A Follow-up to the Dave Ramsey Mortgage Post – This is Interesting!

March 8, 2007

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.

What would happen if you paid off a 15-year mortgage in 4 years? Would that change things? Let’s see…

In order to do this little calculation, I had to make some assumptions:

1. Taxes are ignored. There’s too many tax brackets and too many different scenarios. So, I decided to ignore taxes on both investments and the deductibility of interest.

2. I used the interest rates of 6.08% for the 15-year mortgage and 6.30% for the 30-year mortgage from yesterday’s post.

3. To pay off a $200,000 mortgage in 4 years, it would require an additional payment to be made of $3,000 per month, bringing the total monthly payment for the 15-year mortgage to $4,696 . The monthly payment for the 30-year mortgage would be $1,238.

4. I assumed that both families had an extra $3,000 per month. The family with the 30-year note is investing their $3,000 per month and getting an average return of 8% per year (or .67% per month).

5. After the 4 years is up, the family that paid off their mortgage early invests their entire payment of $4,696 per month and also gets an 8% annual rate of return.

Here’s what I came up with:

Mortgage Payoff

This all boils down to the fact that we have to make choices as to where we allocate our money. These choices involve picking one “return” for another. If you choose to pay an extra $3,000 per month on your house note so that you can be mortgage free in four years, then you also are making the choice NOT to invest the money elsewhere. This kind of thinking requires you to look at your personal finances like a business owner looks at their business.

57 responses to A Follow-up to the Dave Ramsey Mortgage Post – This is Interesting!

  1. Now “BeyondWeird” has hit the nail on the head – CASH is king, as long as you don’t “plop” it down on your home mortgage. It’s amazing how much a $29 financial calculator can keep you from making a 1.5 million dollar mistake. Say you have a windfall of $200,000 and you want to pay off that home mortgage, just so you are free of that $1104 mortgage payment (5.25%.) Ok, let’s look at what you just lost in income over 30 years — that $200K would be $3,967,000 @ 10% rate of return. Now what did you gain – $1104 @ 10% for 30 yr. is $2,495,000 — basically a $1.5 million dollar mistake.

  2. Beentheredonethat July 2, 2010 at 9:08 am

    Interesting read. I paid off my 30 year in 3 years in 08 just before the market tanked and have invested the payment for the past two years. Alot more money in a cheap market. What also is not stated in these calculations are other freedoms. Yes we all want to expand our wealth but we also want to live an enjoyable life. I am comfortable spending money on vacations or whatever I desire, in cash, knowing that if a financial issue arrises I can stop my investing and have the previous mortgage money for use. Mathmatically you might make more money but, for me, I want to have a life while doing it. Having no debt reduces ones stress level, affords you new freedoms and also allows you to “play” the market at the same time. Had I kept my 30 year mortgage I would still be paying it off, reducing the amount invested each month by my mortgage payment, been unable to move when I wanted where I wanted. I rent that house now and pocket the rent, while living overseas and having my rent paid for by my employer.

  3. Forget the math! Use common sense.
    I am on Step 6, trying to pay off my $86,000 mortgage before age 30.
    It’s putting money I already make toward the debt.
    If I weren’t applying it to the mortgage, I might be spending it.
    Certainly not saving it with the terrible rates.
    You can check my progress on my blog, if you are interested.
    I’ve got about four years to go!

Trackbacks and Pingbacks:

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