Real Estate the Ramsey Way - Why You Should Pay Off Your Home Early

Episode Date: November 20, 2023

Believe it or not, your mortgage doesn’t have to be a debt you carry for the rest of your life. Your income is your biggest wealth-building tool, and if you’re no longer using it to pay off your mortgage, you can win with money in a big way. In this episode, learn the pros of paying off your house early. Helpful Resources: Use our free Mortgage Payoff Calculator.   Find the only real estate agents in your area endorsed by Dave Ramsey.

Dave Ramsey here, and this is the last episode of our limited series, Real Estate, the Ramsey Way. Today, we're talking about how to get rid of the ball and chain. Too many homeowners are dragging around the mortgage. I know paying off your mortgage early seems impossible, but it is completely doable, and people do it all the time. But how can you do it? And why would you want to put in the extra effort? Well, stick around to find out why. Paying off your mortgage early will rev up your wealth.

building journey. Carl is next in St. Louis. Hey, Carl, what's up? Hey, how are you doing, Dave? So I'm glad to talk to you. Really excited on the air with you. Thanks. So my wife and I have kind of been in debt most of our life, and boy, I wish I found you 20 years ago. And we paid off so much of our debt. We paid off my car a little quicker, and after that we started putting that car payment towards her car. And we got sick and tired of her car and started putting extra from savings to it. We kept her savings at a set level and put the extra against that car. And I was talking my financial advisor about a week ago and she's like, oh my gosh, she's got one more month of this. Just pay it off. You're going to feel so glad you did. And so I did. I paid off the car and boy, I feel excited. So the only debt we have

remaining is our house and we owe $45,000 on the house. We have $35,000 in savings. And my financial advisor is like, oh man, you should just put $25 of that against your house. You can pay that off in four months then and just be done with it and then build your savings back up. And so I was kind of like, you know, should I leave more in savings? Should I just follow that? Just take a big 25,000 chunk against savings. You can just knock the house out quick. Or should I just keep paying on the house more and knock it out in about nine months?

Good for you. Wow. Well, I like your financial advisor. I thought you might. I mentioned her so much of the time. Yeah, she hates debt. She hates debt bad. And that's good because your income, once you get it all freed up,

she knows the truth is going to become your most powerful wealth-building tool when you're not giving it all to someone else as a way of life. And you're beginning to experience the emotions of these numbers in the last few months, it sounds like. And it's very exciting for you. I'm proud of you. Yeah, super exciting. Okay, so we teach a process that comes from the same principle.

that she's leaning on. That's why she and I like each other, I can tell. And so baby step one is save $1,000. You've done that. Okay. Baby step two has become debt-free other than the home, and you've done that. Baby step three is have an emergency fund of three to six months of expenses. Okay.

Okay. So I don't want your savings below three months of household. expenses. So if your household expenses are three grand a month, then we can go with her plan. Well, without a house payment, it would definitely be... Oh, you have a house payment. You have a house payment still. Yeah, when that's knocked out, with house payment, it's probably... Okay, with house payment monthly expenses is probably, well, probably pretty close to three. Okay. Well, no, that's not true. I don't think it's that much. I'd say it's probably, I mean, the house payment is what's your

household incomes. I make one 45, my wife makes 48, or about 48. She's a really bit. A couple of hundred a year. Okay. And so, yeah, and if you take, you said there's 35 in there, right, in your savings? Yes. And 40 on the house, 40 or 45 on the house?

45 in the house. Okay. So if we throw 25 at it, leave 10. there like she suggests. That means we have 20 left on a $200,000 household income, and you're done by Christmas then. Yeah, I'd be done by Christmas for sure. Yeah.

