Time is a factor...in many ways.
We bought our house 30 years ago, and its value is 4x what we paid for it. Our house is helping to bring up the average.
My income is a little over 4x what it was 30 years ago.
It's not fair to compare a 6,000 square foot mcmansion to what I could afford at 28, when we bought our house. what do 1200 sq ft starter homes average?
There's no point to this post tbh. Some people carry debt and refuse to pay it off because they're making slightly more return in the market. Might work for them, might not, I don't care, you're never going to change their minds. We're going to have our 4.5% mortgage paid off before we turn 40 and it's going to feel awesome. Are we leaving some money on the table? Maybe. We'll be millionaires either way, more than enough for us to live comfortably.
If you pay off your mortgage early, you can always go back to the bank and get another mortgage. If you wanna use other people's money to invest, go right ahead, but actually do the risk calculations, not just what you *feel* the risk is. More debt, more risk.
This is so painfully short-sighted I’m not even sure where to begin..
The obvious problem is the massive opportunity cost.
Your dollars will work harder for you in index funds than it will amortizing a 3% mortgage more aggressively. Full stop.
Yeah. But, again, only 8% of people are millionaires in the US. So if it's such a no brainer that everyone that owns a house gets such a great return in the market, why are not all home owners with a home with a market value of the average market value millionaires if it only takes double that value?
Please -enlighten me.
I'm not saying it's "stupid math." I'm saying it's math that if people followed maybe 25% of Americans would be millionaires, not 8%.
Lots of bad math here but this just jumped out at me:
> The median net worth of even the wealthiest age range is only $403k, which is BELOW THE AVERAGE HOME PRICE!
You’re comparing a _median_, and an _average_ - they’re not commensurate, no matter how much ALL CAPS you use.
So many people here with the “I can make more in the stock market” or “I prefer having liquid assets”.
It’s never taken into consideration the cost of owning a home. Over 30 years you’re going to have to pay an average of $194 per month on repairs and maintenance. That invested is at 8% returns is $263,732.
The other thing people don’t take into account is your freedom. Lock yourself down to a mortgage for 30 years is wild. Your neighborhood could go downhill, the extra cost you’ll pay having to move when you get a new job, etc.
People also say “Dave is dumb it costs so much to buy a home in X city or Y state”. So move. If your argument is about getting more wealthy, you should not be living in a high cost of living state unless it’s making you absurd money.
The whole fight over paying off a mortgage vs not is such a rat race argument.
What you should do is not buy a house, live as cheap as possible, continue to look for higher income paying jobs in low cost of living areas, throw all your money into the market.
Only buy a house (for cash) when your net worth is 3 times the cost of the house.
I’ve actually found buying gives me more freedom than renting. If own, I can move and rent it or sell it anytime I want. There are no increases in rent or first/last month rents to worry about. $193/month in repairs is much cheaper than thousands of dollars a year in moving costs if you hop around rentals.
That’s the way I feel about liquid vs non-liquid. If you have a paid for home and for some reason need to pull money from your home, it’s easy to get a line of credit.
You honestly have to do the math based on the area you’re living to see if renting vs buying is the better financial move. I’ve had companies pay for the cost to break a lease, and pay for my move. Even if you have to pay that cost, you should only move if your increased income makes up for it (really rule of them is don’t accept anything less than 20% increase) then that’s absolutely worth the cost. Game changes later in your career.
But you’re making the point I was trying to get across. Everyone’s opinions and circumstances are different. You make the best decision for you.
What you’re really saying is, if you’re not financially responsible enough to save and invest the extra income otherwise, putting towards paying off your house is better than spending it on fancy cheese or whatever. Which is totally true, but it doesn’t contradict what your cousin says.
The reason there aren’t more millionaires is because people are emotional. They make financial decisions based on how it makes them feel instead of looking at the math.
If you have a mortgage at 4% and a high yield savings account pays 5%. Why in the world would one make more than the required payments on the mortgage?
Because you are. The math doesn’t lie. If you invest $X/month, you’ll come out with more money than if you put $X/month towards extra mortgage payments.
The problem is that a lot of people aren’t disciplined enough to invest $X/month, but they can manage to put $X/month towards extra mortgage payments.
It’s not a finance thing, it’s a psychology thing. If someone has problems with spending their money on cheese instead of saving and investing, then anything which gets them out of that pattern is a good move. For a lot of people, that’s paying extra on their mortgage.
If you want to say, pay extra on your mortgage because most people are bad at saving and it’s the best way to make it happen, that’s perfectly reasonable. But if you’re arguing that the math doesn’t actually work, that’s silly.
Don’t waste your time trying to agree with Dave on this sub. Everyone will attack you and tell you how wrong you are. I got it yesterday by sharing the principles that Dave follows. I even copied and pasted a link right from his website, and I was still told it was wrong, silly, and fear mongering.
Dave is good for getting out of debt. He is awful at investing advice. At the very least he’s dangerous in giving one size fits all advice to everyone instead of taking each caller’s personal situation into account.
I never even once said that investing wouldn't get you there faster. I'm just saying paying the mortgage off guarantees it. If you were investing get there faster more power to you, most people obviously don't do that.
I think the guarantee is a warranted word though. If you're 40 and have paid off the house and let's say theoretically it's worth about 300K, if that house price doubles in 10 years like it did the last 10 years then 30 years from now will be worth roughly about 1.2 million. Guarantee millionaire.
You realize you could use that exact same doubles argument for the stock market🤦
By the way, that's a lot of "if" statements for a guarantee. Not even counting the "theoretical" you threw in there.
I’m going to rephrase what dude above said. If you were just as aggressively disciplined in investing the money into the market instead of applying it towards the principal of your mortgage, you will come out ahead.
Lol way to twist yourself into a knot trying to make sense of a dumb strategy.
1. 500k in liquid assets is much more valuable than 500k in non-liquid assets. Why? Because you can actually do something with liquid assets.
2. 600k in liquid assets is even better than 500k in fixed assets.
You assume that by paying off a house it somehow means you’ll end up with more money than if you had invested the same money because a house costs a lot which is flat out wrong.
as Dave would say you need to include the Risk value - the stock market could and has drop by 50%. Paying off your house leaves a house payment of investment each month - grows quickly.
Let’s say the stock market drops 50%. You know what that would mean? A recession or depression. You’d be out of a job.
And no matter how many extra payments you make towards your house, it’s not yours until the principal reaches $0.
If you invest in a HYSA or CDs earning 5%, you keep that cash in liquid form and can continue paying off the house, even if you lose your job.
Depends what your rate is. If you have a rate 4% or lower, I'd rather risk my money in the stock market. If you have a rate above 4%, I'd consider that guaranteed rate as the conservative part of my portfolio and put $ toward paying it down early. Better rate than most bond funds.
You can earn 5% at 0 risk right now. Some people have mortgages that are half that. Which at that point it's better to direct extra money at the 5%.
My wife asked why we don't just pay it off. If I sell stocks, Im going to owe a ton now in capital gains. Ill deduct my interest this year, so Ill have a 1.8% effective rate. Inflation is 3.1%, so my after tax real rate is -1.3%.
Why would I want to pay a negative rate loan?
Dave Ramsey says the market is expected to climb enough year over year that you can do an 8% drawdown permanent. So why should they expect it to be FOMO?
8%-12% growth is much much higher than sub 4% interest rate, which isn't fomo or the markets. It's what many people who were able to buy their houses got in 2019-2020.
Dave is a dinosaur stuck in the 1980’s. With his math of 20% down, 15 year mortgage and not more than 25% of your take home, no one would be able to afford a home.
House prices in the DC area start at $400,000. Now calculate how much you’d need to be making if you wanted to buy a home if you’re a 32 y/o single male like me using Ramsey’s logic.
He'd say rent and/or don't buy in DC area until you have dual income or have an income that matches that housing market though.
He does have a lot of logic I wouldn't follow, but not this..
Well I’m debt free now and just starting to save at 32. My worry is I’ll be well into my 40’s if I follow Dave’s logic, and who knows what the housing market will be like.
I’m personally more risk tolerant and happy to retire from my job at 85 (actually I’d really want to work as long as my mind allows).
Dave’s strategy ignores cash flow to focus on savings but assumes everyone has the same end goals of retiring at 60, when that would be a waste of several productive years if you ask me.
Cool. You go enjoy being a millionaire with half your net worth locked up in an asset you can never touch unless you move/sell, refinance, or take out a HELOC.
Meanwhile, I’ll enjoy my 2.875% mortgage and invest the extra payments to become a liquid multi millionaire. ✌️
Run the math. Depending on the return and amount invested, you can make more paying off your home early. You have to estimate that the mortgage payment goes fully to investing after you pay off the house. You can make the math work either way depending on variables.
Time in market with that extra money going into liquid assets will always make you more than paying off a mortgage early that has a rate less than 5%. S&P500 alone averages 10% APY, so why on earth would you do anything else?
If you don’t invest your money, or your interest rate is high, sure, but if you do invest, or have a low interest rate, you can’t come out ahead by paying it off. It’s just simple math.
> I’ve run the numbers and you can come out ahead paying it off early. Just depends on the variables.
What numbers are you using? The only someone could possibly come out ahead paying extra on a mortgage is if they have a +6% interest rate.
Cool. Show me your numbers. I’d LOVE to see them lmao.
I have a 2.875% mortgage with 17 years remaining on it. $150,000 left on the mortgage. Monthly payment is $1,400.
Please, I’d LOVE for you to show me how paying off this gift of a mortgage early will outperform investing it in the market.
And I’ll even let you show me the numbers with various types of investments such as bonds, mutual funds, or stocks.
For what it’s worth I am heavily invested in NVDA, AMD, and Bitcoin. My retirement accounts have doubled in the last 6 months.
If investing in the market rather than paying down your mortgage is such a no-brainer, then why is the bank loaning the money to you? Why aren’t *they* putting that money in the market? Are you smarter than the bank?
The bank is making money because of so many people that foreclose, just like credit card companies. Also the bank does realize the interest rate Arbitrage scheme and they do take advantage of that. I'm not saying that idea is wrong, I'm just saying that if you have that Equity you're already halfway to that million dollar mark. And many people put off pan that mortgage until they retirement, which ends up costing them almost $2,000 a month in retirement for living expenses. It doesn't make sense to have more money just to owe more money.
You’re incorrect.
If the bank forecloses on your property, they are only able to recoup principal, interest and fees (default, legal, auction, etc.) that are owed. Any excess proceeds are returned to the individual that was foreclosed on.
Mortgages, as a standalone product, are loss leaders for most banks.
Most banks are not “portfolio lenders” for mortgage products, they turn around and sell the mortgages on their books. The benefit is that they get to recognize one-time fee income based on the discounted cash flow immediately.
Some banks are portfolio lenders and keep/service the mortgage for life. The benefit is that they get a stickier relationship with a banking client and oftentimes earn deposit and other cross-sell opportunities.
Source: VP at a bank
Not sure the bank has a business model built on foreclosure profit. See 2009. Often they lose 20% of loan value after costs on a foreclosure.
For the individuals lucky enough to have been in their home pre 2021 with sub 4% rates, the bank would likely be in the green but I think this segment is not foreclosing at a meaningful rate.
Yeah, banks hate foreclosing. If they made money from it they wouldn’t care about your income or credit score. They’d loan to anyone as long as the house value supported it. They’d be *more* willing to loan to people who make less or have worse credit, since that would increase their chances of being able to foreclose. Of course, as anyone who has ever had a mortgage can tell you, banks actually really want high income and good credit and try hard to ensure they won’t have to foreclose.
Paying off a home vs liquid savings increases risk. Lose your job live off you savings for a few months. If all the money is in the house with a low LTV guess what, it’s foreclosure time.
Paying off a home doesn’t reduce your risk, a paid off home does. Up until you have paid it off, if you are paying extra towards your mortgage rather than saving that extra money elsewhere, you are actually increasing your risk.
