Dave Ramsey Mortgage suggestion...

[poundwise]

I recognize the points mentioned and understand their merits. Honestly, the replies above include those from people I consider to be quite smart and among the best members here when it comes to certain advice.

And, before I continue, I should note that I am not attempting to make hard arguments here. I am being a bit purposefully contrarian.

Having said that...

While it is true that most people don't keep 30 year mortgages for 30 years, this is mostly attributable to people moving (which was mentioned), not people paying their mortgages off early. When people who have a house and 30 year mortgage move, what do they typically do? Buy another house, with a brand new 30 year mortgage. If I have a house and a 30 year mortgage, and I live there 10 years and move to a similar COLA, why is it that I should restart at 30 again? Wouldn't a 20 suffice to give me approximately the same payment and same term I had when I began to build equity?

Also, I certainly understand opportunity costs. However, in the example cited, a person earns 7% per year. That average is absolutely attainable, however, there is the possibility of earning more or less, including considerably more or considerably less. The person who pays the 5.5% mortgage saves 5.5% guaranteed. Also, the example breaks out a calculation of the payment difference invested based on 30 years. It is important to remember that the comparison isn't between two people who each pay on a mortgage for 30 years, with one having a $500 less payment that he invests while the other does not. That is, consider that the one person has $500 more that he invests for 15 years, while the other does not. Then, for the next 15 years, the first party has the same $500 and the same mortgage payment, while the second party now has the total of his entire mortgage payment to save/invest for the next 15 years. I also understand the value of investing early and consistently, so don't think I fail to recognize that. However, the fact is, you have to consider the value of the second 15 year period, with a paid-for house and no mortgage payment, when making the comparison in order to have more of an apples to apples look.

There is also something to be said for owning your own house outright when it comes time to retire. The same can be true for the person who becomes disabled during their working lifetime, or a person who loses their spouse. Again, I know that there are other things like long-term disability and life insurance that we use to attempt to account for these things, however, you have to follow even that out to its end to get a fair comparison. If you become disabled, you will not have as much income as you did before and will not likely have the same opportunity to increase your income as before. Wouldn't it be nice, in that situation, to have a paid-for house? Or, at worst, a mortgage with 2 years left rather 17? Similarly, you may have a $110k left on your mortgage when you die. Your spouse receives the proceeds from your $250k life insurance policy and, with everything else you've done in preparation, he or she will be just fine. However, it is still quite a different picture if they receive those same proceeds and yet have no mortgage. (Or if you outlive your policy, but not your mortgage. Or if you aren't adequately insured, etc.)

Ultimately, all of that is just what I said it was before, food for thought. The one point I will stand behind more firmly is the comparison of the 30 year with the 20 year. In the example I provided earlier, with a rate of 5.5%, for the relatively small sum of $240/month, a person knocks of $80k and 10 years from their mortgage. That's a point worth attention.

Allow me to state one last time - in an attempt to keep the flames away - I understand all that has been said in contrast to my comments and recognize the truth and value to those statements. Prevailing wisdom is often such for a reason. However, I also believe that what is 'commonly done' is not always what is best. There are a lot of 'smart' people with a plan that will be struggling in retirement with 18 years left on a mortgage and their 'smart' student loan (that's another topic, I know), from 35 years ago, still owing.

In conclusion, and for the record, I presently rent. When I buy, my current view is that I intend to apply between 10% and 20% down and to seek a 20 year mortgage.

[gamecock43]

I gotta be honest- my financial education has advanced a bit because I have "read" this argument many times in the past but today was actually the first time I understood it! I'm proud of that accomplishment alone.

BB and I were planning to pay an extra $100 a month to our 30yr mortgage, shaving off about 10 yrs. poundwises' argument made me realize I might as well get a 20 yr mortgage then and get the benefit of a lower interest rate. Then Jim talked me back into a 30 yr mortgage with no prepayment and instead invest the $100 a month! I'm not sure what we're gonna do at this point.

[MonkeyMama]

I think at face value I agree with your feeling poundwise. Not necessarily the means, but I think mostly we agree.

I think we disagree on factors. If I don't prepay a dime of my mortgage it will be paid off well before retirement. I don't think it's wise to have a mortgage in retirement. But 30 years does not equal mortgage in retirement. If we never refied or bought up, house would have been paid off age 52. (Age is a factor).

I think our personal choice was to put a little more down and have lower payments. We actually put 25% down on our current home. Which I do think few agree with, but I wouldn't do it any other way.