Okay. I don't want you below 10. Are you okay with 10? Borderline, but I just want you to gauge everything around you and be very wary because if you have a $15,000 event, we got a problem, dude, and you make $200 grand, and that's silly. The other idea I had that I kind of threw up my wife is we were putting what up, you know, the first thing was take our house payment, put our two car payments against it,

and then put the extra credit from savings, which takes us to a house payment of $5,100 a month. We're just going to keep cranking it up. And so my other idea was every month, you know, pay that, and then pay an additional $5,000 from savings and kind of see how we feel as we're going with that. That would be okay, too. I just don't want, if I could establish real comfortably what three was, I mean, I'd be more comfortable with 15. I'd probably do it if it was 15.

But people often call me and say, I have enough money in my savings account to pay off my house today, and it would leave me with $1,000 left in my account. And I would tell them no. And I'm the get out of debt guy. And I'm still telling them no, because I don't want you sitting there with $1,000. is at this stage of your financial plan.

Now, at the beginning of your financial plan, when you're broke and got a bunch of other debts and everything else, you're living on beans and rice. But this is more intentional than it is intensity at your stage. And so I just want to be wise and careful, even though I'm as excited as you are to get you out of debt. So I'm guessing that either way you're out of debt by Christmas. Yeah, it's going to be really close if not.

I mean, if we live a bit more in it, I think we're... I mean, another way you could work in is, you know, another, you know, we're just keep manipulating the numbers here. But if you said, okay, let's just call it three to six months, let's call it 20 grand throw the rest of it at it, and then just start chunking on the house, you're still going to make it. And if you don't, reach over and pull 10 out

and take it down to 10 for one month in December. But just go, you know, December, I'm done, as long as I don't go below 10 in my savings. But you could, if the math works, the math works on throwing it at the debt or it works than throwing in in the account and then pulling out of the account. So either way is fine. And but I would not stop, are you saving for a 401K?

I would not stop that. Absolutely. Yeah, my wife puts about 11% in. I'm putting about 7% in. Yeah. Then I'm going to buy an 8% into raw IRA. Yeah, you're getting, you got the right numbers in. I wouldn't stop that either.

So the difference is only whether it's Christmas or whether it's March. That's the only difference. and when you're 75 years old, that date won't matter. I like the advice, Dave, and I'd actually be a little bit more cautious with that savings because if it's me and I really want to get this because it's just intensity, he sees the finish line, how could you make $5 to $10,000 extra? That's what I'm looking at. I like that savings posture.

I really do having that just in case a big event happens because you're talking about the difference between three months. So it's great advice. I certainly agree with you. I would personally, I started getting a little nervous listening to that going lower and 15 myself. I was like, ooh. 10 or 15 has got to be your floor for sure. But, I mean, you could just throw money, you know, leave the savings, like it sits and throw money at the house.

And then when you get within striking distance and taking it down to 15, then do it in one lick. Yeah. Then you're sitting on savings the whole time while you're waiting to do it. And that won't mess you up either. You'll still get there in exactly the same period of time. Exactly. And so, yeah, it's a great place to be, though, Carl. I love where your head's at. And I like that you found a financial advisor who's understood that getting out of debt is the key to building wealth. Because not having any payments, you know what you can do if you don't have any payments? Anything you want. I mean, it opens up the door, baby. It's Americans live in such bondage that we don't even know what it's like to be free. Yeah, I was getting ready to say, if you're new to the show and you're listening and watching, Carl is a great example of where you can be. You know, he started off by saying, I wish I had found. you 20 years ago, but they've jumped into the process, and now he's looking at the finish line. He can't get there fast enough. It's a wonderful, wonderful place.

John is with us. John's in Tampa. Hi, John, how are you? Good, sir. How are you doing today? Better than I deserve. What's up? So I have my wife in the background listening. She works in mortgages, some prior Marine Corps veteran. We recently sold our property that we owned, and we stood to gain $175,000. from the property. We own another house and our goal is to be debt-free. We follow your principles. We both go to church.