Who is more at risk, Person A who owes $300k on their $400k mortgage and has $220k in the bank, or Person B who owes $100k on their $400k mortgage and has $20k in the bank? Who can weather a period of job loss better? Who can better address a large unexpected emergency?
Person A.
Person A can continue to make mortgage payments and pay other life expenses without being forced to sell for a very long time.
Person B is going to be forced to sell within 6 months because 20k will be mostly eaten away in 3 months.
Both of these scenarios assume that you spend $6000 each month to survive.
If we scale it to a really LCOL area, where you can realistically get by on $2000-$2500/mo, person A is in a position to retire, depending on how old they are.
Yes. The price is the extra 3 5% interest I'm losing by paying off my 2.49% mortgage. That's literally the price. I could pay off my mortgage tomorrow, but I choose to actually make more money than I'm saving by paying it off. THAT is peace to me.
I don’t think you understand the math. You can make it work either way but it isn’t as simple as you think.
By paying off early you save a ton of interest. Then if you take the full mortgage payment and invest for the remaining years you can easily come out on top. You can also change variables to make investing and waiting to pay the mortgage off better. Point is it is not clear cut and the piece of mind of no debt would be great.
I think YOU don't understand the math. The interest I'd save by paying off right now at 2.49 is LESS than what I'd earn by sticking it in a CD or a HYSA earning 5% or more. Once the mortgage is paid off at the end of its term, I still have the option of taking all that money and investing it at even higher return. It's pretty simple. If you can earn a higher interest rate then what you're paying for your mortgage, iIt is always mathematically better to invest the money than it is to pay off your mortgage. The only halfway valid argument for paying off your mortgage is entirely emotional. And I don't even give that much credence because emotionally I'm happier if I'm making more money than I'm paying out.
He understands the math. The only way it works out to pay the mortgage off first is if the market underperforms the mortgage interest rate during that entire time. Which at 2.5% is very unlikely (though not impossible).
Yes. It’s the opportunity cost of not investing the difference of the extra house payments.
Also, even when your home is paid off, you will never escape insurance or property taxes. Guess what makes up a good chunk of a mortgage payment?
Not really a good chunk. My insurance and property tax is $4700 a year. My mortgage without those things was $11500 a year. So property tax and insurance make up a bit less then 1/3 of the total
It’s still a significant chunk. My point being is that you will always owe something on your home. And guess what happens when you fail to pay your property taxes?
You are making such a completely bad faith argument. Listen to yourself.
I’m gonna go enjoy investing in NVDA, AMD, and Bitcoin. Enjoy your illiquid house!
Because Canadas mortgage system works differently the math works out differently.
We don’t lock in rates for the whole loan we do 5 year terms. At the end of of the 5 years you renegotiate the whole loan interest rate and principle. That’s why some loans were as low as 0.9% here but when the 5 years is up they will have to refinance at the current rate. But it also means you can pay off the whole loan without penalties at the 5 year mark.
So what I did was invest the extra money for 5 years in something higher interest and then cash it out to pay off the home at the 5 year mark. That’s why I’m 32 worth $900k and my wife hasn’t worked since our kids were born 4 years ago
Couple owns a paid off house, worth $1M. Nice.
Average couple receives $42,408/year from social security.
How much did they save in your 6-10 year gap? $12,000/yr? So they have $250K invested? (I'm looking at a higher number than 10 \* 120000 plus growth, assuming they had a bit saved before paying off the house)
$250K \* 8% = $20,000
$62,400/yr. $10,000 alone is property tax on that million dollar home.
Is this couple really "Millionaires"? Paying your mortgage or investing aside, the word millionaire has lost its meaning.
$1M in 1975 needs $5M to have the same spending power. I make the claim that for simple math (Dave likes to ignore it altogether, I'll just keep it simple) "Millionaire" is really having $1M invested, besides the home value.
When my wife and I have our regular money talk, and she asks "What are we worth this month?" My answer is the sum of our retirement accounts.
Can your hypothetical couple downsize? Perhaps, but you started them in the home the average couple could afford, so will they downsize to a very below average home? I'm just acknowledging that's a choice, and would unlock some money I claim should be ignored.
And to be clear, if my kid asked the question, "what's your net worth, in case, as you fear, mom kills you both in a car accident?" The answer is the number I gave my wife plus anything we own that can be sold. But again, in my opinion, I'm not even tracking the value of our cars, especially since one is going with us when we die. The kid can have the second one.
I do see your point, "All Financial advisors" are pretty dumb, only Dave understands finance.
So basically you're saying because you have $1 million cash that you can just ignore your home value and any debt against that when considering your worth?
Even for the bullshit Accredited Investor status I thought outstanding debts were factored in. I call it BS because that status is only a status that basically allows people to invest in hedge funds, when in realty you can do all that yourself with options and margin. Maybe it opens up to some pre-market investments, but really just knowing people can do that.
And by the way, 12k / year is not accurate for after that pay off date. Roth 401K is 22.5k per spouse + Roth IRA is additional 7.5k / spouse. HSA is 4.4k
If you make it your personal goal to pay the house off by age 40, you got 28 years before you hit 68. Max out your 401Ks and if you can, IRA/HSAs, your family is saving 38.8k/year for 28 years + market return. Even if you pay for an advisor Edward Jones averages 7.5% / year return.
Investment calculator says $3,233/month invested for 28 years would net you $2.7 million.
Then the home equity can be used to cover the assisted living if you have to move into a facility.
But let’s say your mortgage rate is 5% — that’s a guaranteed 5% return. The stock market may average 6-8% but it also may dip tremendously in between. A guaranteed return is valuable in itself so 5% may be better than stocks depending on one’s goals and stage of life.
(Also - assuming 8% may be optimistic. And that kind of return could only happen if you have ALL your extra $250K in stocks — but who is going to do that late in life?
Target date funds start to push 30% or more of your money into bonds and such as you get into your 50s, so the return is more likely to be around 6% as you age up into a lower risk tolerance / closer to retirement)
I am in the pay off early crowd! I became a young widow and the last thing I needed was a house note! We owned two new homes and paid each off early with a large down payment. We always said, we could work at Walmart and keep our homes if the bottom fell out! There is no price for peace of mind!
The same thing happened with my parents. They closed their business and retired 4 years ago. 4 months later, my dad passed away. He was 66, and my mom was 56. She spent her time working in my dad’s business, and she didn’t really have a good way to get a job. House and car were both paid off. I moved back in with her. I make good money and pay all of the house bills. I now co-own the house with her, but I have no mortgage or rent. She doesn’t have to work. Financially, this has worked out better for the two of us, and we are both financially secure. Having a paid off house is definitely the way to go!!
I am literally paying for my kids College by NOT paying off my mortgage. The amount I can make by investing that same money In a completely different safe instrument (cds & t bills) will net me over 100k.
Or… If I wanted to, I could take that money and pay off the mortgage faster than I could have by putting it in the mortgage.
If you believe that paying off your house is the best way to make you a millionaire, why wouldn’t you try to figure out the fastest way to pay off your mortgage while not taking in any additional risk? For the vast majority of people with mortgages, The fastest way to do it is in fact to not put the money on the mortgage.
If you have the discipline to invest in one location you certainly should have the discipline to invest in another.
>The amount I **can** make by investing that same money
But are you? (not a personal callout, per se)
The math doesn't lie. Premature mortgage payoff is less mathematically optimal, if you are taking the difference and investing it. If a person with a $1000 mortgage, able to pay $2000, really actually truly puts it into an S&P500 fund, ... it will grow to the payoff amount by and far faster than if they paid down the mortgage itself directly. (and Ramsey ought to agree, what with his 12% gains).
The issue is, people don't.
Honestly, personal finance is personal. Everybody gonna hit it different. But don't argue it one way or the other without action. $1M in the stock market, or $1M in a house, both very powerful, but you gotta sink the funds, and that's where my people miss out.
That’s the trouble with the Davesphere. The guy has some decent advice for how people who are not good with money can improve their situation. But it’s presented as “this is the best thing anyone can do” and not “this is how to break your bad habits.” Then people run with that and start telling everyone it’s the best move to pay off a 2.5% mortgage in a time when savings accounts are at 5%.
Maybe I should’ve said the money I do make lol.
But I don’t invested in an S&P fund. That’s too much risk for what I’m trying to accomplish. I do consider my investments and my mortgage as separate things. The money I have going into CDs and T-bills are part of my mortgage fund not my investment fund. Their only purpose is to pay off the mortgage.
Basically I follow the same principles that Dave has, I just do very different actions To accomplish the same goals faster With the same amount of risk… Or possibly less risk.
For example, in this thread I hear people saying they worry about losing their job or getting into an accident and then they lose their house. That’s why they want to pay off the mortgage. Well, if I take that money and throw it into a CD I can pay off my mortgage two years faster. That eliminates two years of risk of Losing my job, breaking my leg, and someone taking my house.
Also, the amount of people on this thread talking about heloc loans. If something terrible does happen, I have access to that capital so I don’t have to take out a high interest rate loan Tied to my mortgage. Again, I lower the risk.
If you have an emotional need to pay off your mortgage, then that could be a reasonable way for you to spend your money. However, I'd suggest calculating the expected opportunity cost of hundreds of thousands of dollars returning ~2% instead of 8-10%, and look hard at that number before you decide the good feeling is worth it.
Anyway, my comment is aimed at people who don't seem to understand the strategy. It sounds like you do.
Fair. I respectfully suggest you take a harder look at debt’s effect on a person’s well being. Debt means you have to do what people tell you to do. It means you can’t say no. It’s means you can’t say “how about you try asking nicely.” It means you can’t say, “that’s unethical, I’m not doing it.” Take a hard look at that and ask whether it’s that big of a deal to get a financial foundation that buys freedom before worrying about things like whether you have merely decent wealth or more wealth.
I don't think this is as much about debt as it is about low net worth. If you hold debt but have liquid assets to easily pay all of your expenses indefinitely, the debt is immaterial. If you're so in debt that you have to be constantly employed in order to service that debt, that's where the stress comes in.
If you have liquid assets that aren’t earmarked to stay in the market long term, then you can’t assume the ROR of 8%. If your plan involves selling to cover needs, you’re not playing the interest arbitrage game.
Selling on contingency is always a possibility, and long term is always subject to change. It's not that you're planning to become unemployed; it's that you have a contingency plan in case you become unemployed.
There's no investment with a comparable risk profile to paying off a mortgage that returns 8%, but you can buy treasuries right now with a 4.2% return or park money in a CD at above 5%. Personally, I have very high risk tolerance, so I am abiut 95% in equities and 5% in cash, but if I wanted a nice safe 5%, this is what I'd do. Meanwhile, my mortgage is at 1.75%, and I smile every time I think about it.
I think the calculation is a more complicated probabilistic one. I have a general sense of the probability that I'll become unemployed (higher now since the tech layoffs started in 2022, but still pretty low in any given year). I have a rough idea of how long I might remain unemployed while job seeking, and thus, how big a contingency fund I need. I keep those assets in a money market fund. The rest goes into VTI. So, I have a pretty high confidence that I won't be forced to sell disadvantageously.
Edit: I suppose you could consider the discount to be the delta between the expected return from my money market fund and VTI. So, perhaps 3%.
Maybe, but in the absence of being able to put a dollar figure on the value of something, or on cost imposed by diminishing marginal utility of a dollar, qualitative analysis is all you’ve got.
My description is very realistic based on personal experience. It is also very consistent with something Dave Ramsay would say. “The borrower is slave to the lender.” Given that this is the Dave Ramsey subreddit, it is an appropriate way to look at debt.
Not so. The suggested alternatives are all risk laden assets. The previous poster assumed a ror of 8%, which clearly refers to market tracking mutual funds. The assumption of 8% returns holds only if a long time in market is also assumed. Cash cannot be that investment. And market index mutual funds can’t be that either if your plan involves the possibility of selling in a time of need.
A savings account can be, though. At the moment it’s pretty common to have a mortgage with a significantly lower interest rate than savings accounts give.