HCOLA is a whole other ball of wax. I could care less about the cost of a mortgage for 30 years. Fact is, some day it will be paid off. Most of our friends rent half the house for a rent payment double our mortgage.

If something happened to my spouse the last thing I would do is tie up the insurance money on paying the mortgage. We have a reasonable payment either of us could afford. I can't say the same if we had a 15-year mortgage. Not at all. (I think this is my most important point here).

It's a balance between payments and liquidity. I like the balance we have struck. But different circumstances mean different results. Your plan is probably best balance for you. Nothing to say about that. (We both have a 20-year plan; I believe mine is more flexible. But I think yeah, we are mostly on the same page).

I also think most people over value the security of a paid off house. Retirement is a far safer place to park your money. No one can get at your retirement for anything. People can take your house (bankruptcy, lawsuit, etc.). A house is more protected than most assets, but retirement assets are like an impenetrable fortress. There is just no comparison.

[LivingAlmostLarge]

You are missing out poundwise on the tax break for the mortgage and the tax break from the 401k. Your calculations are flawed. You cannot talk about a 5.5% mortgage without calculating the tax break.

You cannot talk about investing the extra money without talking about the tax break. Thus the argument youare making about paying less interest cannot be real unless you factor in these things.

I get paying it off to feel good, and resetting the mortgage clock. I've done that, and I probably will get a 30 year fixed again next time. But I plan on making sure no matter what happens I'm saving all my retirement options 100%, then ESPP (15% discount) if offered, then my mortgage.

So everything I can get a break on, I will.

By the way saving 25% on $1 I put into my 401k instead of my 5.5% mortgage, which one has the higher return? I think 25%. But even at 15% tax break I could be wrong about having save myself 15 cent taxes over 5.5 cents interest. Not counting state income tax break.

Realize I pay 5% state income taxes. If I so fortunately move one day to a state with no income taxes (hello washington), I'll never pay state income taxes on that retirement money! Cha-ching.

So whose farther ahead? And that 5% state income taxes negates my 5.5% mortgage, which is actually only 4.25% or so.

[gamecock43]

Is it possible that this argument is for two separate sets of people? I have heard that Americans save some ridiculously low amount towards retirement (like 4% or something), and are in debt a ridiculously high amount. So in general, for AMERICANS, its best to prepay the mortgage as a forced savings account, raise consciousness of numbers and money in general and to reduce debt.

But for SA members...things are different because members of this forum tend to try already be on the path to reducing debt, stretching their dollars, and find the most efficient, productive use of their money.

just an idea.

[MonkeyMama]

Gamecock - you have a point.

I've seen many statistics that people who pay less on their mortgage don't tend to invest the difference.

Um, *I* am going to invest the difference. !!! As would many SA-ers.

Also, reminds me of another thing. Whenever this debate comes up I find I completely agree with both sides. I also tend to play devil's advocate, a lot, because I am so moderate in general. But really, my goal is to pay off my mortgage insanely early and save a pile for retirement. Both. I don't intend to hit age 50 with a mortgage. I'd prefer to pay it off closer to age 40. I also don't intend to lose the tax benefits of maxing out my retirement plans. So, um, yeah, I guess you can argue until the cows come home. I am doing both. I think more SA-ers can claim this than the average population.

We've discussed dividing dh's future income 50/50 to taxable investments and mortgage payoff. We have no idea which is better. That's how in the middle we are. Figured we'd start there and re-evaulate as time progressed.

[jIM_Ohio]

Poundwise- I appreciate the contrarian point. I would like to clarify. You posted this:

Also, I certainly understand opportunity costs. However, in the example cited, a person earns 7% per year. That average is absolutely attainable, however, there is the possibility of earning more or less, including considerably more or considerably less. The person who pays the 5.5% mortgage saves 5.5% guaranteed. Also, the example breaks out a calculation of the payment difference invested based on 30 years. It is important to remember that the comparison isn't between two people who each pay on a mortgage for 30 years, with one having a $500 less payment that he invests while the other does not. That is, consider that the one person has $500 more that he invests for 15 years, while the other does not. Then, for the next 15 years, the first party has the same $500 and the same mortgage payment, while the second party now has the total of his entire mortgage payment to save/invest for the next 15 years. I also understand the value of investing early and consistently, so don't think I fail to recognize that. However, the fact is, you have to consider the value of the second 15 year period, with a paid for house and no mortgage payment, when making the comparison in order to have more of an apples to apples look.

and I posted this before:

Consider cash flow on the 30 year. That $500/month difference is a Roth deposit. Invest the $500/month difference for 30 years and see it grow at 7%, you have $600k+ in the investment account.

