Dave Ramsey’s 7 Baby Steps: Step 6 – Pay Off The Home Early!
Posted by P.B. | Posted in Baby Steps, Dave Ramsey, Mortgage | Posted on 23-06-2009
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Last time we looked at Baby Step 5, college funding for your children. We talked about when to start and some options to use for saving for their education. Today we look at taking extra money and use it to pay off your home early. Before we begin, here are the steps we have covered so far:
- Step 1: Emergency Fund – When It Rains It Pours
- Step 2: Pay Off All Debt Using The Debt Snowball Method
- Step 3: 3-6 Months Of Expenses In Savings
- Step 4: Invest 15% of household income into Roth IRAs and pre-tax retirement
- Step 5: College funding for your children
Baby Step 6: Paying Off Your Home Early
After having payed off all your debt, saved for your retirement and put away money for your children’s college expenses, the next thing Dave Ramsey suggest doing is paying off your mortgage early.
To start with Dave suggests getting no more than a 15 year fixed rate mortgage, that is no more than 25% of your income. If you don’t already have a 15 year fixed rate mortgage, now may be a good time to get one by refinancing your home. A 15 year mortgage will probably mean higher monthly payments, but it also means you will pay the home off sooner, and pay less in interest.
Why Should I Pay Off My House?
- Interest Savings: You will be saving thousands of dollars in interest payments on the mortgage. For example, on a 200,000 dollar mortgage over 30 years at a 6% interest rate, you will end up paying over $250,000 in interest. Cut that time frame to 15 years and you will only pay $115,000 in interest!
- Peace Of Mind: Having paid off your house means having peace of mind. Having debt of any kind is extra weight on your shoulders, and it can weigh you down.
- Less Stress: You will have less stress in your life when you need to deal with a job change (or loss), or want to have a spouse stay at home to raise your kids.
- Getting a Raise: Without that large bill every month, it’s like getting an instant raise!
Why I Should Not Pay Off My Mortgage
- Investing Returns Could Be Higher: Yeah right, in this economy? But at times this may be the case, and if you can get a better return on your money, than maybe this might be a better choice.
- Inflation Works With You: As you know, inflation goes up by 3-4% a year, so by not pre-paying your mortgage you will be paying it off with cheaper money.
- I Will Lose My Tax Write Off: And you are giving the government a free loan for what reason?
Conclusion
When I look at both sides of the issue, there are valid points to debate. To me it comes down to weighing the benefits, the risks, and the emotionl/psychological sides of the equations. I am still leaning towards paying off the mortgage early. Have I been able to do that yet? NO, but it is a goal I will be working on!
What do you think about paying ogg your house early? Good or bad idea?
