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. Too many people here are doing exactly what the first person said not to do. Don’t take little chunks, but look at the whole thing. It is advocated by Dave that after you pay off your mortgage you continue to invest that money into the market. Once you have no debt and can invest all your income you will surpass the time that you wasted in those 3 years quickly. As for the guy that thinks that he is going to continue to get 33% – that is where the fantasy is.

  2. Two years ago we stopped investing in our 401k and we began paying thousands against the principle on our home. We only have $1,500.00 left to pay and the property is ours and we didn't lose our a$$et$ to the stock market. We don't have to worry about losing our home to the bank. Our money isn't tied up in unstable companies that could fail in a second with no warning. We are debt free and will now be able to live comfortable lives without worry. There's something to be said about that don't you think? If all of your money is placed in the stock market, which most likely it is. You most likely are worried that you'll never get back what you just lost in the latest crisis. I don't have that worry and in 11 years, I will have saved approximately $500,000.00 that I probably would have sank into the stock market and lost. Now that is a $500,000.00 gain in 11 years. Can you beat that? I don't think so… Oh, and did I mention that God was in all of this? That is right! God. If we all would just obey the Lord and keep his word, "owe no man nothing" then we wouldn't be in the situation that were in today.

  3. This example proves that Dave Ramsey KNOWS what he’s talking about!

    In this example the people who paid off mtg early apparently didn’t invest their extra cash and were almost even to the person who kept the 30 year mortgage.

    If the payed off people truly didn’t invest the money that’s ok, look at all the years they lived in peace, debt free!!!

  4. Okay, So I’ve got a 15yr mortgage interest rate of 4.375% fixed, & no other debt. I’ve maxed out my 401k contributions each year, & can’t do a Roth due to income level. One “child” is now 25, the other is 18 & 529 College money is set aside. Not bad, so far.

    I’ve got about a year or two of emergency fund set aside, and I STILL believe one of the RISKIEST choices I could make is paying off my mortgage early!

    As has been said earlier, you get no good behavior credits for paying early – in other words if you’ve paid $1000 per month additional for years, and you’re late on your payment next month, or you start missing payments, that extra money you’ve been paying won’t do you a bit of good…. you’re still late, you will still eventually be forclosed on, and it won’t matter if the mortgage balance is $150,000 or $50,000! Now if you had INVESTED that $1,000 per month in a liquid asset, you could use it to pay the mortgage if you fell on hard times. That extra $1,000 per month would have possibly paid the mortgage payment for YEARS, during which time you would have been able to “float your boat” and move (takes money), or find a new job (takes money). So having LIQUIDITY could mean the difference between being stuck in a depressed market with no money at hand.

    I work in a volatile industry, and I think I’ll stick with my CASH, and my net cost of funds 3% mortgage, after I take my mortgage interest tax deduction… and INVEST wisely instead…
    IMHO

  5. 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.

  6. 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.

  7. 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!