If you did the 15 year and could not invest until year 16 (and invested the full $1634), you have $527k at end of same 30 year period.

If the return is 9% the 30 year plan has just short of 900k and the 15 year plan has 627k (30 year plan almost 50% more).

Note the underlined portion- I did take into account that the person using a 15 year fixed would not invest until year 16, and would have a larger sum to invest ($1634 was the amount invested per month=$19,608 per year).

Your response (quoted in my reply) sounded like you thought that math was not used or not true.

[gamecock43]

I think we are going to start with prepaying the mortgage because; 1)its a fixed savings amount (it wont drop with the stock market) and 2) I can actually comprehend the process, benefits of prepaying the mortgage.

I am trying to get smarter with investments and learn the differences about ROTH's, 401k's ect. but educationally I'm not there yet and just don't have a strong enough grasp of the concepts to feel comfortable setting aside money each month to go into funds and stuff I just don't quite understand when I do understand mortgages and those benefits.

I'm sure in a year or so I will re-evaluate our money allocation and make changes based on my added understanding and comprehension.

[ScrimpAndSave]

Once I do buy...I do think it is much more important to max out a roth before putting extra toward the mortgage...especially because of my age...that I DO know...any extra that I make after maxing out my roth can be thrown at my mortgage.

[disneysteve]

Here's what I'm doing. I think it covers both sides of the argument.

Each month, 20% of my gross is designated for savings.
$200 goes to a taxable mutual fund earmarked for retirement.
$300 goes to a 529 plan for our daughter's education.
The remainder of the 20% goes to our Roth accounts until they are maxed for the year, usually by the end of June.
Once the Roths are maxed, that portion of the 20% then goes to pay down the mortgage for the remainder of the year. When January 1 rolls around again, the extra mortgage payments stop and we go back to funding the Roth.

If my income was such that it took longer to max the Roths, then less would go toward the mortgage. If it took 12 months to max the Roths, then nothing extra would go toward the mortgage. Fortunately, I'm able to do both.

[Goldy1]

Most people move. My dh bought our house in 1997, and we met in 2000 and married in 2001 and still live in the house. I like it still. House has been refinanced twice. WE have a 5.25 rate 30 yr fixed. We made massive extra payments being DINKs for a few years. We switched to minimum payment 2 months ago only b/c dh got laid off, and son on the way.
WE have not been able to itemize mortgage interest in about 2 years. We could have invested more instead of paying off mortgage, yes. However, it is personal choice. I feel comfortable knowing my house is almost paid off. To me, that means more than a lot saved for retirement, but we have money in retirement also, just have not maxed roths in lieu of house payments.
Either way, I didn't blow the cash on stupid stuff.

[Goldy1]

I think it was DR who said something about the grass being greener or softer on a paid off house. lol. I don't think it is wise for people to always pay it off too early. If had chosen to sell soon, I don't think paying it off early would have benefited us.

[Ima saver]

Well I knew very little about investing in my 20's and early 30's. I paid off my mortgage at age 32 and have never had a mortgage since. Every time we sell our house, we build and pay cash for the new house. It has worked for me for a long time. After the mortgage was retired, we used that money to build up our savings.

[LivingAlmostLarge]

gamecock I made the argument earlier as well that it only makes sense if you invested the money. I made 3 categories of people. Those who invest, those who pay off the mortgage, and those who do neither.

I also called it rich, comfortable, and broke. Which do you want to be? LOL. But seriously it's basic leverage.

You are borrowing money at say 5.5% to invest in your 401k or Roth IRA.

I think Disneysteve your answer would be diffferent if you had a 401k at work like your wife? Wouldn't you be maxing out the 401k, Roth IRAs, college, then mortgage?

I hate the fact were so far behind in retirement savings for our age. Ugh. And disproportionately we have too much home equity. To balance that I'm trying to save as much in retirement accounts as possible.

[disneysteve]

I think Disneysteve your answer would be diffferent if you had a 401k at work like your wife? Wouldn't you be maxing out the 401k, Roth IRAs, college, then mortgage?

Absolutely. If I had a retirement plan at work, I'd be putting all the money in there.

Keep in mind, though, that less than half of workers in this country have access to a 401k. We talk about them like they are commonplace, but they really aren't. The majority of people don't have one.