And we owe about $120,000 in the property and an $18,000 car payment. Today when I finish work, I'll be going to pay off that car. Our question collaboratively is, do we do a recast and put $50,000, $60,000 down on the house and pay it off in a year, or do we go out and pay it off outright? Our savings, we have about $30,000 in savings. So just sort of wanted to hear your perspective. So if you pay it off outright, how much is left in savings? There's about $35,000.

So you wouldn't have to touch that? No. Okay. As a whole, there would be... Okay, so why would you not just pay off your house in your car today? Our biggest worries is that if we find ourselves in a recession or a housing market issue, we wanted to have money to potentially go and buy a house on a cheap, potentially a not refinance, what do you call them, a foreclosure.

Would you want to hear your perspective? So you would not pay off your house in order to maybe buy a foreclosure if the housing market tanks? that's our idea or our idea is to have you know have that amount of money set aside okay i would tell you regardless of inflation and regardless of recession that your best goal your best process is to never buy a rental property except with cash and to never do that until your personal residence is paid for and so that that set of principles that i've used in my life and for millions of other people would lead me to pay off your house and your car today. So pay off the house, if it wasn't a rental property, it was a secondary, it was a secondary house.

I would be debt free before I wrote any checks to buy rental property, and I would only pay cash for rental property then. So the point being, we're going to pay off this other property. We're going to pay off your house. You're going to pay off your car. You're going to be 100% debt free. And if $35,000 left in the bank, you've got all of your income now to start saving to buy a foreclosure when the housing market goes down someday.

I don't know when it's going to go down. Not soon enough to change this answer. Okay, so what you're saying is give you a call back in a month and scream on the year that we're debt-free. There you go, brother, or next week if you want. Or tomorrow if you want. But yeah, because you're debt-free. Pay off everything.

That's what I would do. Listen, something's the worry, the angst that you have around the economy. you're watching the news too much. Number one, you turn the channel off. But number two, the worry and the, it's real, but there's no sense in just bathing in the blood every night, the blood of the newscast. And so, you know, the angst that I hear,

what you don't see coming is that when you pay off all of this stuff, you're going to get peace. Yes. And you don't even realize that that's there. So because 100% We've done detailed research. 100% of the foreclosures occur on a home of the mortgage. If you're wondering how paying off your mortgage early would work for your financial situation,

let us help you crunch some numbers. Use our free mortgage calculator to find out how increasing your monthly payment can shorten your mortgage term and help you get rid of it as soon as possible. Just go to the link in the show notes or ramsysolutions.com slash payoff calculator to check it out. David is calling from Saigon, Vietnam. I think that's my first call from Saigon in 30 years, David. How are you? Hi, I'm good, thanks.

How are you? Good. What are you doing in Saigon? Living abroad. I've been living abroad. My wife and I have been living abroad for about 16 years, but our investments and properties are in the U.S. Cool.

What do you do for a living? International educator. Okay. I teach. The teacher, yeah. I was going to say, that sounds a lot of the business. A lot like Art Van der Leys, importer, exporter from Seinfeld. I've got a...

Nice. I actually have a good friend whose brother lives in Saigon that is in your business, and I'm wondering if you're him. Anyway, yeah. All right. Go ahead, brother. How can we help? Maybe I know them.

Well, okay, we're big fans of the 80 steps. We've done them all. We've done them all except for one, and I might get in trouble from you on this one. And that is that we have two rental properties that are turning a profit. and we don't want to pay off the rest of the mortgage because we feel like we're making more having that money invested in the market. So, and I know you, with your baby steps,

you highly, I recommend paying off those mortgages or thinking why do that if we can make more if that money is in the market. Can you share your wisdom? Oh, you want to know why I said to do that? Oh, I see. Okay. And how much money do you have in investments? A little over a million.

Good for you. Well done. How old are you? 57. Excellent. And how much of these mortgages? They're about 170 each. So 340 knocks it out, and that leaves you with 660 in your investment if we use that

investment to Google to do that, okay? Is that right? Yes. Okay. And so really what we're discussing is how much more you would make on 340,000 over the interest on the houses. Okay? Now, here's the thing.