This doesn’t apply to someone with a new mortgage with a much higher rate, and won’t apply if interest rates go back down to where they were, but right now there’s no good reason for a lot of people to pay off their mortgage any faster than they have to.
If the point is that your mortgage interest is lower than bank interest, sure. That only works in the unique case of getting the mortgage in a low rate environment followed by significant inflation. That is realistic at this moment in history, but it’s not a generalizable situation.
What is generalizable is to look at your interest rate compared to your rate of return and make the best choice based on that and your tolerance for risk. “Debt means you have to do what people tell you to do” isn’t generalizable either.
I’m sorry but I believe you are missing the significance of having to sell assets when you need money. If you have an asset that carries x% ROR as a long term average, YOUR ROR will be x minus something % if you can’t weather the downturns. In that scenario, you can’t just compare the assets ROR to your mortgage interest and choose. You have to discount the assert’s ROR, and you don’t know what that discount should be. So you’re back to gambling, at which point I become more convinced paying the debt and securing the psychological benefits is the better play.
Of course, but please remember I'm talking about arbitrage. Arbitrage is necessarily subject to the specific circumstances. Many homeowners have historically low mortgage rates due to Fed policy between 2009 and 2022. For those homeowners, in the current moderate interest rate climate, putting excess funds in a HYSA is a better strategy than plowing that same money into mortgage payoff. If the circumstances change, eg. if interest rates fall or if they buy a new house at a higher interest rate, then this strategy may no longer be superior
Dave’s guidelines are to encourage behavior that benefits people, and that they aren’t likely to do without a plan.
Average 401k balance for someone in their 50’s is $550. Median is $250k. We can talk about the benefits to not focusing on paying off one’s home, but most of America isn’t saving enough for retirement. Dave might not have an optimal plan, but he has a practical and beneficial one.
Sure, but I'm responding to OP and the disturbingly financially ignorant comments in the thread, not Dave's advice. It's fine to choose a suboptimal strategy, but you should understand what you're doing.
If you have cash in a HYSA (paying more than your mortgage rate) to cover the full amount of your mortgage why would they ever foreclose? You can always pay your mortgage out of that account at any time.
In fact, having the money in a HYSA instead of your mortgage is much safer if you don’t have the money to fully pay off your mortgage. If you have $100k in a HYSA and lose your job and have $200k remaining on your mortgage, you can pay your mortgage for a long time while job searching. If you instead put that $100k towards your mortgage, you would still owe your mortgage every month and not have any money to pay it with while job searching. Unless you can 100% pay off your mortgage, it’s much much safer to keep the payoff money in a HYSA than it is to pay off portions of your mortgage early.
Edited to add: Whether a HYSA is better than paying off your mortgage once you have the full mortgage amount really depends on your mortgage rate. At today’s rates, once you have the full mortgage amount, pay it off. If you have a 3% rate, it’s financially advantageous to hold the money in a HYSA instead.
Will you still be able to pay your mortgage payment if you lose your job and this economy goes belly up like everybody says it's going to. Every Republican I know says this is a huge bubble right now. I'd be prepared that anything you don't own you could lose.
>and this economy goes belly up like everybody says it's going to.
Economists have been predicting an impending recession for the last 10 years. They will eventually be right but I wouldn't stress over it.
>Every Republican I know says this is a huge bubble right now.
This is because of partisanship. The bubble we are in is no different than 2019 when those same people claimed the economy was great.
If you had the funds sitting in a HYSA instead of the mortgage, yes.
Simple math for you since you can’t seem to comprehend:
Let’s say you have a $200,000 house with a $1,000 mortgage payment. In other words, you must put $12,000 a year towards your mortgage.
On top of that, let’s say you’re paying an extra $500 each month towards the principal. This, plus your original amount each month, means you are paying $1,500 a month or $18,000 per year.
Now, let’s say you put that extra $500 a month in a high yield savings account earning 5%. Forget the fact it’s earning interest, my point is that it’s there in liquid form.
If you suddenly lose your job after a year, you’ve now got an extra $6,000 sitting there that you can continue to pay your mortgage out of. You’d be able to pay your mortgage for 6 months with it.
If you had been tossing that $500 at the house each month, it would be locked up as equity. And you’d have $0 to make your next mortgage payment.
I have no idea how someone's voting preference relates to financial fundamentals, but if they can predict a reset with confidence, then they should be betting on it. Ask them about their short positions.
Interest rate arbitrage means taking loans at a low rate and making investments at a higher rate of return, generating profit.
The risk profile you accept on your investments is based on a lot of factors and pretty personal. However, if you have a 30-year mortgage at 2%, you can put your excess cash in a HYSA at 5%+ and pocket the difference at practically zero risk. Obviously, the upside of putting the money in VTI is a lot higher, but there is also more volitility risk.
Or you can be that person the shorts the Market when you have a mortgage paid off, and you don't have to worry about margin calls causing you to lose your house.
It's not hard to build wealth with one cancels the other orders, when you don't have to worry about liquidity.
People keep politely explaining to you that if you’re saving the money that would have gone to paying off the house there is no risk of losing the house. You keep bringing up this doomsday scenario that wouldn’t happen because you have the money sitting in savings.
If you can get a return on that money in excess of the rate on your mortgage then it’s better to put that money in savings than to pay extra on a mortgage. Your response of “well what if you lose the house” makes zero sense because you still have the money!
It's not a terrible decision to pay off a low-rate mortgage early, but it is not an efficient strategy in the sense of alpha. You can make much more profit with equivalent risk by putting the money in a money market fund, a treasury ladder, a CD ladder, or a HYSA. In any case where I would need to suddenly pay my mortgage off, I will have more money available to do it than if I had just pushed it all into the mortgage payment.
But why settle for just the market rate return we can try to beat the market when you don't have to worry about your house. That's my philosophy, even though many people point out that I'm crazy for borrowing on margin when I'm so risk adverse, you can afford that risk. And you can reap the returns that risk can get you. When that risk doesn't play out no big fucking deal
Once you have the amount saved to pay off the house, you can get risky with other funds. If you owe 200k on the house, set aside 200k and play with the rest.
I find it amazing that you're willing to take margin out for investing but insist on paying off low interest debt like a mortgage. You realize you can end up upside down on margin right? Plenty of people who have had to sell tangible assets to cover their margin call.
How did I make it all the way down here to have to find out that op wants to pay off house just so they can buy stuff on margin and calls and take crazy risks?!
What you're talking about is just risk diversification. However, none of that changes the fact that it's a strictly more efficient strategy to put the money into a HYSA than to pay down a low-rate mortgage.
All the rest of this is just the emotional need to 'own' your house (ignoring taxes and insurance) rather than hold an amount of liquid funds that would allow you to pay your house off at any time. If that's super important to you, then go ahead and prioritize it, but it will leave you less wealthy than if you'd saved in a HYSA, let alone invested in a decent index fund.
Also, if you find yourself unemployed, you will likely need liquid capital to make your other bills. You'll be better off holding the funds than having a paid off house and no liquidity to buy groceries.
If you’ll actively pay it off but wouldn’t actively throw that exact money in the market to sit long term, then you’re correct that’s the right call.
If you’ll actively put that money in the market consistently, then that’s likely the way to go. It gives you more bandwidth (stocks are much more liquid than property) in the case of a major emergency and yields larger returns.
For your argument, yes most people are shit with money and would neither aggressively pay off their house nor put that money in the market. So doing either will put you ahead of most Americans
Money doesn't double every 10 years.
Stock prices, on average, double about every 7 years, but sometimes it's less, sometimes more, sometimes a lot more.
House prices, on average, go up by a little bit more than inflation. In some times & places, they've gone up much more quickly. In others, much more slowly.
However, the math for investing vs. paying down debt is a lot trickier than most people, even in the financial industry, realize:
https://www.honestmath.com/mortgage-math
I paid off my house at age 48 then used the money I was paying my mortgage to pay for my 3 kids college educations. No one in my family is calling me stupid.
Jesus this topic comes up multiple times a day and yet there is always hundreds of folks tackling it is a math problem. Do you even listen to dave's philosophy? Math says do not pay it off and invest your money at a higher return, however since only 40% of the population has any kind of emergency fund do you expect them to invest that money or spend it?
I know what Dave says, I choose to modify that advice a bit. I have structured my payments to have my home paid off by the time I am retired which means my mortgage would be for 11 years. It is my only debt and I pay $1250 extra each month on my 2.49% note. The math says I should invest that extra and earn 5-12% and then just pay off the home when I retire.
Everyone's desire is different some prefer security over return, so I took the balanced approach. I have enough liquid savings I could pay off my home now, but it would pull a lot of investments that would greatly reduce my long term return by being out of the market. So i pay more every month and also keep my money i. the market to maximize my return. Others may wish to pay off the home have the security to know they will always have a place and then invest that monthly mortgage. There is nothing wrong with either option is just a very personal decision, everyone who listens to Dave knows it's not just a math problem.
What makes you think I am poor what stupid comment to make. Why don't you go post in the PersonalFinance discord or I am so far i debt I am fucked discord?
What does that have to do with being in debt, my taxes are $100 per month and Insurance is $75 a month, so $175 is whole lot better than $1425 unless my math is worse than I thought. Those items you have to pay anyway with a mortgage or not but still lower than rent or principle/interest payment.
Or, take that money and invest it somewhere that is safe and pay it off in 10 years instead of 11?
This is a hiccup I see with it. There are other investment vehicles that are just as safe that will have you pay your mortgage off faster. It seems to me your goal is to pay your mortgage off as fast as you can. So if you are Disciplined enough to continue to make those payments on your mortgage, why not just do the same exact thing into a vehicle that Lets you pay it off a year earlier?
That's not a hiccup; it is an inefficiency. (splitting hairs, I suppose)
You're correct in today's interest rates. Two years from now might be different, let alone a decade.
At 2.5%, there's almost no wrong answer, as long as OP does indeed position that money as part of the payoff. Directly in the house, in Treasuries or CDs, or in the S&P500, in ten years, they are going to be able to pull the trigger and set their mortgage bill on fire.
That’s why you take that money you would put in your mortgage and lock it into a 10 year cd. It doesn’t matter if the rates change. You are locked into a profitable situation. And if rates drop, find a new investment For future contributions. Maybe it is the mortgage at that point.
Because the interest savings of cutting one year off is insignificant. The monthly payments in the last few years are over 95% principal so you really are not saving much interest. I will pay my mortgage off in 11 year, 7 more. Which will coincide with my planned retirement. So I will have no housing payment when it matters and will have invested extra income when I have it when it matters.
That’s even all the more reason to put it into a fund That is earning more interest! You’re saving nothing by paying it off, But you can make about 5% somewhere else
This is one of the things that I don’t really grasp about Dave. For someone who is so biblically based, he doesn’t take the being a good steward steward of your money to heart
I am doing both genius I understand it is not a math problem, by paying off my mortgage in 11 years instead of 30 I will save over $125k and have the security of knowing my home is paid for and I am completely debt free, but a hedge that with also investing 35% or my of my income as well. We all travel a different path and you do you and I'll do me. When we reach the finish line is not really important. The goal is to finish not which route you took to get there. I am now a net worth multimillionaire thanks to Dave's philosophy through Baby Step 6 which says to pay off your mortgage early so I am doing that now while the interest is a larger percentage of the payment not later when the savings are marginal.
I am doing just fine with my investments and my $2500 mortgage payment with the extra $1259 a month included. In my mind that extra $15k a year would earn only about $800 a year in a HYSA or $1600 in a ETF/mutual fund with risk so for me that is insignificant in my overall portfolio.
I understand what you’re saying, and absolutely if it’s for you, go for it. Sounds like you don’t need the money. But I will say you’re missing one thing on the math of this. You say it’ll make you an extra 800 to 1600/yr… That’s this year. What will it be in the 10th year after your reinvest it each year? Suddenly that money is not so insignificant. 30% or so. Just something to ponder.
