Comments on: Personal Finance 101 – Paying off your Home Mortgage

By: Making Financial Goals for 2010 — Bija Talks Blog

Making Financial Goals for 2010 — Bija Talks Blog — Wed, 30 Dec 2009 15:53:03 +0000

[...] Personal Finance 101 – Paying off your Home Mortgage [...]

By: Kymberly

Kymberly — Fri, 20 Mar 2009 17:05:48 +0000

Thank you! As Dave Ramsey converts and people who actually enjoy living frugally to allow ourselves to enjoy the fruits of what we DO have AND landlords as well - I couldn't agree more. Obviously I am not unbiased (see: Landlord, I am one, (above) but the idea that you are nothing if you don't have a mortgage in hand is one of the myths that got so many into this mess. There is no shame in renting until you can buy a home. None at all. Kymberly´s last blog post...Now showing ...

By: simplemom

simplemom — Tue, 17 Feb 2009 05:26:06 +0000

True – he recommends investing in mutual funds. Not single stocks, but mutual funds, which are still equities.

Thanks for the good discussion, Rebecca. (By the way, just for the record, we are renters, and are in absolutely no hurry to buy a home.)

By: Rebecca

Rebecca — Tue, 17 Feb 2009 03:28:35 +0000

Absolutely. Risk tolerance is key. People have different risk preferences, so this rule of 'minimize mortgage principal' by definition cannot be a rule. Higher risk simply means a higher variance of potential returns, both good and bad. As an economist, I like to say that "risk" is not a four letter word (not one of those anyway). People that take higher risks earn higher expected (and average) returns over the long run. People that don't make lower average returns. This is a foundational concept of finanial theory. One could take cash and put it in a home safe, which would be the least risky of all. But it would virtually guarantee a negative return over 30 years. The fundamental issue here is that people need to be aware of the risk return trade-off and their investment decisions and choose accordingly. A rule of 'pay down your house as early as possible (or pay 50% down)' cannot apply to everyone. Millionaire momy next door has a bunch of great links to articles which note that houses are really poor investments in the long run. This adds further support to the idea that if you want to build wealth, you need to think beyond the house. One final point, Dave Ramsey himself advocates investing in equities. So he even recognizes the potentials of diversification and long term wealth building strategies. Individuals just need to recognize their own risk tolerances and decide on wealth creation goals. To clarify one point in my earlier post, the 8% return would be 6% after tax (again assuming a 25% tax bracket). That is the right comparison number for the 3.75%. Over 30 years, that interest rate difference of 2.25% would most likely be tremendous in terms of wealth creation. This is one issue which cannot be oversimplified.

By: simplemom

simplemom — Mon, 16 Feb 2009 14:43:40 +0000

I just wonder what the risk is in being debt-free. Seems like there’s no risk there. And even in a low-risk fund in the stock market with a good-standing track record still has some risk.

Thanks for sharing your thoughts, Rebecca!

By: Rebecca

Rebecca — Mon, 16 Feb 2009 14:36:33 +0000

I understand everything Dave is saying right up until the point where he recommends paying off the mortgage early. Then I don't get it. Yes, people should always buy only as much house as they can afford. But is making extra mortgage payments always a good idea? Arguably the US stock market has had its worst short-term performance in a long time. But the DJIA has still averaged a 7.78 percent return over the last 30 years (Feb 1979 to Feb 2009). If you have a 5% interest rate on a 30 year mortgage, then paying down early likely would not beat the long-term returns of equities. I say likely not because certainly there is some risk here. But risk yields return. No risk/ low risk yields lower returns. If you have 30 years, what is the benefit to paying down early? If you pay down early, you save 3.75% in interest (assuming a 25% marginal tax bracket). If you instead take that money and invest in the market, you have a great chance of making a long term return of close to 8%. If the stock market returns just an average of 3.75% over the next 30 years, we are going to have catastrophic political and social problems to deal with, so the worst case scenario here is really a doomsday scenario. Rebecca´s last blog post...Visit to the Park

By: 10 Surprising Side Effects to Money Management | Simple Mom

10 Surprising Side Effects to Money Management | Simple Mom — Fri, 26 Dec 2008 18:02:24 +0000

[...] take awhile, but I don’t doubt we’ll have 6 months of expenses in savings, at least a 20% down payment for a house, and plenty for retirement when the time comes. Knowing that they are possible breeds excitement [...]

By: Don

Don — Sun, 02 Nov 2008 09:28:41 +0000

The problem many people have with Dave Ramsey, isn’t Dave Ramsey! Our modern selves can’t live without cell phones, cable tv, gadgets, games, and weekly dinners out. We are a generations of Gotta Have it NOW!..My parents (in their 70s) had to wait to afford anything, the only “credit” was a bank loan that most folks were afraid of getting into post depression. We are spoiled, overfed, underworked, whiney babies who want everything and want to do little to receive it. Its time to pay the piper and debt is MOST DEFINITLEY NOT normal!

By: Alexis

Alexis — Thu, 14 Aug 2008 22:34:20 +0000

I know I’m finding this post a bit late but I had to comment! I haven’t read any of Dave Ramsey’s books but my husband and I had already decided that we would live debt-free and when we said that we meant w/out a mortgage as well! Everyone thinks we are crazy and says that we will never own our own home but we have never been able to find a scriptural reference to debt being a blessing rather than a curse. So, I strongly feel that if the Lord does desire for us to have a home, he will work it out, if not….well, we will just enjoy renting! He has given us contentment no matter what the circumstance and so I know even if we rented our entire life, we would be happy with that!

By: Frugal Babe

Frugal Babe — Mon, 28 Jul 2008 02:20:51 +0000

We only had 5% to put down when we bought our house. We were 24 and 26 at the time, and didn't have much money to put towards a house. But we got a good loan and found a perfect house, where we plan to stay forever. We've been here five and a half years now, and we're paying off the mortgage as quickly as we can. Our goal is for it to be gone within the next ten years. We're hoping to beat that number by quite a bit, but overall we'd feel good if we paid off a 30 year loan in 15 years. Frugal Babes last blog post..Frugal Blog Network Round Up