ramseyites” aren’t so bad at math after all ;)

    BTW, how is that massively arbitraged and up-side down mortgage working for ya?

    (*1) census.gov $329,400 down to $246,900 (Dec 08)
    (*2) NASDAQ:VFINX 129.62 down to 77.26

  50. It’s Called Long-Term For a Reason | AllFinancialMatters Says:
    February 4th, 2009 at 1:07 pm

    [...] in some of my posts about mortgages vs. investing. Take for instance, this comment that was left on this post this morning by someone named LOL (I’m pretty sure that’s a joke): So it’s almost [...]

  51. 30 WIns if Unemployed Says:
    April 16th, 2009 at 9:54 am

    Well, now that unemployment is way up, I wonder how many 15-year mortgage holders are in a crisis because they lost a job? I’m glad I have a 30-year for peace of mind. I can pay it as if it’s a 15 anytime I want, but if I lose my job, I’m not at risk of being kicked out my house or having to go without health insurance to keep my other expenses paid (has anyone seen the rates for COBRA insurance if you lose your job? For me, COBRA would cost significantly more than my entire mortgage! It’s insane! All the more reason why we need a universal health care option available from the government so these scam artists in the insurance industry will have to compete against the lower prices of a gov’t program) because of having zero flexibility on my minimum mortgage payment.

  52. consider this Says:
    November 15th, 2009 at 2:43 pm

    In the comparison above the amount in savings is only listed for the 30 year mortgage. Where does this number come from? Multiplying $458 times 180 (months) come to $82440. Nonetheless, one really important peice is missing. If I am in the 15 year category, and I just paid off my last payment of $1696. How’s about I save $1696/mo for 15 years and then let’s compare savings accounts. At the end of 15 years of saving $1696 (as I paid off my mortgge after 15 years), my savings account reads a sweet $305,280. Did I miss something?

  53. JLP Says:
    November 16th, 2009 at 12:41 am

    test

  54. Mike H Says:
    November 16th, 2009 at 6:18 pm

    Interesting discussion. Given the assumptions made, I agree with JLP’s numbers from a straight dollars and cents perspective.

    That said, my wife and I are aggressively paying down our debt (both school loans and mortgage). We’re also funding our Roth IRAs to make use of the tax advantages there. Our direction has been less of a focus on the mandated length of the mortgage, but on paying it off in much less time than either a 15 or a 30 year would require.

    The reason is simply that the “medium-term” flexibility of not having the payments will allow us to more whole-heartedly focus on our other goals: giving to the Church and saving for the long-term.

    Could we save the money and pay off the debt in the medium-term while having the short-term benefit of the cash on hand? Perhaps. However, the returns you can theoretically count on in the long term become less likely to match reality in the short/medium term (less than 15 years), as we’ve seen recently.

    Besides, all those years WITHOUT the debt hanging out there is far more valuable to me than the straight dollars and cents. It feels a bit strange to say that, as I’m something of a math nerd… but it’s true.

    Thanks for all the thoughtful discussion.

  55. BeyondWeird Says:
    January 25th, 2010 at 10:17 pm

    Its low risk to have a home paid for, but making extra principal payments on a home is risky! The reason is that if one were to INVEST until one had enough to pay off the house in full, then if one loses their job (very common these days) the house, and the money put into it, is at less risk. This is because, if needed, the money saved, intended to be used to pay off the home in the future, could be used NOW to pay the mortgage payment! As they say, “Cash is King.”

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