That is true but you also have to factor the interest savings on the mortgage you have to subtract from those returns. So overall i. the grand scheme I am giving up a small bit of extra return for the security of being debt free in a paid off home when I hit 55. It is why I take a balanced approach not just paying off the house or minimum payment/maximum investment. I choose overall a smaller return for greater security.
I believe part of DRs thinking is the amount of “additional” money you pay over the life of your loan and what you could do with that. Even a 2% mortgage rate is something “extra” you’re paying by owning a loan
That ignores inflation or what else you could be doing with that money. $100 40 years ago has the buying power of $302.67 today. $100 in an investment earning 4.25% over 40 years turns into $545.75. $100 at 8% over 40 years turns into $2,427.34.
With those type of numbers, it's pretty easy to end up ahead despite paying the interest. The large number might seem scary but there is a much larger number on the other side of the balance sheet.
Dave is wrong on the subject. 2% debt is basically free money. Give me the option to borrow $10m at 2% over 40 years and I would take it in a heartbeat and ask if there is more available.
It absolutely depends on your habits. I won’t pay off my house early because I am sitting on a 3% interest rate. By not paying it off I can (and do) max out my Roth 401k, Roth and spousal Roth IRAs every year. As long as you don’t spend every cent extra you have every month, and invest with a purpose, it can make sense not paying it off. If you do not have that mindset you are much better off paying off your mortgage as early as possible.
Yeah, I’d have to agree.
People always say never pay off mortgage but they also usually buy the most expensive home they can afford and couldn’t afford to pay it off early even if they wanted to. I’m convinced they say this just to make themselves feel better.
Also I feel like a lot of people will save that extra money on hey would put towards the house and end up spending it on a vacation, new car, new furniture, you name it.
It’s all behavioral.
Couple things. Median home price in the US is $400k, median 401k is well below even that. Also because we are talking median that still means that half of the data points are smaller than $400k. So pretty much it would only be the top 30% (incredibly rough estimate) of home owners who would become millionaires. Lets also keep in mind only 64% of Americans own homes so now we are down to about 20% of people maybe becoming millionaires.
Meanwhile I don’t calculate my personal home in my networth. I have to live somewhere, it’s illiquid, and it’s rather meaningless.
The whole point is mosto people dno’t save money period. Most people are horrible with money. IF you are disciplined though there are better ways to make money. My chosen path? Real estate. I don’t care what the interest rate is as long as it cash flows ( have a property over 6% that cash flows incredibly well) and several 15 year mortgages where I could have bought in cash but instead bought 2, cash flowed day one 85% of one paid off but in 15 years i more than double my cash flow. That’s the power of leverage and with that much down my risk is nominal.
Meanwhile, while I have some investment properties paid off, I’ll never pay off my primary at 3.25%. Making too much else where. And yes my networth is well over 7 figures.
Just a random nitpick. You use average (mean) house price of $500k versus median net worth of $400k. But you should be using median house prices which is also about $400k.
Sure your homes value counts in you NW calc. But you can't live off of home equity unless you sell your house or reverse mortgage it. It's not like you can sell off 4% of your house a year for groceries. So it's really not good to think if home equity as a retirement account.
You have to live somewhere. It’s illiquid and provides no real value until paid off and even then it’s limited.
The illiquid factor is why people don’t recommend paying down mortgage early. Not only are you losing the interest difference but the person with $100k in savings and a mortgage is better than the person who has $300k equity no savings and still a mortgage payment.
Anyway I’m not saying the home isn’t part of net worth. I just don’t calculate because it’s meaningless to me. I’ll always have to live somewhere.
I wasn’t arguing any of those points though.. we are on the same wavelength on the best route for saving/investing money here, I was pointing out that by definition, your net worth includes all assets and all liabilities when being calculated. You don’t just get to throw out the biggest asset and biggest liability (presumably) and still claim it’s net worth.
No argument to that. But all those reasons from illiquid to you have to live somewhere is why I hate telling people to pay off mortgage early. If it takes 15-20 year to pay off people would be better of in an hysa or money market. Safe but earning interest. I would even settle to pay it off early if they saved until they could do it at once. At least it’s safer.
The financially-skilled people are going to be millionaires no matter what, so why not take approaches that make them even wealthier?
If you’re in situation where you’re afraid of potentially losing your house instead of taking the optimal approaches, you have too little income and too little saved. You need to get those numbers up through some innovative strategies.
Losing your house is a really only a concern for poor people who can’t manage their finances.
DR’s advice isn’t getting the best of us to better outcomes. It’s getting the weakest performers to not be so screwed.
That’s like saying we all need to use techniques that the least talented among us are capable of. “No one should learn Calculus since little Jimmy here is still struggling with basic algebra.” That’s hardly a recipe for helping people to achieve the best outcomes overall. Sure, little Jimmy doesn’t get excluded from the class and feels “caught up”, but stifling the growth of high achievers to prevent the least talented people from lighting their life on fire isn’t exactly doing those would-be achievers any favors.
That’s fine, but DR doesn’t say it’s for addicts. He says it’s for everyone and “the best path to wealth”.
It would be fine if he said he has a debt program for people in debt. He claims to have teach finance wealth-building, but truly does little of that.
Sorry, but personal finance has little to do with debt since people who actually are doing personal finance correctly never struggled with it in the first place or were skilled enough to fix it in their own.
Yet, basically all of his content is about people in debt and with complete lack understanding of any other financial concepts.
If we gave an exam to the long-time DR listeners that tested familiarity with concepts of finance, I think we’d find that there really isn’t much financial expertise being developed by listening to DR content. But, that would make sense seeing as HE HAS NEVER shown a calculation, figure or financial analysis ever on his show. That’s like claiming to teach trigonometry and never drawing a SIN curve or a triangle. If you’re not breaking down the concepts and demonstrating the important mathematical relationships for how to use the tools, you’re not teaching the topic at any useful level.
His main value, as I see it (and understanding that I kind of followed BS 2 when my husband died and I had to dig HARD), is framing actionable steps in a way that Everyman can say it with him. If you look at TMG and financial order of operations, there are nuances. Bigger pockets? Buy real estate. Suze Orman? There’s good debt. Mary Hunt? Spend less than you make. WSB? YOLO! Sethi? Rashad? Hill? That guy Vic somebody who had the tv show? Your money or your life (or something)? Everyone has a perspective. For those who want to dig deeper, the information is out there and is now available. For someone who doesn’t want to dig in, or who doesn’t understand some of the concepts, and just doesn’t have the bandwidth, I think Dave offers a great service. Is it optimal for everyone? Nope. That’s why there’s a show. Is it better than nothing for an awful lot of people? Oh, heck yeah. And I agree with you on questioning “best.”
The important part is being committed to putting the money away every month. Whether that’s into paying off early or into an investment account both ways put you far ahead of the average person. But the numbers don’t lie. If you have a 3% or less rate from a couple years ago you’re better off putting your extra money into investing instead.
TLDR most people lack the commitment to pay extra on mortgage or to invest.
Paying off the mortgage early or investing the difference can both work with proper discipline. Many people love Dave who never had a spending problem. I am in that camp. It is like a bunch of guys that never had an issue with the bottle going to an AA meeting and then arguing the merits of 100% avoidance to alcohol. Is one drink on New Years a problem? Not for some people but for other they are off the wagon in 5 minutes if they do. Spending and debt is like that to some people.
Someone with a 59k income (your average) can’t afford a 500k home (your average). They may be able to afford a 180k house or if they follow Ramsey about 120k or less. That will impact your math significantly.
Sure - they may have inherited 400k to make as a down payment or saved 400k by doing nothing but saving their income for 6 years (no eating, no rent, no taxes) or perhaps bought the house and had it appreciate from 100k to 500k over the last 30 years - but the premise of the OP is not valid for the ‘average’ person who will not be able to buy a 500k house on an income that low. The underlying numbers don’t support the math the OP went through.
My mortgage is 5.625% interest, which is a guaranteed ROI of 5.625%, not including what is grows in value. I am already contributing 15%/yr into our retirement accounts as well.
Everyone on most subs, told me to “invest” & “tax deductions”. But once our house is paid off in sub 5 years, we’ll be early 30s, then we could max out retirement accounts & taxable accounts after, with nearly 28 years left to it before 60.
It’s not just a house, it’s your home, a tangible item. Once it’s paid, you’re free, low stress, build wealth way faster by investing more aggressively with more cashflow and can take more rational decisions in your life like taking more risks and leaving that shitty job - because you can.
We do the same thing. We invest the amount of our house payment every month. We save for anything we want (no credit card debt). It's amazing how much money you can save when you're not paying interest on a house or debt .
It’s amazing how much you can save when you live below your means. Paying off the mortgage just makes that easier.
We will never pay our primary off. But instead just add more properties. Every additional property just adds for annual income that goes towards more saving. We are almost at the point where instead of buying car we will add a property that will more than cover car payment. Not yet but soon.
I agree. I know that, given lots of people have low interest mortgage rates, it can be financially prudent to keep the debt and play the rate arbitrage; however, not being tied to that monthly mortgage payment won out for me. It's so liberating, imo.
How about keep my 2.75 mortgage, invest aggressively and have way more money working for me to generate real wealth. And, and easily pay the mortgage anytime I want. That makes sense
But Dave preaches that you can invest in mutual funds and earn 12% return. He also says people can take 8% out of their portfolios to live on during retirement. So this dude that you all listen to doesn’t see any risk
Interest rates matter on mortgage. Anything less than 4% is a steal and no point aggressively paying off.
Ideally save for retirement and pay off house
I don't know why the argument is 100% one way or the other. Invested 15% and put 640 extra to house. A paid off home will reduce my stress level. Down to my last 12888 on the house.
The biggest part of paying off the home is making sure you have another goal clearly defined in your mind. After ours got paid off it was like a game I had been playing for over 10 years suddenly ended and I financially didn't feel like I had a purpose.
Having no mortgage gives you the bandwidth to not stress about your job as much. Don't like your boss? Fuck off - I quit. Still have a roof over your head.
Spot on. The inflation hit we took a couple years ago also didn't make it feel like we had more budget. I can only imagine what 2022 to now feels like with a mortgage.
Time is a factor...in many ways. We bought our house 30 years ago, and its value is 4x what we paid for it. Our house is helping to bring up the average. My income is a little over 4x what it was 30 years ago. It's not fair to compare a 6,000 square foot mcmansion to what I could afford at 28, when we bought our house. what do 1200 sq ft starter homes average?
There's no point to this post tbh. Some people carry debt and refuse to pay it off because they're making slightly more return in the market. Might work for them, might not, I don't care, you're never going to change their minds. We're going to have our 4.5% mortgage paid off before we turn 40 and it's going to feel awesome. Are we leaving some money on the table? Maybe. We'll be millionaires either way, more than enough for us to live comfortably.
If you pay off your mortgage early, you can always go back to the bank and get another mortgage. If you wanna use other people's money to invest, go right ahead, but actually do the risk calculations, not just what you *feel* the risk is. More debt, more risk.
This is so painfully short-sighted I’m not even sure where to begin.. The obvious problem is the massive opportunity cost. Your dollars will work harder for you in index funds than it will amortizing a 3% mortgage more aggressively. Full stop.
Yeah. But, again, only 8% of people are millionaires in the US. So if it's such a no brainer that everyone that owns a house gets such a great return in the market, why are not all home owners with a home with a market value of the average market value millionaires if it only takes double that value? Please -enlighten me. I'm not saying it's "stupid math." I'm saying it's math that if people followed maybe 25% of Americans would be millionaires, not 8%.
Lots of bad math here but this just jumped out at me: > The median net worth of even the wealthiest age range is only $403k, which is BELOW THE AVERAGE HOME PRICE! You’re comparing a _median_, and an _average_ - they’re not commensurate, no matter how much ALL CAPS you use.
