Any tips from those who have paid off their house early or are on track to do so?

[crisi]

What you want to be sure of, however, is that you are investing the extra with the same diligence and commitment as you would if you were sending the extra to pay down your mortgage. If you don't, and just end up spending the extra, then it won't work and you would have been better paying off your mortgage early. What I have found, however, is that followers of Dave Ramsey have incredible diligence, but because he doesn't actually explain how money works but rather just instills a fear of debt, they use that diligence to make financial decisions that are not as wise as they otherwise could have made.

Ramsey also gives bad investment advice, so while he might inspire you to get out of debt (which is a really good thing), you need to learn from someone else what to do with money when you have it. And this is a good example of where the two cross over and not understanding will set you back. On my mortgage, I'll have made $20,000 in dividends from the leverage between the time I took it out and the time I'll pay it off. I'd like an extra $20k heading into retirement that I didn't need to do anything for.

 

[lisaross]

Totally personal as we'll - some just love having no debt whatsoever - I think paying off mortgage early is great if u are saving enough for retirement each month and if u have kids u are saving for college if that is something u want to fund and enjoying life a bit as well

 

[QVCshopper]

Let me try a simple but mathematically real example to see if it helps explain my distaste for Dave Ramsey's methodology:

Couple A & Couple B both take out $375,000 mortgages at 4.5% to buy a home worth $450,000 in 2014.

Couple A pays an extra $1,000 per month towards principal, thereby paying off the mortgage in almost exactly 15 years (14 years, 10 months to be precise). At that point, they have a home worth $600,000, no mortgage debt, so effective equity of $600,000.

Couple B pays the mortgage as scheduled and invests $1,000 every month in a brokerage account earning 10% per year. In 15 years, the brokerage account will be worth $401,000 and their home will be worth $600,000. They will have a balance remaining on their mortgage of approximately $249,000, giving them effective equity of $752,000.

Couple B is $152,000 ahead of Couple A in fifteen years and has $152,000 to keep working in the market, versus Couple A which is just getting started. Just as importantly, should Couple B decide at that time to pay off the balance on their mortgage, they are still $152,000 ahead of Couple A after paying off their mortgage in full.

I realize the world's not perfect, markets (both equity and real estate) fluctuate, but borrowing money cheaply and investing it wisely is mathematically always going to win in the long run.

While your example is well and good, you're assuming that your investments will make money. When my DH and I pulled out the last $90k to pay off our mortgage, it was right before the real estate bubble burst and the stock market went WAY down. I fact, we didn't see over investments recover until right about when we were selling the house (which we made $90k on before realtor fees, moving expenses, etc.)

In the meantime, we took the extra $12k+ that having no mortgage freed up and bought continuously low mutual fund shares in our IRAs. We tried to also max out our 401ks and save more in the kids' college funds. At one point (before we bought our new house) we were saving 40% of our income, and that's on one full-time and one part-time salary. We more than doubled our savings in those five years without a mortgage, and it wouldn't have happened if we had a mortgage because we weren't even positive we could afford to live on my husband's salary alone.

So, I basically get what you're saying, but it's not so cut and dry. Now that we again have a small mortgage (less than $100k) locked in at 3.5%, I'm not in a huge rush to pay it off. We still want to invest and save, but also enjoy life a little. Our goal is to pay it off by the time my eldest goes to college--she's in third grade right now. Hopefully, when I return to work full time, we can throw even more at the mortgage than we do now.

I used to work for one of the big mutual fund companies as a writer, so I try to look at every situation for what it is, and while historically investments do go up, they don't always in the short term.

 

[A_Princess'_Daddy]

While your example is well and good, you're assuming that your investments will make money. When my DH and I pulled out the last $90k to pay off our mortgage, it was right before the real estate bubble burst and the stock market went WAY down. I fact, we didn't see over investments recover until right about when we were selling the house (which we made $90k on before realtor fees, moving expenses, etc.)

In the meantime, we took the extra $12k+ that having no mortgage freed up and bought continuously low mutual fund shares in our IRAs. We tried to also max out our 401ks and save more in the kids' college funds. At one point (before we bought our new house) we were saving 40% of our income, and that's on one full-time and one part-time salary. We more than doubled our savings in those five years without a mortgage, and it wouldn't have happened if we had a mortgage because we weren't even positive we could afford to live on my husband's salary alone.

So, I basically get what you're saying, but it's not so cut and dry. Now that we again have a small mortgage (less than $100k) locked in at 3.5%, I'm not in a huge rush to pay it off. We still want to invest and save, but also enjoy life a little. Our goal is to pay it off by the time my eldest goes to college--she's in third grade right now. Hopefully, when I return to work full time, we can throw even more at the mortgage than we do now.

