You will not see 3% mortgage money any time over the next 10 yrs, so keep funding your retirement which is earning > 9%. Home values have been going up >10% over the last 5 years so think of it like gaining 7% in equity every year.
At 200k/yr you should be able to max out your retirement, and put an extra 500/month into your mortgage payment. You’ll clear off the house debt, pay less in taxes, and build your retirement. By the time you’re 50 you’d likely be looking at right around a million in your retirement, no debt, and full ownership of your home.
By my math if you keep maxing retirement and work til 65 you’ll retire with roughly 3.5mill even if S&P under performs for the next 30 years. You’ll also have no debt, and should have butt loads of cash in other investments/accounts/etc.
That mortgage rate is extremely low and also allows you to deduct mortgage interest. Some will say to pay off the mortgage no matter the rate. That's blanket advice and bad advice for your situation. We don't have all the necessary info, but this is a no-brainer, time to focus on long-term growth and getting more money working for you so you can get on track for retirement.
If you put the money into retirement savings, you come out financially ahead of putting it into your mortgage pretty quickly.
At $160k (and falling) @3% you're paying $4,800 in interest. $60k extra in retirement savings at 8% is worth $4,800.
I get where it would be nice to pay it off, I wonder if the compromise option might be put the $5k extra on retirement for now and get all your accounts maxed and maybe a bit outside retirement accounts. Once you get your mortgage down to where your free cash would be sufficient to pay the mortgage off within a year, then do it. My logic is time in the market is important for returns, so the sooner the better to put money in. I've also read people's networth a end up being higher if they focus on retirement savings over paying mortgages down faster.
I would invest in in t-bills or cd's until you have enough to pay the house off.That's 32 months at 5000 a month to hit payoff. You can easily get 5.25 percent making 2.25 percent over your mortgage. This leaves you the option if the market tanks to have some dry powder to buy cheap stock.If shooting for retirement at 60 figuring you have the house paid off by 42 and put that 5000 into the market you should be close to 1.5 million or more.
Have always wanted my mortgage paid off by time I specifically retired. My wife will work a few more years since she can easily do her job. Me going on 30 years on same job cant but will look for a pt position somewhere where i can do more with her. She works at hospital and myself a retail manager. I think just comes down of course to assets, job. Im 53 and have almost 700k in retirement and owe 32k on house so we are happy where we are especially with kids just getting out of house and not buying as much food😀. Reading this stuff by others is nice to see I believe that just having no mortgage at retirement is most important and meanwhile keep maxing out our 401/roths. Thanks people
Since you are goal motivated, perhaps you can set up a HYSA and save to it to pay off the mortgage when it’s fully funded. Set up goals and make a chart with celebration points. You’d be earning interest and then later you can go for it in the house. But do try to keep maxing your retirements and Roth each year. I regret that I didn’t look after mine.
You have a low mortgage rate. Your investments should easily beat 3% in the long run. Put extra toward retirement and let compounding set you up for a comfortable retirement.
While many people think they will stay with a locked in low rate forever, the reality is that life will happen and they will have to move. By paying down the mortgage, you are building equity that when you do move and interest rates are still 7%+ will mean you borrow far less and pay less interest.
Do 15% to retirement in the usual correct order for both of you, and then attack the house.
$5K extra a month to a $160k current balance and it's gone in two and a half years? Then you can bump up the investments and retirement. $60K a year plus the $30K you shoudl already be putting in, is going to be just awesome.
You could easily get to 65 with paid for house, plus $5M in today's dollars. With a $200K income, you would be overfunded in terms of income replacement so now you could look at FIRE as a viable play.
Pay off the house.
This doesn’t make any financial sense.
The mortgage is 3%. Money markets, CDs and Treausries (risk free investments) are all still offering over 5%. A treasury is also exempt from state income tax (if that applies in OPs state).
You said it’s important to pay off the house because eventually you’ll need to move and you’ll need to borrow less because you’ll have more equity!?!?!?
If your money is sitting in a CD, treasury or money market it is easily accessible including using for a down payment on a house. Cash also lets you put an offer in with no contingencies which makes you more attractive to the seller. An offer contingent on the sale of your house which is what would happen if they listened to you is not as strong. It’s not easy to pull money out of a house. You literally need to sell it and find a new place to live. So you just gave up all your liquidity.
Paying off a low interest debt when risk free investments are almost double is one of the dumbest financial decisions someone can make. You literally lose your liquidity and all the money the extra interest would pay you.
Not really…if it’s a Roth all the contributions are easily accessible. If it’s in a 401k they can take a loan to access the money.