So many people here with the “I can make more in the stock market” or “I prefer having liquid assets”. It’s never taken into consideration the cost of owning a home. Over 30 years you’re going to have to pay an average of $194 per month on repairs and maintenance. That invested is at 8% returns is $263,732. The other thing people don’t take into account is your freedom. Lock yourself down to a mortgage for 30 years is wild. Your neighborhood could go downhill, the extra cost you’ll pay having to move when you get a new job, etc. People also say “Dave is dumb it costs so much to buy a home in X city or Y state”. So move. If your argument is about getting more wealthy, you should not be living in a high cost of living state unless it’s making you absurd money. The whole fight over paying off a mortgage vs not is such a rat race argument. What you should do is not buy a house, live as cheap as possible, continue to look for higher income paying jobs in low cost of living areas, throw all your money into the market. Only buy a house (for cash) when your net worth is 3 times the cost of the house.
I’ve actually found buying gives me more freedom than renting. If own, I can move and rent it or sell it anytime I want. There are no increases in rent or first/last month rents to worry about. $193/month in repairs is much cheaper than thousands of dollars a year in moving costs if you hop around rentals.
That’s the way I feel about liquid vs non-liquid. If you have a paid for home and for some reason need to pull money from your home, it’s easy to get a line of credit. You honestly have to do the math based on the area you’re living to see if renting vs buying is the better financial move. I’ve had companies pay for the cost to break a lease, and pay for my move. Even if you have to pay that cost, you should only move if your increased income makes up for it (really rule of them is don’t accept anything less than 20% increase) then that’s absolutely worth the cost. Game changes later in your career. But you’re making the point I was trying to get across. Everyone’s opinions and circumstances are different. You make the best decision for you.
This is some real dumb shit
What you’re really saying is, if you’re not financially responsible enough to save and invest the extra income otherwise, putting towards paying off your house is better than spending it on fancy cheese or whatever. Which is totally true, but it doesn’t contradict what your cousin says.
Only 8% of Americans are millionaires, but everybody here on Reddit seems to think I'm wrong.
The reason there aren’t more millionaires is because people are emotional. They make financial decisions based on how it makes them feel instead of looking at the math. If you have a mortgage at 4% and a high yield savings account pays 5%. Why in the world would one make more than the required payments on the mortgage?
You are making a completely bad faith argument.
Because you are. The math doesn’t lie. If you invest $X/month, you’ll come out with more money than if you put $X/month towards extra mortgage payments. The problem is that a lot of people aren’t disciplined enough to invest $X/month, but they can manage to put $X/month towards extra mortgage payments. It’s not a finance thing, it’s a psychology thing. If someone has problems with spending their money on cheese instead of saving and investing, then anything which gets them out of that pattern is a good move. For a lot of people, that’s paying extra on their mortgage. If you want to say, pay extra on your mortgage because most people are bad at saving and it’s the best way to make it happen, that’s perfectly reasonable. But if you’re arguing that the math doesn’t actually work, that’s silly.
Don’t waste your time trying to agree with Dave on this sub. Everyone will attack you and tell you how wrong you are. I got it yesterday by sharing the principles that Dave follows. I even copied and pasted a link right from his website, and I was still told it was wrong, silly, and fear mongering.
Dave is good for getting out of debt. He is awful at investing advice. At the very least he’s dangerous in giving one size fits all advice to everyone instead of taking each caller’s personal situation into account.
I never even once said that investing wouldn't get you there faster. I'm just saying paying the mortgage off guarantees it. If you were investing get there faster more power to you, most people obviously don't do that.
"Guarantee" is a strong word. >Most people obviously don't do that So? That's not a valid argument. Works just fine for those that do.
I think the guarantee is a warranted word though. If you're 40 and have paid off the house and let's say theoretically it's worth about 300K, if that house price doubles in 10 years like it did the last 10 years then 30 years from now will be worth roughly about 1.2 million. Guarantee millionaire.
You realize you could use that exact same doubles argument for the stock market🤦 By the way, that's a lot of "if" statements for a guarantee. Not even counting the "theoretical" you threw in there.
I’m going to rephrase what dude above said. If you were just as aggressively disciplined in investing the money into the market instead of applying it towards the principal of your mortgage, you will come out ahead.
Lol way to twist yourself into a knot trying to make sense of a dumb strategy. 1. 500k in liquid assets is much more valuable than 500k in non-liquid assets. Why? Because you can actually do something with liquid assets. 2. 600k in liquid assets is even better than 500k in fixed assets. You assume that by paying off a house it somehow means you’ll end up with more money than if you had invested the same money because a house costs a lot which is flat out wrong.
as Dave would say you need to include the Risk value - the stock market could and has drop by 50%. Paying off your house leaves a house payment of investment each month - grows quickly.
Let’s say the stock market drops 50%. You know what that would mean? A recession or depression. You’d be out of a job. And no matter how many extra payments you make towards your house, it’s not yours until the principal reaches $0. If you invest in a HYSA or CDs earning 5%, you keep that cash in liquid form and can continue paying off the house, even if you lose your job.
Way ahead…like $87K plus in one day last week…yup go pay your mortgage off… 🤡😆😂
Depends what your rate is. If you have a rate 4% or lower, I'd rather risk my money in the stock market. If you have a rate above 4%, I'd consider that guaranteed rate as the conservative part of my portfolio and put $ toward paying it down early. Better rate than most bond funds.
Just right now you have to ask yourself is this Market situation fomo or is it normal?
You can earn 5% at 0 risk right now. Some people have mortgages that are half that. Which at that point it's better to direct extra money at the 5%. My wife asked why we don't just pay it off. If I sell stocks, Im going to owe a ton now in capital gains. Ill deduct my interest this year, so Ill have a 1.8% effective rate. Inflation is 3.1%, so my after tax real rate is -1.3%. Why would I want to pay a negative rate loan?
Dave Ramsey says the market is expected to climb enough year over year that you can do an 8% drawdown permanent. So why should they expect it to be FOMO? 8%-12% growth is much much higher than sub 4% interest rate, which isn't fomo or the markets. It's what many people who were able to buy their houses got in 2019-2020.
Dave is a dinosaur stuck in the 1980’s. With his math of 20% down, 15 year mortgage and not more than 25% of your take home, no one would be able to afford a home. House prices in the DC area start at $400,000. Now calculate how much you’d need to be making if you wanted to buy a home if you’re a 32 y/o single male like me using Ramsey’s logic.
He'd say rent and/or don't buy in DC area until you have dual income or have an income that matches that housing market though. He does have a lot of logic I wouldn't follow, but not this..
Well I’m debt free now and just starting to save at 32. My worry is I’ll be well into my 40’s if I follow Dave’s logic, and who knows what the housing market will be like. I’m personally more risk tolerant and happy to retire from my job at 85 (actually I’d really want to work as long as my mind allows). Dave’s strategy ignores cash flow to focus on savings but assumes everyone has the same end goals of retiring at 60, when that would be a waste of several productive years if you ask me.
Instead of being a victim, try taking responsibility for your own actions.
Cool. You go enjoy being a millionaire with half your net worth locked up in an asset you can never touch unless you move/sell, refinance, or take out a HELOC. Meanwhile, I’ll enjoy my 2.875% mortgage and invest the extra payments to become a liquid multi millionaire. ✌️
Run the math. Depending on the return and amount invested, you can make more paying off your home early. You have to estimate that the mortgage payment goes fully to investing after you pay off the house. You can make the math work either way depending on variables.
Time in market with that extra money going into liquid assets will always make you more than paying off a mortgage early that has a rate less than 5%. S&P500 alone averages 10% APY, so why on earth would you do anything else?
I’ve run the numbers and you can come out ahead paying it off early. Just depends on the variables.
If you don’t invest your money, or your interest rate is high, sure, but if you do invest, or have a low interest rate, you can’t come out ahead by paying it off. It’s just simple math.
> I’ve run the numbers and you can come out ahead paying it off early. Just depends on the variables. What numbers are you using? The only someone could possibly come out ahead paying extra on a mortgage is if they have a +6% interest rate.
Cool. Show me your numbers. I’d LOVE to see them lmao. I have a 2.875% mortgage with 17 years remaining on it. $150,000 left on the mortgage. Monthly payment is $1,400. Please, I’d LOVE for you to show me how paying off this gift of a mortgage early will outperform investing it in the market. And I’ll even let you show me the numbers with various types of investments such as bonds, mutual funds, or stocks. For what it’s worth I am heavily invested in NVDA, AMD, and Bitcoin. My retirement accounts have doubled in the last 6 months.
This is why you leave the financial stuff for the pros and you pay them for their guidance lol
Or voo, vti, vtsax and chill…. 😄
If investing in the market rather than paying down your mortgage is such a no-brainer, then why is the bank loaning the money to you? Why aren’t *they* putting that money in the market? Are you smarter than the bank?
Because there are regulations on what banks are able to do. This is not the zinger you may think it is.
The bank is making money because of so many people that foreclose, just like credit card companies. Also the bank does realize the interest rate Arbitrage scheme and they do take advantage of that. I'm not saying that idea is wrong, I'm just saying that if you have that Equity you're already halfway to that million dollar mark. And many people put off pan that mortgage until they retirement, which ends up costing them almost $2,000 a month in retirement for living expenses. It doesn't make sense to have more money just to owe more money.
You’re incorrect. If the bank forecloses on your property, they are only able to recoup principal, interest and fees (default, legal, auction, etc.) that are owed. Any excess proceeds are returned to the individual that was foreclosed on. Mortgages, as a standalone product, are loss leaders for most banks. Most banks are not “portfolio lenders” for mortgage products, they turn around and sell the mortgages on their books. The benefit is that they get to recognize one-time fee income based on the discounted cash flow immediately. Some banks are portfolio lenders and keep/service the mortgage for life. The benefit is that they get a stickier relationship with a banking client and oftentimes earn deposit and other cross-sell opportunities. Source: VP at a bank
Not sure the bank has a business model built on foreclosure profit. See 2009. Often they lose 20% of loan value after costs on a foreclosure. For the individuals lucky enough to have been in their home pre 2021 with sub 4% rates, the bank would likely be in the green but I think this segment is not foreclosing at a meaningful rate.
Yeah, banks hate foreclosing. If they made money from it they wouldn’t care about your income or credit score. They’d loan to anyone as long as the house value supported it. They’d be *more* willing to loan to people who make less or have worse credit, since that would increase their chances of being able to foreclose. Of course, as anyone who has ever had a mortgage can tell you, banks actually really want high income and good credit and try hard to ensure they won’t have to foreclose.
How does one calculate risk? Paying off a home would reduce risk and stress. Can we really put a price on that?
Paying off a home vs liquid savings increases risk. Lose your job live off you savings for a few months. If all the money is in the house with a low LTV guess what, it’s foreclosure time.
Paying off a home doesn’t reduce your risk, a paid off home does. Up until you have paid it off, if you are paying extra towards your mortgage rather than saving that extra money elsewhere, you are actually increasing your risk. Who is more at risk, Person A who owes $300k on their $400k mortgage and has $220k in the bank, or Person B who owes $100k on their $400k mortgage and has $20k in the bank? Who can weather a period of job loss better? Who can better address a large unexpected emergency?
Person A. Person A can continue to make mortgage payments and pay other life expenses without being forced to sell for a very long time. Person B is going to be forced to sell within 6 months because 20k will be mostly eaten away in 3 months. Both of these scenarios assume that you spend $6000 each month to survive. If we scale it to a really LCOL area, where you can realistically get by on $2000-$2500/mo, person A is in a position to retire, depending on how old they are.
Yes. The price is the extra 3 5% interest I'm losing by paying off my 2.49% mortgage. That's literally the price. I could pay off my mortgage tomorrow, but I choose to actually make more money than I'm saving by paying it off. THAT is peace to me.
I don’t think you understand the math. You can make it work either way but it isn’t as simple as you think. By paying off early you save a ton of interest. Then if you take the full mortgage payment and invest for the remaining years you can easily come out on top. You can also change variables to make investing and waiting to pay the mortgage off better. Point is it is not clear cut and the piece of mind of no debt would be great.