I used to work for one of the big mutual fund companies as a writer, so I try to look at every situation for what it is, and while historically investments do go up, they don't always in the short term.

My example was based on the long-term, and historically over a fifteen year span, or even a ten year span, the highs and lows even out and a well-diversified portfolio will always come out ahead.

If one is moving every few years on their own dime, they are likely making far larger financial errors, as the cost of constantly buying and selling homes eats away at any realized gains (and decreased liability through a paid-down mortgage is not a realized gain, it's a low-rate savings account). And even over the past seven years, the markets have on average returned exceedingly solid rates of return and a diversified portfolio started in 2007, right before the last downturn, is still going to be many percent ahead of of a savings account at 4%.

Lastly, but to repeat again, my example is just as much not the only solution as the "pre-pay your mortgage solution." My concern (and it sounds like it is Crissi's concern, as well) is that Dave Ramsey is far from the financial guru he is often made out to be, and in my professional opinion his approach to shun debt as universally bad and scary and to not fully explore the financial world is really only enriching Dave Ramsey and is doing very little for his acolytes. For the average person, a balanced approach is the best approach, and universally shunning the leverage of debt is completely unbalanced.

 

[crisi]

While your example is well and good, you're assuming that your investments will make money. When my DH and I pulled out the last $90k to pay off our mortgage, it was right before the real estate bubble burst and the stock market went WAY down. I fact, we didn't see over investments recover until right about when we were selling the house (which we made $90k on before realtor fees, moving expenses, etc.)

In the meantime, we took the extra $12k+ that having no mortgage freed up and bought continuously low mutual fund shares in our IRAs. We tried to also max out our 401ks and save more in the kids' college funds. At one point (before we bought our new house) we were saving 40% of our income, and that's on one full-time and one part-time salary. We more than doubled our savings in those five years without a mortgage, and it wouldn't have happened if we had a mortgage because we weren't even positive we could afford to live on my husband's salary alone.

So, I basically get what you're saying, but it's not so cut and dry. Now that we again have a small mortgage (less than $100k) locked in at 3.5%, I'm not in a huge rush to pay it off. We still want to invest and save, but also enjoy life a little. Our goal is to pay it off by the time my eldest goes to college--she's in third grade right now. Hopefully, when I return to work full time, we can throw even more at the mortgage than we do now.

I used to work for one of the big mutual fund companies as a writer, so I try to look at every situation for what it is, and while historically investments do go up, they don't always in the short term.

The thing with paying off a mortgage over time and investing in the market over time is that you are doing dollar cost averaging - which most people think is the safest way to invest. And I only have my mortgage money in a diverse portfolio of good dividend paying stocks that tend to be more stable in a market crash (a lot of utilities). There isn't a scary big bang of timing the market poorly and taking money out when its low - or putting it in when its high. A mortgage isn't usually a short term thing, and we aren't talking about a short term commitment to the idea of investing rather than paying down a mortgage.

 

[JanaDee]

We re-financed to a 15 year (from a 15 year) last year to an interest rate of 2.7%. We have no intention of paying our mortgage off early.

ETA: Though when we re-financed, we kept the same amount going toward the principal/payment and make bi-monthly payments. So I guess we will technically pay it off early. LOL

 

[eliza61]

So first, thanks for everyone for responding. I appreciate all the great stories of how you paid off your mortgage early. And Princess Daddy - I really appreciate the time you took to explain your reasoning for investing vs. paying off the mortgage. This is something I plan to explore further with my accountant. So I assume couple B invested their extra cash into roth IRAs with the thought of paying off their mortgage when they retire?

It doesn't have to be in a roth. depends on your investment stratergy.

I did the opposite of what you want to do. I just brought a new home after being mortgage free with a 250K loan.

As others mentioned, my investments last year returned 20% & over the last 3 years I'm up over 15%. no way was I liquidating funds when my mortgage rate is 4.12% and I'll get to write of the mortgage interest.

Now the caveat is of course no one knows what the stock market will bring but I'm diversified enough to handle most downswings and as I get older I reevaluate my portfolio.

Also my kids are already in college so I don't have to worry about saving for that and I have 2 years worth of mortgage pretty liquid.

I just don't see any financial benefit for me to be mortgage free at this point.

My only advice is to look at the "entire" financial picture. would it make better sense to take any extra to plow the money in your kids college fund that would probably get great returns (tax free if used for education)?