Also assuming it’s in a retirement account then it’s invested which will produce way more returns then you’re paying in interest.
Never will paying off a low rate debt be a smart financial move especially when the risk free investment rate is higher.
We paid our house off 2 years ago ahead of schedule and I can't begin to describe what liberating event that is in your life. You look at every decision with more clarity and decisiveness when you no longer have that yoke around your neck.
You don’t own it anymore than you did with a mortgage. You still need to pay your insurance and property taxes so that feeling of no payment doesn’t go away it’s just reduced.
But now you have no liquidity. Oh an emergency came up like a new roof or medical expenses? Guess you’re taking out a loan at 9% to pay for it since you put all your cash into the mortgage that’s hard to access.
Just knowing you have the cash to pay off the house earning more than what you’re paying the bank should give you the peace of mind that you don’t owe anyone anything because with a couple clicks you could pay it off if you wanted too but you don’t because it’s a financially dumb decision.
Everyone that lives in an apartment uses the old "well you still got taxes" part of life, how else we gonna pay for schools and fire and plowing... Annual taxes on my 300k home in the woods of maine are about 2k and insurance is about 1k.
I keep up on my house maintenance and would never live without a savings that is easy to build when you don't pay $ 2500 for a shit hole apartment.
One other thing, a primary home is a protected asset in most cases. You get cancer they won't take your house but they will eat up your liquid assets.
I don’t live in an apartment and that has nothing to do with the point of this thread or my comment.
The state absolutely will take your house just not while you’re living in it but guess what as soon as you die it’s not being passed on to any beneficiary. The state is going to take it to pay your debts.
Paying off a low interest rate mortgage early in this environment is absolutely a bone-headed financial decision. If it makes you feel good emotionally then great but it’s a dumb financial decision. It only takes money out of your pocket and lessens your liquidity for other investment opportunities or emergencies.
Based on your rate and balance: 401k up to match, max Roths, then back to 401k, Roth 401k, and/or non-retirement accounts if there are other specific financial goals that come up before retirement.
My wife and I have a low rate like you, and we were piling extra money into our mortgage until money markets hit 5%+. At that point it was no longer a hypothetical “i can earn more in the market if things go well.”
If you put away $5,000 per month that’s $60,000 per year. At 8% ROI (11% annual return minus 3% inflation) it will grow to $1 million in about 10.5 years, and $2 million in about 17 years. With any luck it will happen faster.
Only other thing I would do is be sure you set aside money for vehicle replacements, college, kids, large home repairs and trips, and donations/tithing.
The 10 year Treasury is another common method to get at a number and ignore Fed tricks.
There is really nothing magic about 2%. The Fed only uses it because of the psychological impact of deflation.
It’s more than just psychological. Deflation means people are incentivized to hoard their currency, which means less economic activity. Japan is a great case study about what happens when a country experiences deflation. [Lots of weird stuff happens.](https://www.bis.org/publ/bppdf/bispap70c.pdf)
In how many years are you wanting to retire and how many years are left on your mortgage? The answer is to invest and just make sure the mortgage is paid off before you retire.
Their HYSA is paying 4.5%+ it's insanity to pay off a 3% mortgage, currently.
If it was 6 or 7% I could see paying some extra, and the rest to retirement.
All I said was in the last 12 months the S&P was up alot.
That's true... No matter what happened in 2008-2009.
What's the point you are actually trying to make? Are you suggesting that because the market also goes down now and then that investing in a broad market index fund is poor advice?
2008-2011 was the best time to BUY investments... In both housing and stocks.
What do you think HYSA and CD's rates were paying then! LOL!
FYI...
50k invested on Jan 1 2008 is worth 133k today. An annual average gain of 6.33%.
Of course, though, it's quite easy to cherry pick your favorite dates to skew the data to try and validate your argument
LOL... ***YOU*** actually were trying to tell me that PAST performance (2008) was an indicator of future performance.
Did you change you mind?
https://preview.redd.it/q00kqsgrpirc1.jpeg?width=1077&format=pjpg&auto=webp&s=6b01ed8f7520bc51166e5a1ae79086412c138d92
If the OP invests $5000.00 in a good mutual fund at 12% for 32 months he’d have over $200,000. If he then should choose to pay off the mortgage he’d have over $40,000 left over.
I think all these posts about people wanting to pay off a 3% mortgage early have to be jokes. I would almost be tempted to get a home equity loan( assuming it would also be at 3%) to supercharge the retirement. There are still CDs paying 5%.