I first approached this through the lens of faith, was my first approach, because I have all the letters and licenses after my name, the academic crap that says I'm supposed to know something about money, but I went broke. So apparently I did something wrong. And so I discovered common sense

and what the Bible says about money and I can't find anywhere as a Christian. And this is my journey, not yours, okay? I can't find anywhere in the Bible ever that says anything positive about debt. It's not a salvation issue. You're not going to hell because you have debt. It's not a God loves you less if you have debt. It's all negative, though.

The borrower is slave to the lender. And it goes on and on and on and on and on. All the negative references from that. So as part of my faith walk, I had to say, okay, God must know something or, that I don't understand about debt because I was taught if you can borrow money at, you know, three, four, five percent on your mortgage and you can invest it in a mutual fund and make 10 or 12, then you're making that spread, that arbitrage, which is what you're discussing, correct? Yes, exactly.

Now, as I've gone forward, what I've discovered is that the vast majority of wealthy people that we've studied, people of faith or otherwise, have avoided debt and gotten out of debt. and have stayed away from it. And I kind of had to stop and go, why is that? I find very few people, now you're not highly leveraged, but I find very few people that are highly leveraged that actually survive. The people that borrow money like crazy to buy rental properties

and do an Airbnb and all this crap, they're all broke in 10 years. I went broke doing that within 10 years. And so you can't find someone that's been doing that for 20 years and survived. One of these economic cycles takes their head off. And so what that means, is that debt equals risk, more debt equals more risk. And I think we can all agree to that. Can you?

Yes. You have a small amount of debt, so it doesn't feel like a lot of risk. It's not as much risk as if you had $3.4 million. Agreed? Correct. Yeah. That's all I'm saying. More debt is more risk, less debt is less risk, zero debt is approaching zero risk. And the only thing, the only math formula I have found that adjusts for risk, does not exist in the real estate world. It's only in the investment world.

And we adjust for risk using the math formula of a beta. A beta is the height of a, if you do peaks and valleys of an investment, it goes up and down, up and down, up and down. The difference in the peak and the valley is called a beta. And it's your, the higher beta is a higher volatility, a steeper mountain than a more often cycle. Does that make sense? Yes. And in the investment world, we use a beta, the higher the beta, the higher the risk, because the more volatile it is.

And we use an inverse relationship in the math, meaning you drop it under the denominator and get nerdy here. But that gives you the ability to calculate risk into the investment and measure a risky investment against a not-so-risk investment that has a lower beta. And you've neutralized for risk, therefore you can compare them apples to apples. We don't enter risk into the formula that you used to tell me you wanted to keep your debt. if we put risk in that formula, and you do have some risk, not as much as if you had 3.4 million, but if we put a low beta in your formula, it starts to neutralize and do away with all your spread. The other thing that happens is when you don't have any payments, you just straight up sleep better. That's true.

And I've done detailed research. 100% of the foreclosures occur on a house with a mortgage. And so I would tell you this. Let's do this. You could try this if you want to. I would pay them both off. and if you hate it, go get you on the mortgage later.

Okay. Okay, fair enough. Can I ask you another question? I'll follow-up question, then. You should be scared to after that long answer, but, yeah. Back in stats class. If we do yank all that money out, we're going to pay,

we're going to pay through the nose and taxes pulling it out of all of our retirement investment. How old are you? Oh, you're 57. No, I would not take it out of retirement. Is it all in retirement? Yeah, this is all. You don't have any money that's not in retirement?

We have, yeah, we have some. How much? We have a couple hundred. Well, I'd use that then. Tadda. Yeah. And you have a good income, and I would just, no, I'm not going to cash out and pay penalties on your retirement. I was not suggesting that.