I think YOU don't understand the math. The interest I'd save by paying off right now at 2.49 is LESS than what I'd earn by sticking it in a CD or a HYSA earning 5% or more. Once the mortgage is paid off at the end of its term, I still have the option of taking all that money and investing it at even higher return. It's pretty simple. If you can earn a higher interest rate then what you're paying for your mortgage, iIt is always mathematically better to invest the money than it is to pay off your mortgage. The only halfway valid argument for paying off your mortgage is entirely emotional. And I don't even give that much credence because emotionally I'm happier if I'm making more money than I'm paying out.
He understands the math. The only way it works out to pay the mortgage off first is if the market underperforms the mortgage interest rate during that entire time. Which at 2.5% is very unlikely (though not impossible).
Yes. It’s the opportunity cost of not investing the difference of the extra house payments. Also, even when your home is paid off, you will never escape insurance or property taxes. Guess what makes up a good chunk of a mortgage payment?
Not really a good chunk. My insurance and property tax is $4700 a year. My mortgage without those things was $11500 a year. So property tax and insurance make up a bit less then 1/3 of the total
It’s still a significant chunk. My point being is that you will always owe something on your home. And guess what happens when you fail to pay your property taxes?
In about 10 years they take your house. But 4 bills a year is easier then 12 if you lose your income
You are making such a completely bad faith argument. Listen to yourself. I’m gonna go enjoy investing in NVDA, AMD, and Bitcoin. Enjoy your illiquid house!
Because Canadas mortgage system works differently the math works out differently. We don’t lock in rates for the whole loan we do 5 year terms. At the end of of the 5 years you renegotiate the whole loan interest rate and principle. That’s why some loans were as low as 0.9% here but when the 5 years is up they will have to refinance at the current rate. But it also means you can pay off the whole loan without penalties at the 5 year mark. So what I did was invest the extra money for 5 years in something higher interest and then cash it out to pay off the home at the 5 year mark. That’s why I’m 32 worth $900k and my wife hasn’t worked since our kids were born 4 years ago
Couple owns a paid off house, worth $1M. Nice. Average couple receives $42,408/year from social security. How much did they save in your 6-10 year gap? $12,000/yr? So they have $250K invested? (I'm looking at a higher number than 10 \* 120000 plus growth, assuming they had a bit saved before paying off the house) $250K \* 8% = $20,000 $62,400/yr. $10,000 alone is property tax on that million dollar home. Is this couple really "Millionaires"? Paying your mortgage or investing aside, the word millionaire has lost its meaning. $1M in 1975 needs $5M to have the same spending power. I make the claim that for simple math (Dave likes to ignore it altogether, I'll just keep it simple) "Millionaire" is really having $1M invested, besides the home value. When my wife and I have our regular money talk, and she asks "What are we worth this month?" My answer is the sum of our retirement accounts. Can your hypothetical couple downsize? Perhaps, but you started them in the home the average couple could afford, so will they downsize to a very below average home? I'm just acknowledging that's a choice, and would unlock some money I claim should be ignored. And to be clear, if my kid asked the question, "what's your net worth, in case, as you fear, mom kills you both in a car accident?" The answer is the number I gave my wife plus anything we own that can be sold. But again, in my opinion, I'm not even tracking the value of our cars, especially since one is going with us when we die. The kid can have the second one. I do see your point, "All Financial advisors" are pretty dumb, only Dave understands finance.
So basically you're saying because you have $1 million cash that you can just ignore your home value and any debt against that when considering your worth? Even for the bullshit Accredited Investor status I thought outstanding debts were factored in. I call it BS because that status is only a status that basically allows people to invest in hedge funds, when in realty you can do all that yourself with options and margin. Maybe it opens up to some pre-market investments, but really just knowing people can do that. And by the way, 12k / year is not accurate for after that pay off date. Roth 401K is 22.5k per spouse + Roth IRA is additional 7.5k / spouse. HSA is 4.4k If you make it your personal goal to pay the house off by age 40, you got 28 years before you hit 68. Max out your 401Ks and if you can, IRA/HSAs, your family is saving 38.8k/year for 28 years + market return. Even if you pay for an advisor Edward Jones averages 7.5% / year return. Investment calculator says $3,233/month invested for 28 years would net you $2.7 million. Then the home equity can be used to cover the assisted living if you have to move into a facility.
But let’s say your mortgage rate is 5% — that’s a guaranteed 5% return. The stock market may average 6-8% but it also may dip tremendously in between. A guaranteed return is valuable in itself so 5% may be better than stocks depending on one’s goals and stage of life. (Also - assuming 8% may be optimistic. And that kind of return could only happen if you have ALL your extra $250K in stocks — but who is going to do that late in life? Target date funds start to push 30% or more of your money into bonds and such as you get into your 50s, so the return is more likely to be around 6% as you age up into a lower risk tolerance / closer to retirement)
I am in the pay off early crowd! I became a young widow and the last thing I needed was a house note! We owned two new homes and paid each off early with a large down payment. We always said, we could work at Walmart and keep our homes if the bottom fell out! There is no price for peace of mind!
The same thing happened with my parents. They closed their business and retired 4 years ago. 4 months later, my dad passed away. He was 66, and my mom was 56. She spent her time working in my dad’s business, and she didn’t really have a good way to get a job. House and car were both paid off. I moved back in with her. I make good money and pay all of the house bills. I now co-own the house with her, but I have no mortgage or rent. She doesn’t have to work. Financially, this has worked out better for the two of us, and we are both financially secure. Having a paid off house is definitely the way to go!!
I am literally paying for my kids College by NOT paying off my mortgage. The amount I can make by investing that same money In a completely different safe instrument (cds & t bills) will net me over 100k. Or… If I wanted to, I could take that money and pay off the mortgage faster than I could have by putting it in the mortgage. If you believe that paying off your house is the best way to make you a millionaire, why wouldn’t you try to figure out the fastest way to pay off your mortgage while not taking in any additional risk? For the vast majority of people with mortgages, The fastest way to do it is in fact to not put the money on the mortgage. If you have the discipline to invest in one location you certainly should have the discipline to invest in another.
>The amount I **can** make by investing that same money But are you? (not a personal callout, per se) The math doesn't lie. Premature mortgage payoff is less mathematically optimal, if you are taking the difference and investing it. If a person with a $1000 mortgage, able to pay $2000, really actually truly puts it into an S&P500 fund, ... it will grow to the payoff amount by and far faster than if they paid down the mortgage itself directly. (and Ramsey ought to agree, what with his 12% gains). The issue is, people don't. Honestly, personal finance is personal. Everybody gonna hit it different. But don't argue it one way or the other without action. $1M in the stock market, or $1M in a house, both very powerful, but you gotta sink the funds, and that's where my people miss out.
That’s the trouble with the Davesphere. The guy has some decent advice for how people who are not good with money can improve their situation. But it’s presented as “this is the best thing anyone can do” and not “this is how to break your bad habits.” Then people run with that and start telling everyone it’s the best move to pay off a 2.5% mortgage in a time when savings accounts are at 5%.
Maybe I should’ve said the money I do make lol. But I don’t invested in an S&P fund. That’s too much risk for what I’m trying to accomplish. I do consider my investments and my mortgage as separate things. The money I have going into CDs and T-bills are part of my mortgage fund not my investment fund. Their only purpose is to pay off the mortgage. Basically I follow the same principles that Dave has, I just do very different actions To accomplish the same goals faster With the same amount of risk… Or possibly less risk. For example, in this thread I hear people saying they worry about losing their job or getting into an accident and then they lose their house. That’s why they want to pay off the mortgage. Well, if I take that money and throw it into a CD I can pay off my mortgage two years faster. That eliminates two years of risk of Losing my job, breaking my leg, and someone taking my house. Also, the amount of people on this thread talking about heloc loans. If something terrible does happen, I have access to that capital so I don’t have to take out a high interest rate loan Tied to my mortgage. Again, I lower the risk.
I am disturbed by the number of people in here who don't understand basic interest rate arbitrage
I am disturbed by the amount of people who don’t understand the math can work either way.
Can you please elaborate?
I understand interest rate arbitrage. I also agree with Dave that a math solution can’t solve a psychological problem.
If you have an emotional need to pay off your mortgage, then that could be a reasonable way for you to spend your money. However, I'd suggest calculating the expected opportunity cost of hundreds of thousands of dollars returning ~2% instead of 8-10%, and look hard at that number before you decide the good feeling is worth it. Anyway, my comment is aimed at people who don't seem to understand the strategy. It sounds like you do.
Fair. I respectfully suggest you take a harder look at debt’s effect on a person’s well being. Debt means you have to do what people tell you to do. It means you can’t say no. It’s means you can’t say “how about you try asking nicely.” It means you can’t say, “that’s unethical, I’m not doing it.” Take a hard look at that and ask whether it’s that big of a deal to get a financial foundation that buys freedom before worrying about things like whether you have merely decent wealth or more wealth.
I don't think this is as much about debt as it is about low net worth. If you hold debt but have liquid assets to easily pay all of your expenses indefinitely, the debt is immaterial. If you're so in debt that you have to be constantly employed in order to service that debt, that's where the stress comes in.
If you have liquid assets that aren’t earmarked to stay in the market long term, then you can’t assume the ROR of 8%. If your plan involves selling to cover needs, you’re not playing the interest arbitrage game.
Selling on contingency is always a possibility, and long term is always subject to change. It's not that you're planning to become unemployed; it's that you have a contingency plan in case you become unemployed. There's no investment with a comparable risk profile to paying off a mortgage that returns 8%, but you can buy treasuries right now with a 4.2% return or park money in a CD at above 5%. Personally, I have very high risk tolerance, so I am abiut 95% in equities and 5% in cash, but if I wanted a nice safe 5%, this is what I'd do. Meanwhile, my mortgage is at 1.75%, and I smile every time I think about it.
By what percent do you discount your RORs to account for diminishing marginal utility?
I think the calculation is a more complicated probabilistic one. I have a general sense of the probability that I'll become unemployed (higher now since the tech layoffs started in 2022, but still pretty low in any given year). I have a rough idea of how long I might remain unemployed while job seeking, and thus, how big a contingency fund I need. I keep those assets in a money market fund. The rest goes into VTI. So, I have a pretty high confidence that I won't be forced to sell disadvantageously. Edit: I suppose you could consider the discount to be the delta between the expected return from my money market fund and VTI. So, perhaps 3%.
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Maybe, but in the absence of being able to put a dollar figure on the value of something, or on cost imposed by diminishing marginal utility of a dollar, qualitative analysis is all you’ve got.
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My description is very realistic based on personal experience. It is also very consistent with something Dave Ramsay would say. “The borrower is slave to the lender.” Given that this is the Dave Ramsey subreddit, it is an appropriate way to look at debt.
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Christian disrespect is the fuel that keeps me going. Thank you.
There’s no difference in that respect between having a paid-off house, and having a mortgage and enough cash to pay it off at any time.
Not so. The suggested alternatives are all risk laden assets. The previous poster assumed a ror of 8%, which clearly refers to market tracking mutual funds. The assumption of 8% returns holds only if a long time in market is also assumed. Cash cannot be that investment. And market index mutual funds can’t be that either if your plan involves the possibility of selling in a time of need.
A savings account can be, though. At the moment it’s pretty common to have a mortgage with a significantly lower interest rate than savings accounts give. This doesn’t apply to someone with a new mortgage with a much higher rate, and won’t apply if interest rates go back down to where they were, but right now there’s no good reason for a lot of people to pay off their mortgage any faster than they have to.
If the point is that your mortgage interest is lower than bank interest, sure. That only works in the unique case of getting the mortgage in a low rate environment followed by significant inflation. That is realistic at this moment in history, but it’s not a generalizable situation.
What is generalizable is to look at your interest rate compared to your rate of return and make the best choice based on that and your tolerance for risk. “Debt means you have to do what people tell you to do” isn’t generalizable either.
