One of the things that Dave has taught us is to rethink the typical 30 year home mortgage. We have tried to set ourselves up to pay if off much sooner than that.
In this post, Dave addresses why this is wise:
QUESTION: Jason in Texas and his wife are on Baby Step 2. He told his mother-in-law that, by working Dave’s plan, they will pay off the house in 10 years. She told him that would be a stupid move, but she has no reason why she thinks that. How can he talk to her about it being smart to do? Dave gives him a few answers.
ANSWER: She is the stupid one if she thinks you should behave a certain way, yet can’t tell you why. If someone can’t tell you why they have an argument, then they don’t have an argument. Keep that in mind when someone is trying to unsettle your spirit like that.
There are three reasons why you should pay off your home that people rail against. The first is that paying off the house lowers risk, because you won’t be foreclosed on if your house is paid off. It gives you great security. The second reason people say not to pay it off is because they say you can make money by borrowing money at a low interest rate on your house and investing it in the stock market. But by the time you adjust for risk and taxes, you don’t come out ahead. I would never borrow on my home to invest.
The big reason that people say not to pay off your home is that you’ll lose your tax deduction. If you have a $200,000 loan at 5% interest, you’d pay about $10,000 a year in interest, which would give you a $10,000 deduction. If you make $70,000 a year, that deduction is saving you $2,500 in taxes if you’re in a 25% tax bracket. You are sending Countrywide Mortgage $10,000 to keep from sending the government $2,500. That’s stupid. You are better off being debt-free and giving your church $10,000. You’ll save on taxes and do some good with the money.
2 comments:
Dave is a great guy. Very sound in his approach to finances. My wife and I are on baby step #2 of the plan (working on saving up 1 month's living expenses and paying off the last of our consumer debt); when we got our emergency fund shored up, it was like a weight had been lifted.
Congrats on taking out $50K in 4 years, Z! That's really, really encouraging.
Z,
Speaking to a mutual friend about this the other day. The point he made contrary to Ramsey was...
If you're planning on buying a bigger house in a few years (fewer than you would be able to pay your house off in), better off saving the money than using it to pay down your interest.
Now that I say that, not sure of WHY this is better, other than there is also risk by investing in paying off your home loan and depreciation in the short term.
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