Because that changes the formula. Now, you may have some capital gains on it, and I would do that. I have lived 100% debt-free since I went broke 30-something years ago, and I have had a wonderful life. I've made a lot of money. I have a lot of investments, and they're all paid for. And when crap happens, like the island of misfit toys is misbehaving up in Washington, D.C. right now, and they're screwing up the whole freaking economy.

I'm sitting here peaceful and slept really good last night, except that my four-year-old grandson put a plastic snake under my pillow. But other than that, I slept great last night. That really did happen. Cindy's in Baton Rouge. Hi, Cindy. How are you? Hi, Dave. Thank you for taking my call. Sure. What's up?

We have, a husband and I have $460,000 in a money market type account, and then we have $135,000 in cash. And we're to the point of saying, what do we do with this? We're not making any profit on most of that money. And we took the $460 out of equities and securities because we were losing a lot of money in that. And that money had come from a home that we sold, and because we got an interest rate of 2.5 on a new home, we went into 2.5 and put the 460 into securities and equities

and didn't want to lose it beyond what we put in there. So we put it in the money market. What do you owe on your home? 366K. From 30 years of coaching people how to become wealthy and from doing a study of 10,000 millionaires, These are the two sources for my data that tells me the shortest distance between where you are and wealth is two things. It's a consistently funded 401K Roth IRA in good growth stock mutual funds over a long period of time that becomes some money and a paid for house.

Our last debt-free scream was a $600,000 paid for house and $800,000 in their 401K. reverse, I forget which, but it was a $1.4 million net worth. And it was just a few moments ago while you were on hold, you heard it. Yes. Okay. So that is the typical path that we see that is the most often used by people who become millionaires. Now, where does that take us in your situation?

It says I would pay off my house today. Because here's what you ended up doing. It wasn't the start of your plan, but the net result of your plan is you borrowed money at 2.35%. and invested it at a half a percent, right? Yes, sir. We were. I know that wasn't where you,

that wasn't what you set out to do, but that's where you ended up, isn't it? It is. I pay off my house today. Today. By close of business today. Write a check. Okay.

Okay. And now you don't have any house payment anymore. How's that feel? Awesome. Because I want to retire. Yeah. And now you've got $200,000 in cash that we've got to do something better than a stupid money market account with. You need an emergency fund of three to six months

of expenses for your short-term emergencies. And, I mean, you know, let's call that 50 grand at your house for the fun of it. You've still got 150,000 that you need to do something with other than a stupid but savings account. Now, if you put it into some kind of a mix with a stock broker and you were losing money, I get that. If you put it into good mutual funds and the overall economy slowed down like it is right now, and the value went down, then you didn't have somebody good in your corner to coach you and say, hey, the only person gets hurt on a roller coaster is those that jump off in the middle of the ride, which is exactly what you did. Now, were you invested in single stocks?

No. You're mutual funds. Very diversified. In mutual funds. Some of them were mutual funds. Okay. Well, what I would do is sit down with a good investment broker, and here's what you're looking for this time. And you're looking for someone with the heart of a teacher that teaches you

the history of the mutual fund that you're putting the money into. I'll give you an example. I own one that's over 80 years old. In the 80 years it's been open, fewer than 15 of those 80 years has been a down year. So if we happen to have a down year, and I know that, I know that, not my broker knows that, but I know that, then I'm not freaking out. It's kind of like the house that you own in Baton Rouge. If it went down in value this year, you wouldn't freak out because, generally speaking, homes in the neighborhood you live in for the past 40 years have gone up in value. Agreed? Agreed. So you wouldn't freak out on one down year and bail out. That's just like that mutual fund I'm describing. I'm not going to freak out in one down year and bail out. But that's all

knowledge on your part rather than depending on someone else to tell you what to do, and then you get scared because you watch the news and you never take financial advice from the news if the commercial breaks where you're watching tv are walk-in bathtubs gold commercials and reverse mortgages and snuggies that tells you you don't want to take financial advice there that's just a bad plan and so here's me looking at you fox but anyway yeah so there you go but the fox business right but i love them they're wonderful. But the commercials are comical. Saturday night live.