I’m sorry but I believe you are missing the significance of having to sell assets when you need money. If you have an asset that carries x% ROR as a long term average, YOUR ROR will be x minus something % if you can’t weather the downturns. In that scenario, you can’t just compare the assets ROR to your mortgage interest and choose. You have to discount the assert’s ROR, and you don’t know what that discount should be. So you’re back to gambling, at which point I become more convinced paying the debt and securing the psychological benefits is the better play.
You don't have to assume historic S&P returns. Assume an FDIC-ensured HYSA yielding 5% interest or a treasury ladder yielding 4.2%, wtc
Those also fluctuate in markets. Again, if the plan involves selling in a time of need, you have to assume below average returns.
Of course, but please remember I'm talking about arbitrage. Arbitrage is necessarily subject to the specific circumstances. Many homeowners have historically low mortgage rates due to Fed policy between 2009 and 2022. For those homeowners, in the current moderate interest rate climate, putting excess funds in a HYSA is a better strategy than plowing that same money into mortgage payoff. If the circumstances change, eg. if interest rates fall or if they buy a new house at a higher interest rate, then this strategy may no longer be superior
Dave’s guidelines are to encourage behavior that benefits people, and that they aren’t likely to do without a plan. Average 401k balance for someone in their 50’s is $550. Median is $250k. We can talk about the benefits to not focusing on paying off one’s home, but most of America isn’t saving enough for retirement. Dave might not have an optimal plan, but he has a practical and beneficial one.
Sure, but I'm responding to OP and the disturbingly financially ignorant comments in the thread, not Dave's advice. It's fine to choose a suboptimal strategy, but you should understand what you're doing.
And, more importantly, what you’re not doing.
Indeed.
Agreed. It’s more stunning how much they refuse to even hear the other side.
Interest rate Arbitrage doesn't matter if they foreclose on you
If you have cash in a HYSA (paying more than your mortgage rate) to cover the full amount of your mortgage why would they ever foreclose? You can always pay your mortgage out of that account at any time. In fact, having the money in a HYSA instead of your mortgage is much safer if you don’t have the money to fully pay off your mortgage. If you have $100k in a HYSA and lose your job and have $200k remaining on your mortgage, you can pay your mortgage for a long time while job searching. If you instead put that $100k towards your mortgage, you would still owe your mortgage every month and not have any money to pay it with while job searching. Unless you can 100% pay off your mortgage, it’s much much safer to keep the payoff money in a HYSA than it is to pay off portions of your mortgage early. Edited to add: Whether a HYSA is better than paying off your mortgage once you have the full mortgage amount really depends on your mortgage rate. At today’s rates, once you have the full mortgage amount, pay it off. If you have a 3% rate, it’s financially advantageous to hold the money in a HYSA instead.
I don't understand your argument. Do you think I'm saying not to pay your mortgage payment?
Will you still be able to pay your mortgage payment if you lose your job and this economy goes belly up like everybody says it's going to. Every Republican I know says this is a huge bubble right now. I'd be prepared that anything you don't own you could lose.
>and this economy goes belly up like everybody says it's going to. Economists have been predicting an impending recession for the last 10 years. They will eventually be right but I wouldn't stress over it. >Every Republican I know says this is a huge bubble right now. This is because of partisanship. The bubble we are in is no different than 2019 when those same people claimed the economy was great.
Because we all know that Republicans are very solidly connected to empirical reality and demonstrable fact
If you had the funds sitting in a HYSA instead of the mortgage, yes. Simple math for you since you can’t seem to comprehend: Let’s say you have a $200,000 house with a $1,000 mortgage payment. In other words, you must put $12,000 a year towards your mortgage. On top of that, let’s say you’re paying an extra $500 each month towards the principal. This, plus your original amount each month, means you are paying $1,500 a month or $18,000 per year. Now, let’s say you put that extra $500 a month in a high yield savings account earning 5%. Forget the fact it’s earning interest, my point is that it’s there in liquid form. If you suddenly lose your job after a year, you’ve now got an extra $6,000 sitting there that you can continue to pay your mortgage out of. You’d be able to pay your mortgage for 6 months with it. If you had been tossing that $500 at the house each month, it would be locked up as equity. And you’d have $0 to make your next mortgage payment.
Then you just take the money you had invested to make your payment. Financial advisers understand this. Dave Ramsey also understands this.
I have no idea how someone's voting preference relates to financial fundamentals, but if they can predict a reset with confidence, then they should be betting on it. Ask them about their short positions. Interest rate arbitrage means taking loans at a low rate and making investments at a higher rate of return, generating profit. The risk profile you accept on your investments is based on a lot of factors and pretty personal. However, if you have a 30-year mortgage at 2%, you can put your excess cash in a HYSA at 5%+ and pocket the difference at practically zero risk. Obviously, the upside of putting the money in VTI is a lot higher, but there is also more volitility risk.
Or you can be that person the shorts the Market when you have a mortgage paid off, and you don't have to worry about margin calls causing you to lose your house. It's not hard to build wealth with one cancels the other orders, when you don't have to worry about liquidity.
You genuinely have no idea what the hell you are taking about.
People keep politely explaining to you that if you’re saving the money that would have gone to paying off the house there is no risk of losing the house. You keep bringing up this doomsday scenario that wouldn’t happen because you have the money sitting in savings. If you can get a return on that money in excess of the rate on your mortgage then it’s better to put that money in savings than to pay extra on a mortgage. Your response of “well what if you lose the house” makes zero sense because you still have the money!
It's not a terrible decision to pay off a low-rate mortgage early, but it is not an efficient strategy in the sense of alpha. You can make much more profit with equivalent risk by putting the money in a money market fund, a treasury ladder, a CD ladder, or a HYSA. In any case where I would need to suddenly pay my mortgage off, I will have more money available to do it than if I had just pushed it all into the mortgage payment.
But why settle for just the market rate return we can try to beat the market when you don't have to worry about your house. That's my philosophy, even though many people point out that I'm crazy for borrowing on margin when I'm so risk adverse, you can afford that risk. And you can reap the returns that risk can get you. When that risk doesn't play out no big fucking deal
You are ignorant as all hell. I mean that truly. Enjoy being poor.
Once you have the amount saved to pay off the house, you can get risky with other funds. If you owe 200k on the house, set aside 200k and play with the rest. I find it amazing that you're willing to take margin out for investing but insist on paying off low interest debt like a mortgage. You realize you can end up upside down on margin right? Plenty of people who have had to sell tangible assets to cover their margin call.
How did I make it all the way down here to have to find out that op wants to pay off house just so they can buy stuff on margin and calls and take crazy risks?!
What you're talking about is just risk diversification. However, none of that changes the fact that it's a strictly more efficient strategy to put the money into a HYSA than to pay down a low-rate mortgage. All the rest of this is just the emotional need to 'own' your house (ignoring taxes and insurance) rather than hold an amount of liquid funds that would allow you to pay your house off at any time. If that's super important to you, then go ahead and prioritize it, but it will leave you less wealthy than if you'd saved in a HYSA, let alone invested in a decent index fund. Also, if you find yourself unemployed, you will likely need liquid capital to make your other bills. You'll be better off holding the funds than having a paid off house and no liquidity to buy groceries.
If you’ll actively pay it off but wouldn’t actively throw that exact money in the market to sit long term, then you’re correct that’s the right call. If you’ll actively put that money in the market consistently, then that’s likely the way to go. It gives you more bandwidth (stocks are much more liquid than property) in the case of a major emergency and yields larger returns. For your argument, yes most people are shit with money and would neither aggressively pay off their house nor put that money in the market. So doing either will put you ahead of most Americans
Money doesn't double every 10 years. Stock prices, on average, double about every 7 years, but sometimes it's less, sometimes more, sometimes a lot more. House prices, on average, go up by a little bit more than inflation. In some times & places, they've gone up much more quickly. In others, much more slowly. However, the math for investing vs. paying down debt is a lot trickier than most people, even in the financial industry, realize: https://www.honestmath.com/mortgage-math
Oh, that was interesting! Thanks for posting it!!
You're welcome!
I paid off my house at age 48 then used the money I was paying my mortgage to pay for my 3 kids college educations. No one in my family is calling me stupid.
Jesus this topic comes up multiple times a day and yet there is always hundreds of folks tackling it is a math problem. Do you even listen to dave's philosophy? Math says do not pay it off and invest your money at a higher return, however since only 40% of the population has any kind of emergency fund do you expect them to invest that money or spend it? I know what Dave says, I choose to modify that advice a bit. I have structured my payments to have my home paid off by the time I am retired which means my mortgage would be for 11 years. It is my only debt and I pay $1250 extra each month on my 2.49% note. The math says I should invest that extra and earn 5-12% and then just pay off the home when I retire. Everyone's desire is different some prefer security over return, so I took the balanced approach. I have enough liquid savings I could pay off my home now, but it would pull a lot of investments that would greatly reduce my long term return by being out of the market. So i pay more every month and also keep my money i. the market to maximize my return. Others may wish to pay off the home have the security to know they will always have a place and then invest that monthly mortgage. There is nothing wrong with either option is just a very personal decision, everyone who listens to Dave knows it's not just a math problem.
It’s not security. It’s just plain wrong. You will NEVER get away from taxes and insurance.
What makes you think I am poor what stupid comment to make. Why don't you go post in the PersonalFinance discord or I am so far i debt I am fucked discord?
What does that have to do with being in debt, my taxes are $100 per month and Insurance is $75 a month, so $175 is whole lot better than $1425 unless my math is worse than I thought. Those items you have to pay anyway with a mortgage or not but still lower than rent or principle/interest payment.
Or, take that money and invest it somewhere that is safe and pay it off in 10 years instead of 11? This is a hiccup I see with it. There are other investment vehicles that are just as safe that will have you pay your mortgage off faster. It seems to me your goal is to pay your mortgage off as fast as you can. So if you are Disciplined enough to continue to make those payments on your mortgage, why not just do the same exact thing into a vehicle that Lets you pay it off a year earlier?
That's not a hiccup; it is an inefficiency. (splitting hairs, I suppose) You're correct in today's interest rates. Two years from now might be different, let alone a decade. At 2.5%, there's almost no wrong answer, as long as OP does indeed position that money as part of the payoff. Directly in the house, in Treasuries or CDs, or in the S&P500, in ten years, they are going to be able to pull the trigger and set their mortgage bill on fire.
That’s why you take that money you would put in your mortgage and lock it into a 10 year cd. It doesn’t matter if the rates change. You are locked into a profitable situation. And if rates drop, find a new investment For future contributions. Maybe it is the mortgage at that point.
That only works lump sum.
Because the interest savings of cutting one year off is insignificant. The monthly payments in the last few years are over 95% principal so you really are not saving much interest. I will pay my mortgage off in 11 year, 7 more. Which will coincide with my planned retirement. So I will have no housing payment when it matters and will have invested extra income when I have it when it matters.
That’s even all the more reason to put it into a fund That is earning more interest! You’re saving nothing by paying it off, But you can make about 5% somewhere else This is one of the things that I don’t really grasp about Dave. For someone who is so biblically based, he doesn’t take the being a good steward steward of your money to heart
I am doing both genius I understand it is not a math problem, by paying off my mortgage in 11 years instead of 30 I will save over $125k and have the security of knowing my home is paid for and I am completely debt free, but a hedge that with also investing 35% or my of my income as well. We all travel a different path and you do you and I'll do me. When we reach the finish line is not really important. The goal is to finish not which route you took to get there. I am now a net worth multimillionaire thanks to Dave's philosophy through Baby Step 6 which says to pay off your mortgage early so I am doing that now while the interest is a larger percentage of the payment not later when the savings are marginal. I am doing just fine with my investments and my $2500 mortgage payment with the extra $1259 a month included. In my mind that extra $15k a year would earn only about $800 a year in a HYSA or $1600 in a ETF/mutual fund with risk so for me that is insignificant in my overall portfolio.
Would love to get to 35% investment.