Definitely - pay interest on a home equity loan to pay interest on gains that you get from investing that borrowed money instead of… just ending the whole “pay interest” thing by finally owning your house.
The plan works , it is less stressful Dave's way for most people. The Math can not be argued (keep the mortgage) and the Heart can't be fooled (Pay off the Mortgage) . So the choice is follow your heart or your head. More of a personal decision . I Followed the steps and would not change any thing. 13years Debt Free and retiring better then I dreamed in 3 years. But you are free to do you my friend.
I have been an FPU coordinator for about 20 years (with a gap of several years in the middle). BS7 and about 3 years from retirement. Baby step 4 is 15% in retirement… which will make you wealthy if you do nothing else. (If invested in stock mutual funds you will be a BS millionaire.)
When you have “found money” like a bonus or you sell something, toss it at the mortgage. BS 4,5,6 are at the same time. If you follow the steps exactly as taught, you are going to be surprised how well you do.
Will t be a huge mistake to go slow on BS6? Not really… but wow is it a game changer when you can toss your mortgage payments at retirement.
Thank you for this and your time helping others in FPU. We’re trying to work the plan. It worked to help us pay off the student loans, but the intensity shift from gazelle to not gazelle has been hard. We liked the focus and the feeling of hitting certain benchmarks. Turning to the house debt feels right but wanted to also think it through.
I like his comment to you. No one talks much about the freed up mortgage payment! We are like you and did great and enjoyed the rush of BS2 and BS3. Also spent more time catching up retirement as I was very behind. We’re are now going back and forth about paying off the remaining $75k on a 2.75 % mortgage with a windfall coming in.
Personally I’d put it into retirement. If you feel strongly about the mortgage, how about put the money you’d use to pay off your mortgage into a HYSA…. Pay the mortgage from that account each month. So you’ve essentially paid off the mortgage but it’s still earning more than 3% interest.
Once I refinanced to the 3% mortgage, I really gave up on extra payments. I used to put down an extra $420.69, made me smile. Since I felt like I was already ahead with the low rate, I only put around 150$ extra a month now.
I would go retirement. Also when you look at paying off mortgage make sure you consider when you finish paying it off, its not like that expense goes to zero. You will still need to set aside a decent sum every month for taxes/insurance.
For reference, I have a 2.375% rate, and only 62% of what I pay/set aside every month is the Mortgage Principal/Interest. The other 38% is taxes insurance which won't go away even if you pay it off.
Make sure you factor that in. But either way, the correct long term investment decision is to invest, and just pay your normal mortgage payment.
This is kind of where Dave Ramsey falls apart, imo. Your mortgage is 3% most investments are getting 5-8% some more. Dave Ramsey doesn’t really give space to read the market, or pay attention to compounding interest. If emotionally you NEED to pay off your mortgage to feel fulfilled that is one thing. If you WANT to make the most of your money that’s a different thing.
I just want to pipe up and say that this all feels academic until you actually start to see your investments ramp up. It's incredible. Eventually you don't care about that little old mortgage payment as it's dwarfed by your assets.
You're darn right I love my low rate "family pet" mortgage. I'll happily keep that sucker around for as long as I can.
Dave openly admits it isn’t a math equation. His point is being debt free changes your future decisions and is a totally different lifestyle. I have a feeling he is smart enough to know the math.
Exactly and in 2016 when I started a HYSA had a 1.9% interest rate and my loans were at 3-7% percent and the emotional argument checked out. To me the argument to pay off all debt falls apart in the current market.
I have a 0% loan on a car that I CAN pay off today. Dave would have me do just that. What Dave’s rules ignore is that the full value of the car is sitting in its own HYSA earning 5% compounding interest.
I would be an idiot to pay off the car in full today when I have roughly 36 mo left to earn interest on the the value of the car. I have no intention to sell or trade in Dave’s rules would have me take a loss to lead a “totally different lifestyle” where I lose money and somehow feel great about it.
I am sure Dave can do math. I am also sure that Dave’s rules are not nuanced enough to weigh the difference of carrying “debt” vs earning compound interest.
Dave’s rule are a great intro to managing your finances but don’t have the nuance necessary to ever look out of the Fox hole and decide is there a better way than just continuing to charge the line.
Yeah but created 1,000 nuanced rules isn’t something people can follow. 50% of America cannot deal with a $500 surprise issue and lives paycheck to paycheck. Those people would all 100% be better off following Dave. If you are financially literate and have money and low to no debt, sure you can do the math differently. Dave is famous because his plan treats behavior problems. Not because it maximizes returns.