I'm trying so hard. I can't hold it in. You're not saying walking bathtubs are a bad idea. Just the investment advice. I'm just saying if this is where you get your investment advice. I know what you're saying. When the commercial breaks or walk in bathtubs and snuggies, then you know you're not getting good. This is a bad place.

Oh, that was perfect. I'm sorry. That just got me. That was like the church giggle. I couldn't hold it in any longer. I mean, we've all sat and watched them at the commercial. I know exactly what you're talking about. And we're on there giving financial advice, so what do we know?

But anyway, you know, you really need to sit with a good broker who has the heart of a teacher. Go to Ramsey Solutions.com, click on SmartVestor, sit down with them, interview them, and what you're looking for here is a type of wisdom, not intellect. There's a difference. There's a lot of very, very intellectual. ignoramus is out there. And that's not in the world in general. That's not what you're looking for. You're looking for common sense wisdom that says, I bought a mutual fund that for 80 years has only had less than 15 down years. So we're having a down year. I don't need to panic. And that you learn that,

you internalize that, you emotionally swallow that, and then it becomes part of your plan. And so in that situation, then you invest in good mutual funds in your 401ks and your Roth IRAs and those kinds of things and you get your house paid for. And that's what I'm going to do with your 150, unless you've got other debts, and then I'm going to clean that up too. So I want you debt-free 100% and investing in good growth stock mutual funds. That is the shortest, that have long track records that are comfortable to you and that you understand what's going on. You didn't do it because I said do it or because some goob at a financial office said do it. It's because you learned and your knowledge allows you to sleep at night.

You know, Ken, that's the difference between tossing and turning at night when the stock market's down. Yeah. Is whether you made the decision based on knowledge you had or knowledge someone else had. Yeah. Well, it's true. I mean, you know, for years, I mean, before I even started working with you, this idea, the roller coaster analogy that you've given. And it's really true. When you look at the data, if you look over the last 30 years, you just got to stay calm and ride this thing out. And I just don't freak out when I see the stock market dip. You know, I say, hey, we keep investing. That's an opportunity. it's going to come back. And you're right. Knowledge is what gives us tremendous confidence and confidence the piece. Yeah. And once you really understand that, folks, about the stock market, then when it goes down,

you kind of go like, it's on sale. Yeah, we're getting bargain right now. It's a bargain time. Yeah. This is it time to buy? Well, we don't really do that either because I'm not going to tell you to time the market. I'm just going to tell you steady invest. Steady invest. That's all I have done. I have been tempted at times when the market is down to time it. Yeah. I really, really wish in 2008, when the stock market was crashing in the world's coming to an end, and it went from $13,000 to $6,500, I really wish I'd put an extra million dollars in. Yeah. Because, I mean, the Dow is sitting at, what, 6x of that.

That million today would be worth $6 million. Wow. Because the Dow's, you know, over $30,000, right? So, yeah, there you go. I mean, that's 5x, 5x of that. it would be worth $5 million. Now, ultimately, I did have money in there, and it's worth $5.X. But if you could have timed the market and bought at the lowest possible time we've seen in decades,

then that would have been the time to do it. But who knew when the bottom was? Here's the deal. Every dollar you add to your mortgage payment puts a bigger dent in your principal balance. If you add even one extra payment every year, you'll knock years off the term of your mortgage. plus save thousands of dollars in interest. Listen, I'm telling you when the bank doesn't own your house and you step into the backyard, the grass feels different under your feet

because it's all yours. All right, guys, thanks for listening to our exclusive real estate series. It's been a blast, and I hope you enjoyed it as much as I have. Make sure to let us know what you thought of it and share this series with the people in your life getting ready to buy or sell a home.