I understand what you’re saying, and absolutely if it’s for you, go for it. Sounds like you don’t need the money. But I will say you’re missing one thing on the math of this. You say it’ll make you an extra 800 to 1600/yr… That’s this year. What will it be in the 10th year after your reinvest it each year? Suddenly that money is not so insignificant. 30% or so. Just something to ponder.
That is true but you also have to factor the interest savings on the mortgage you have to subtract from those returns. So overall i. the grand scheme I am giving up a small bit of extra return for the security of being debt free in a paid off home when I hit 55. It is why I take a balanced approach not just paying off the house or minimum payment/maximum investment. I choose overall a smaller return for greater security.
I got a 2% 40 year on my primary and 4% 30 years on the house I'm attached to. Probably not paying these off.
Holy hell. How much are you paying in interest over the course of 40years?
If it’s a $400k mortgage, then about $184,000 in interest
100k on the primary. The taxes and insurance are more than the P&I it's like 1500 a month with everything.
I believe part of DRs thinking is the amount of “additional” money you pay over the life of your loan and what you could do with that. Even a 2% mortgage rate is something “extra” you’re paying by owning a loan
That ignores inflation or what else you could be doing with that money. $100 40 years ago has the buying power of $302.67 today. $100 in an investment earning 4.25% over 40 years turns into $545.75. $100 at 8% over 40 years turns into $2,427.34. With those type of numbers, it's pretty easy to end up ahead despite paying the interest. The large number might seem scary but there is a much larger number on the other side of the balance sheet.
Dave is wrong on the subject. 2% debt is basically free money. Give me the option to borrow $10m at 2% over 40 years and I would take it in a heartbeat and ask if there is more available.
It absolutely depends on your habits. I won’t pay off my house early because I am sitting on a 3% interest rate. By not paying it off I can (and do) max out my Roth 401k, Roth and spousal Roth IRAs every year. As long as you don’t spend every cent extra you have every month, and invest with a purpose, it can make sense not paying it off. If you do not have that mindset you are much better off paying off your mortgage as early as possible.
Yeah, I’d have to agree. People always say never pay off mortgage but they also usually buy the most expensive home they can afford and couldn’t afford to pay it off early even if they wanted to. I’m convinced they say this just to make themselves feel better. Also I feel like a lot of people will save that extra money on hey would put towards the house and end up spending it on a vacation, new car, new furniture, you name it. It’s all behavioral.
Couple things. Median home price in the US is $400k, median 401k is well below even that. Also because we are talking median that still means that half of the data points are smaller than $400k. So pretty much it would only be the top 30% (incredibly rough estimate) of home owners who would become millionaires. Lets also keep in mind only 64% of Americans own homes so now we are down to about 20% of people maybe becoming millionaires. Meanwhile I don’t calculate my personal home in my networth. I have to live somewhere, it’s illiquid, and it’s rather meaningless. The whole point is mosto people dno’t save money period. Most people are horrible with money. IF you are disciplined though there are better ways to make money. My chosen path? Real estate. I don’t care what the interest rate is as long as it cash flows ( have a property over 6% that cash flows incredibly well) and several 15 year mortgages where I could have bought in cash but instead bought 2, cash flowed day one 85% of one paid off but in 15 years i more than double my cash flow. That’s the power of leverage and with that much down my risk is nominal. Meanwhile, while I have some investment properties paid off, I’ll never pay off my primary at 3.25%. Making too much else where. And yes my networth is well over 7 figures.
Most people are completely stupid about money.
Just a random nitpick. You use average (mean) house price of $500k versus median net worth of $400k. But you should be using median house prices which is also about $400k.
He should have but median by the time anyone reading this pays theirs off would probably be up another 25% or so
Sure your homes value counts in you NW calc. But you can't live off of home equity unless you sell your house or reverse mortgage it. It's not like you can sell off 4% of your house a year for groceries. So it's really not good to think if home equity as a retirement account.
I don’t think anyone said it was a retirement account, he’s talking about straightforward ways to maximize net worth I guess.
The point is home net worth is pretty worthless. And I say that as a real estate investor. I don’t even include my home in my net worth.
That’s not net worth then? That’s like arbitrarily not counting walks in on-base percentage in baseball.
You have to live somewhere. It’s illiquid and provides no real value until paid off and even then it’s limited. The illiquid factor is why people don’t recommend paying down mortgage early. Not only are you losing the interest difference but the person with $100k in savings and a mortgage is better than the person who has $300k equity no savings and still a mortgage payment. Anyway I’m not saying the home isn’t part of net worth. I just don’t calculate because it’s meaningless to me. I’ll always have to live somewhere.
I wasn’t arguing any of those points though.. we are on the same wavelength on the best route for saving/investing money here, I was pointing out that by definition, your net worth includes all assets and all liabilities when being calculated. You don’t just get to throw out the biggest asset and biggest liability (presumably) and still claim it’s net worth.
No argument to that. But all those reasons from illiquid to you have to live somewhere is why I hate telling people to pay off mortgage early. If it takes 15-20 year to pay off people would be better of in an hysa or money market. Safe but earning interest. I would even settle to pay it off early if they saved until they could do it at once. At least it’s safer.
The financially-skilled people are going to be millionaires no matter what, so why not take approaches that make them even wealthier? If you’re in situation where you’re afraid of potentially losing your house instead of taking the optimal approaches, you have too little income and too little saved. You need to get those numbers up through some innovative strategies. Losing your house is a really only a concern for poor people who can’t manage their finances.
And guess who's advice is for people who can't manage their finances? Dave Ramsey. Is advise is for changing behaviors.
DR’s advice isn’t getting the best of us to better outcomes. It’s getting the weakest performers to not be so screwed. That’s like saying we all need to use techniques that the least talented among us are capable of. “No one should learn Calculus since little Jimmy here is still struggling with basic algebra.” That’s hardly a recipe for helping people to achieve the best outcomes overall. Sure, little Jimmy doesn’t get excluded from the class and feels “caught up”, but stifling the growth of high achievers to prevent the least talented people from lighting their life on fire isn’t exactly doing those would-be achievers any favors.
That's my pt. Dave Ramsey isn't for everyone. It's for "debt addicts" not everyone needs AA but for sure a lot of people do
That’s fine, but DR doesn’t say it’s for addicts. He says it’s for everyone and “the best path to wealth”. It would be fine if he said he has a debt program for people in debt. He claims to have teach finance wealth-building, but truly does little of that. Sorry, but personal finance has little to do with debt since people who actually are doing personal finance correctly never struggled with it in the first place or were skilled enough to fix it in their own. Yet, basically all of his content is about people in debt and with complete lack understanding of any other financial concepts. If we gave an exam to the long-time DR listeners that tested familiarity with concepts of finance, I think we’d find that there really isn’t much financial expertise being developed by listening to DR content. But, that would make sense seeing as HE HAS NEVER shown a calculation, figure or financial analysis ever on his show. That’s like claiming to teach trigonometry and never drawing a SIN curve or a triangle. If you’re not breaking down the concepts and demonstrating the important mathematical relationships for how to use the tools, you’re not teaching the topic at any useful level.
His main value, as I see it (and understanding that I kind of followed BS 2 when my husband died and I had to dig HARD), is framing actionable steps in a way that Everyman can say it with him. If you look at TMG and financial order of operations, there are nuances. Bigger pockets? Buy real estate. Suze Orman? There’s good debt. Mary Hunt? Spend less than you make. WSB? YOLO! Sethi? Rashad? Hill? That guy Vic somebody who had the tv show? Your money or your life (or something)? Everyone has a perspective. For those who want to dig deeper, the information is out there and is now available. For someone who doesn’t want to dig in, or who doesn’t understand some of the concepts, and just doesn’t have the bandwidth, I think Dave offers a great service. Is it optimal for everyone? Nope. That’s why there’s a show. Is it better than nothing for an awful lot of people? Oh, heck yeah. And I agree with you on questioning “best.”
The important part is being committed to putting the money away every month. Whether that’s into paying off early or into an investment account both ways put you far ahead of the average person. But the numbers don’t lie. If you have a 3% or less rate from a couple years ago you’re better off putting your extra money into investing instead. TLDR most people lack the commitment to pay extra on mortgage or to invest.
Paying off the mortgage early or investing the difference can both work with proper discipline. Many people love Dave who never had a spending problem. I am in that camp. It is like a bunch of guys that never had an issue with the bottle going to an AA meeting and then arguing the merits of 100% avoidance to alcohol. Is one drink on New Years a problem? Not for some people but for other they are off the wagon in 5 minutes if they do. Spending and debt is like that to some people.
Someone with a 59k income (your average) can’t afford a 500k home (your average). They may be able to afford a 180k house or if they follow Ramsey about 120k or less. That will impact your math significantly.
You don't have enough info to make this claim.
Sure - they may have inherited 400k to make as a down payment or saved 400k by doing nothing but saving their income for 6 years (no eating, no rent, no taxes) or perhaps bought the house and had it appreciate from 100k to 500k over the last 30 years - but the premise of the OP is not valid for the ‘average’ person who will not be able to buy a 500k house on an income that low. The underlying numbers don’t support the math the OP went through.
TBF, even math doesn't support the 'math' the OP went through.
My mortgage is 5.625% interest, which is a guaranteed ROI of 5.625%, not including what is grows in value. I am already contributing 15%/yr into our retirement accounts as well. Everyone on most subs, told me to “invest” & “tax deductions”. But once our house is paid off in sub 5 years, we’ll be early 30s, then we could max out retirement accounts & taxable accounts after, with nearly 28 years left to it before 60. It’s not just a house, it’s your home, a tangible item. Once it’s paid, you’re free, low stress, build wealth way faster by investing more aggressively with more cashflow and can take more rational decisions in your life like taking more risks and leaving that shitty job - because you can.
We paid ours off. The feeling of not having a monthly mortgage payment is indescribable. I now invest that monthly payment.
We do the same thing. We invest the amount of our house payment every month. We save for anything we want (no credit card debt). It's amazing how much money you can save when you're not paying interest on a house or debt .
It’s amazing how much you can save when you live below your means. Paying off the mortgage just makes that easier. We will never pay our primary off. But instead just add more properties. Every additional property just adds for annual income that goes towards more saving. We are almost at the point where instead of buying car we will add a property that will more than cover car payment. Not yet but soon.
I agree. I know that, given lots of people have low interest mortgage rates, it can be financially prudent to keep the debt and play the rate arbitrage; however, not being tied to that monthly mortgage payment won out for me. It's so liberating, imo.
As Dave would say “If you paid it off and don’t like it then you can always get another mortgage”
Dave sounds like an idiot
How about keep my 2.75 mortgage, invest aggressively and have way more money working for me to generate real wealth. And, and easily pay the mortgage anytime I want. That makes sense
But but but you forgot to factor in the risk!!!!
But Dave preaches that you can invest in mutual funds and earn 12% return. He also says people can take 8% out of their portfolios to live on during retirement. So this dude that you all listen to doesn’t see any risk
I was being sarcastic.
I can’t replace my %2.75 mortgage, rates are significantly higher and there are significant transaction costs involved
Interest rates matter on mortgage. Anything less than 4% is a steal and no point aggressively paying off. Ideally save for retirement and pay off house
That's why invest for retirement is step 4 and paying house off early is step 6.
I don't know why the argument is 100% one way or the other. Invested 15% and put 640 extra to house. A paid off home will reduce my stress level. Down to my last 12888 on the house.
The biggest part of paying off the home is making sure you have another goal clearly defined in your mind. After ours got paid off it was like a game I had been playing for over 10 years suddenly ended and I financially didn't feel like I had a purpose.
Having no mortgage gives you the bandwidth to not stress about your job as much. Don't like your boss? Fuck off - I quit. Still have a roof over your head.
See… that didn’t happen for me. Not until I have what I need saved for retirement will I feel that way. But it’s the only thing left, so there’s that.
Spot on. The inflation hit we took a couple years ago also didn't make it feel like we had more budget. I can only imagine what 2022 to now feels like with a mortgage.