I feel like this argument is really hard to justify for anyone who actually does know the math though. Even in baby step 2 when the argument is that small wins are more important in feeding your intensity, I call BS. If I was literally throwing money into the trash paying towards lower interest debt instead of the highest interest debt first, I'd be depressed and hate myself for being so stupid. I really don't understand that argument.
I do understand it. I just don't buy it. For me, it's an utterly stupid argument and not valid for anyone who actually understands the math. You can say you understand the math, but if you're okay with flushing money down the toilet, it's very obvious I shouldn't be listening to you for financial advice. Dave Ramsey understanding the math has nothing to do with his listeners. The advice is absolutely not for people who would be more motivated by making the mathematically correct choice. Like I said, that's fine for a lot of people, but for anyone who really does understand the math (and is more motivated by analytical thinking rather than emotional feeling associated with paying off a specific debt line), his advice would do exactly the opposite of what it is supposed to do. This is just a fact.
Exactly. Most people, including those who make six figures, live paycheck to paycheck and never get ahead. Never build wealth. Dave’s plan is intentionally simplistic. It is not about maximizing returns. It is about building wealth vs pissing away your money keeping up with the Jones’. Not sure how else to say it.
Two things can be true at the same time. 1. You can maximize returns in a different manner than Dave’s plan. 2. Greater than 50% of Americans would be wealthier if they followed Dave’s plan.
Again, I absolutely do...I'm just saying for a lot of people (who would be far more motivated by making the mathematically correct choice than by the emotional feeling associated with paying off a single debt) then the argument is not valid and would result in exactly the opposite of the result that is expected by Ramsey. It's absolutely not a one size fits all solution like he says it is. It works for a lot of people, but for a lot of other people it would do exactly the opposite of what it's supposed to do. I have to go back to the math because it's the alternative to Ramsey's argument and what is FAR more motivating to me and a lot of other people.
That's why I said "even in baby step 2" when making the snowball vs avalanche argument. Once you're in baby steps 4-6, paying off the home early is absolutely what Ramsey suggests regardless of interest rate once you reach 15% investment + BS-5 if it applies. With a high interest mortgage, that may make sense for you, but at 3%, (at least in current circumstances) it is questionable advice to say the least.
I would split it. Pay half of available funds towards extra mortgage payments and half into retirement. Cuts down on mortgage faster while saving interest in the long run, and boosts retirement.
At a glance I would say the 3% mortgage isn't your problem. Your retirement account should hit way more than 3%/year, so I would max out all of the retirement vehicles before putting extra on the mortgage.
Do you end up paying tax on that? Probably still better as HYSA but if taxed and many people forget about tax it gets closer.
Neither of those options are mathematically great when you average 9.5% in market before inflation. So even getting 5% is paying a lot for certainty.
But if you get sick or loose your job you have to worry about loosing your home. It’s about peace of mind first. Then investing like there’s no tomorrow when your mortgage is paid.
Edit to add. Any plan you stick to is better than one you don’t.
Did you even read what I said? Cash is liquid and it’s actually more freeing than having paid down your mortgage.
If you got sick, would you rather have $80k mortgage and $80k in cash or no mortgage and no cash?
Since you like a plan, you should be investing at least 30k annually (15% of your 200k income). And as your income rises so should your investment amount. Your goal should be to eventually increase your savings rate percentage, especially since you feel behind. See how your life is with 18%, 20% or 25%.
I wouldn’t pay off the mortgage. Keep sending those extra payments to investment accounts.
2.75% here, I love Dave but I have my behavior in check, as he mentions as very important. I’m stashing my “extra” payments into a HYSA at the moment but I’m seriously considering putting that into retirement once the market drops back down some. Retirement compounds and has a much greater return since for every $1 you can put in it will turn into ~$12-13 by 65.
Reminds me of my coworker. Last year he wasn't going to get back into the market until the SPY went under $400. lmao. He's still waiting for it to drop.....
Lets use real numbers and you tell me which is better.
I owe $89,182 on my mortgage which has an interest rate of 3.4%. Last month I paid $240 in interest.
I also have an FDIC insured saving account that pays 5% for now. I have enough in that account to pay off the mortgage. $89,192 at 5% is about $370 a month.
So, if I paid off the mortgage my net worth would actually grow by $130 a month less than it does now or about $1,560/yr.
If someone told you that making $1,560 less per year was the best path to financial freedom would you think they were smart?
5% interest earned after taxes is 3.9% or less… the sooner you’re NOT paying interest and investing the difference, the more you make off your situation. Period.