As a previous poster mentioned do a long term analysis. see what nets you the bigger pot at the end.

 

[Imhere]

Couple A pays an extra $1,000 per month towards principal,

Couple B pays the mortgage as scheduled and invests $1,000 every month in a brokerage account earning 10% per year.

To be fair though, I don't think the typical person that NEEDS Dave Ramseys advice is doing either of the above.

 

[DawnM]

I don't know what your current interest rate is, but we refinanced with only having to pay the $400 appraisal fee to a 2.6% loan.

We have 13 years left on our 15 year loan, but at 2.6%, I am not overly worried about paying it off sooner. An extra $100 makes very little difference over the life of the loan (save less than $4,000 in interest) and I would rather invest that $100 at this time.

 

[hsmamato2]

watch for a good refi deal, then make it a 5,or 10 year loan, no extras added,that will help.... we have refi'd twice since our purchase (never any extra loans,etc) till we got it down to a 10 year,fixed rate at about 3%... the best way to rfie is obviously to lower the interest rate,pay less time,and never take out a loan against the house....

 

[kiramay]

We paid extra every chance possible. Bonus check? Mortgage. Tax return? Mortgage? Extra paycheck? Mortgage. We paid off our 15 year mortgage in 10.5 years.

 

[A_Princess'_Daddy]

To be fair though, I don't think the typical person that NEEDS Dave Ramseys advice is doing either of the above.

Firstly, my point is that nobody NEEDS Dave Ramsey's advice, as most of his advice is common sense and that which is not common sense is generally not good financial advice. That having been said, while his average follower may not fit that example, the math holds true if they are paying an extra $100 per month, an extra $250 per month, an occasional extra $2,500 when they receive a bonus, etc. Money earning a higher rate of return than is being paid to borrow that money mathematically must generate more of a total economic benefit than paying off the lower rate debt at the expense of earning a higher rate of return.

Barring a catastrophic economic disaster of a never before experienced level, foregoing higher returns in order to pay off debt at a lower interest rate is never going to earn more money. It may psychologically feel good, and that counts for something too, but as a financial strategy it doesn't work and therefore it bothers me greatly when it is offered as a financial strategy.

 

[kellia]

Just make sure you have a big emergency fund! I know of someone who'd paid ahead 9 years on their mortgage, but them became unemployed and was late on payments. The bank didn't care about the early payments and they lost their house.

 

[crisi]

Just make sure you have a big emergency fund! I know of someone who'd paid ahead 9 years on their mortgage, but them became unemployed and was late on payments. The bank didn't care about the early payments and they lost their house.

Yes, no matter which route you take - paying off early or investing, the first step is to make sure you have money set aside. As Eliza said, she has a couple of years of payments in savings, so she can make mortgage payments without needing to sell stock if she needs to. We do the same - I don't need to sell stock in case of a downturn and job loss to make payments for many months - that will give the market some time to recover. Since economic downturn and job loss go hand in hand, I plan for them both to happen at the same time.

 

[Egdisney]

Just make sure you have a big emergency fund! I know of someone who'd paid ahead 9 years on their mortgage, but them became unemployed and was late on payments. The bank didn't care about the early payments and they lost their house.

That's terrible! Very good advice.

 

[Imhere]

Firstly, my point is that nobody NEEDS Dave Ramsey's advice, as most of his advice is common sense and that which is not common sense is generally not good financial advice. That having been said, while his average follower may not fit that example, the math holds true if they are paying an extra $100 per month, an extra $250 per month, an occasional extra $2,500 when they receive a bonus, etc. Money earning a higher rate of return than is being paid to borrow that money mathematically must generate more of a total economic benefit than paying off the lower rate debt at the expense of earning a higher rate of return.

Barring a catastrophic economic disaster of a never before experienced level, foregoing higher returns in order to pay off debt at a lower interest rate is never going to earn more money. It may psychologically feel good, and that counts for something too, but as a financial strategy it doesn't work and therefore it bothers me greatly when it is offered as a financial strategy.

Just like Dave says though, people that make the most foolish money decisions and get in the most trouble somehow turn into math majors when they are trying to get out of debt.

Look, Ramsey is catering to the lowest common denominator. The guy that is in debt up to his eyeballs and is about to lose his house needs far different advice than you or I.

You or I would not agree with Dave that NOBODY should EVER have a credit card. Most of the folks calling him though, SHOULD NEVER have another credit card.

The pounding on Dave Ramsey just for the sake of pounding on Dave Ramsey is a common activity.

There is very little of his advice that is useful for ME. After listening to his show for years though, I see that his advice has helped many many folks.

