Personal Finance 101 - Paying off your Home Mortgage
This is the seventh part in my series on Dave Ramsey’s Baby Steps, a proven personal financial plan. My goal is to explain a really solid money management plan in plain ol’ English, for intelligent yet financially “average” home managers.
It’s now time for Baby Step #6 - pay off your house.
Dave Ramsey recommends being debt-free - as in really debt-free. Zero debt - that includes credit cards, student loans, mortgages, the whole bit. This is something most people can’t fathom, because normal in America is having debt. It’s a way of life.
If you’re debt-free except the house (Baby Step #2), you’re free to load up a fully-funded Emergency Fund (Baby Step #3). Once you have that cushion, you can then invest into retirement, an education fund, and in paying off your mortgage. And once you have that paid off, you then have the complete freedom to invest in yourself and not a bank. You can change your family tree.
Here’s the most common argument for not paying off your home early:
You get a tax deduction when you have a home mortgage.
Dave’s answer: Let’s say you pay $10,000 in interest one year, which creates that tax deduction. If you didn’t have that deduction, the $10K you kept would be taxed, and if you are in a 30 percent bracket, you would have to pay $3,000 in taxes. In keeping a mortgage around, you are essentially paying $10,000 to the bank to avoid paying $3,000 to the government.
A little side note: Another huge myth in our culture is that you have to own a home, that buying is always better than renting. True, owning a home can be a great thing, but only when you’re financially able to do so. When you buy more than you can afford - and this happens all the time, as we can see from all the sub-prime craziness as of late, that home mortgage becomes a curse and not a blessing.
We are currently renting because we live overseas, and in this particular country, the economy is too unstable to risk taking out a mortgage. But whenever we move back to the States, we plan on not buying a house until we have at least 20 percent saved up. Yes, we want to own a home - believe me, it’s a huge dream of ours. We actually want to build a home ourselves. But it truly does not seem worth it if it means chaining us down with a ridiculous mortgage that doesn’t work. Home ownership is not the answer to all of life’s financial questions. But our culture certainly preaches it these days.
Dave recommends only getting a fixed 15-year loan with 20 percent down and the payment being no more than 25% of your take-home pay. But he even advocates that you can even pay 100% cash for a home. Seriously.
If you had no mortgage, your biggest wealth-building tool - your income - would be completely freed up to really invest it where you want it. Then you get to do some pretty amazing stuff, like build more wealth in order to give like crazy. As Dave says, when you live like no one else, later you get to live like no one else.
We’re almost done with Dave Ramsey’s Baby Steps. We’ve got one more, and it’s an awesome one.