 

[timmac]

Money earning a higher rate of return than is being paid to borrow that money mathematically must generate more of a total economic benefit than paying off the lower rate debt at the expense of earning a higher rate of return.

Nit: Should probably specifically call out "after correcting for tax implications on both sides."

For some people, it's more of an emotional decision than a mathematical one, and everyone is certainly free to make whatever decision they feel is best for themselves. That said, if we look long term, then market volatility becomes less of an issue, and one will find that real estate is basically a push compared against inflation, while diversified stock investments may push 10% or higher on average. The other oft overlooked issue--which has been pointed out by a few PPs who stress strong savings--is that paying off a house early is about as non-liquid of an investment as one can make, and won't be anywhere near as helpful as having cash to throw at issues that come up. For some types of problems, namely job loss, the ability to borrow against it may not even be available.

 

[Gracomom]

We recently took our 25 year mortgage (that we were 2-1/2 years into) and reduced it to 12. About a year in, we put down 20%, the max allowed, which we got from an inheritance. Then when the rates went down, this fall we did a "blend and extend" where the bank extended our term for 5 years from today and then blended the lower interest rate with the one we had locked in when we bought the house. Thus allowed us to get a lower rate even though we were locked in without paying a penalty. We also increased the amount of the mortgage so we could pay off our vehicle loan, which was at a higher interest rate. We increased the amount of our biweekly payments (2 extra payments a year) to the maximum the bank would allow us, which is above and beyond our previous mortgage pus car payment by a couple hundred. We aren't very disciplined with money, so for us, this was the best way to pay it off early, we aren't likely to make extra payments on our own often enough. Although I hope to. Shave off 2 years of the mortgage with some extra payments, bringing it down to 10 years, but we'll do our best.

 

[crisi]

Gracomom - you imply something there - if you currently pay any PMI, you want to pay down your mortgage to the point that the PMI goes away before you invest. That PMI is money you are throwing away.

So for MOST people, with your extra money:

1. Set aside savings so you can pay the mortgage in case of a financial bump in the road.

2. Pay down mortgage to get rid of any PMI.

3. Consider moving extra money to investing - you are likely (though never guarenteed in investing) to come out financially ahead over paying off a mortgage, and the money will be more liquid (though not completely so, which is why you want step one). Take into account your circumstances - you may value the security of a paid off house, or need the cash flow improvement from not having a mortgage, more than you need the extra money you are likely to get from investing. If you are investing, you want to treat the money like its your house (because it sort of is). This isn't the money you buy some penny stock your uncle recommends that you "can't lose" on. You want low volatility stock in reputable companies with solid balance sheets and prospects (and I prefer the ones that pay dividends for this purpose, because it lets me do napkin math on the delta). ETA: AND you only want to do this if you are going to be disciplined about leaving it there and letting it grow. If the moment it gets to $10k you are planning a Disney trip with a concierge stay at the Poly off that money - pay down your mortgage instead.

 

[Colleen27]

Firstly, my point is that nobody NEEDS Dave Ramsey's advice, as most of his advice is common sense and that which is not common sense is generally not good financial advice. That having been said, while his average follower may not fit that example, the math holds true if they are paying an extra $100 per month, an extra $250 per month, an occasional extra $2,500 when they receive a bonus, etc. Money earning a higher rate of return than is being paid to borrow that money mathematically must generate more of a total economic benefit than paying off the lower rate debt at the expense of earning a higher rate of return.

Barring a catastrophic economic disaster of a never before experienced level, foregoing higher returns in order to pay off debt at a lower interest rate is never going to earn more money. It may psychologically feel good, and that counts for something too, but as a financial strategy it doesn't work and therefore it bothers me greatly when it is offered as a financial strategy.

DR's advice is far more psychology than finance, though. I'm not a fan for other reasons - I think his advice is potentially very costly because neglecting one's credit rating means paying more not just for borrowing but also for insurance products and can also limit employment opportunities/advancement potential in many situations. But I've read and heard enough from him to realize that he's not selling financial advice; he's selling debt aversion training. It isn't about smart money management, it is about breaking overspending habits.

Just make sure you have a big emergency fund! I know of someone who'd paid ahead 9 years on their mortgage, but them became unemployed and was late on payments. The bank didn't care about the early payments and they lost their house.

That's why I said the same. We saw that happen to several friends and neighbors at the peak of the recession. The bank doesn't care if you've been paying extra, and they don't care whether you still owe 10K or 100K. Fall behind and they foreclose, so a big emergency fund really needs to come before paying down the principle on your home.