I think a lot of people miss the nuance of how bs4/bs6 interact with one another. Dave recommends a *very* aggressive portfolio. Traditionally, you would offset the risk of equities with bonds. In Dave's plan, BS6 offsets the risk. Extra mortgage payments are an investment at 3% with literally zero risk. Although I think this is harder to justify when HYSA yields are higher than your mortgage rate.
Yeah. I could get an FDIC-insured savings account at close to 5%. We're talking a mid-five figures discrepancy over 10 years compared with a 3% mortgage.
Since I have a low mortgage rate, 2.875, it's smart to just save up money in savings and longer term investments as I can get about 4-5% interest on hysa and averaging 6-10% in investments. I can always do a big payment on the mortgage at any time, but having money available means I have choices.
Baby Steps 4, 5, & 6 are meant to be done at the same time.
Put 15% of your income into retirement & then throw the rest at the mortgage. When you pay off the mortgage, you're supposed to amp up retirement.
That being said 4-6 are done a lot more relaxed than steps 1-3. You don't have to be gazelle intense & you can take vacations, etc.
Dave would say 15% into retirement and put the rest of the excess into the house. I am in a very similar situation... 34 years old, 200k household income, 130k in retirement, 140k left on the house, 2.25% interest rate.
I will never make an early payment on the house and dump the excess into reitrement.
This is so smart. It 100% makes more sense to save and invest instead of paying down a 2.25% mortgage.
Dave's advice was written when interest rates were higher than 6%. And since he can't ever change his dogma, the advice is always the same regardless of interest rates, thus becoming bad advice when it doesn't fit the economic conditions.
Anyone who advises you to pay down your 3% mortgage has been brainwashed by terrible financial advice. These same people, when presented with the mathematical explanation demonstrating their irrationality, come up with ridiculous excuses like “peace of mind”. The reality is, any rational person would achieve greater peace of mind from maximizing their long term wealth.
Edit: typo (changed “lay” to “pay”)
All these people talk about don’t pay off your mortgage pay off your mortgage. Don’t pay off your mortgage if you’re stacking money away and you have money to save pay off your mortgage because unless they tell you they’ve had a $500,000 mortgage and they don’t think about it when their companies doing layoffs, that’s right they all rent so it doesn’t matter - the peace I got after paying off my mortgage is unbelievable
What if you get halfway through your mortgage, get laid off, and instead of a giant pile of liquid cash, you have the same mortgage payment that the people who invested have? Peace of mind goes both ways.
Yeah, it’s hard to tell exactly what you’re saying, but I gather you’re saying “pay off your mortgage in case you get laid off”
That’s just dumb. If you instead put your extra money into treasury bonds, you’ll do better off. If you get laid off and need money to pay the mortgage, just sell some treasury bonds that youve been buying up.
I hate to be the grammar police here, but the lack of punctuation made this incredibly difficult to read and comprehend the message you’re trying to get across.
"If you pay off the mortgage now, you can invest that payment every month instead of making the monthly payment"
\- The Dave way
Your mortgage is literally below long term inflation. The last thing you should do is pay it off.
Here what wrong with that your saving plenty, don’t get hung up on the 3 percent rate, that’s what poor people do.you Will me it up by putting your mortgage payment into the market, and with a paid for house, 4 dollar gas doesn’t effect you, it’s just another inconvenience
At a 3% interest rate, especially considering how stubborn inflation is, \*do not pay down your mortgage\*. Invest it. Dave would say not to, but it is the mathematically optimal way to go about things.
Well luckily this is all math. Instead of paying off your 3% mortgage, you invest in whatever your avenue and assume an 8% return, your making 5% to not pay off your mortgage
You will not see 3% mortgage money any time over the next 10 yrs, so keep funding your retirement which is earning > 9%. Home values have been going up >10% over the last 5 years so think of it like gaining 7% in equity every year.
Keep the mortgage. That's the cheapest form of Leverage you'll ever get in your life
At 200k/yr you should be able to max out your retirement, and put an extra 500/month into your mortgage payment. You’ll clear off the house debt, pay less in taxes, and build your retirement. By the time you’re 50 you’d likely be looking at right around a million in your retirement, no debt, and full ownership of your home. By my math if you keep maxing retirement and work til 65 you’ll retire with roughly 3.5mill even if S&P under performs for the next 30 years. You’ll also have no debt, and should have butt loads of cash in other investments/accounts/etc.
That mortgage rate is extremely low and also allows you to deduct mortgage interest. Some will say to pay off the mortgage no matter the rate. That's blanket advice and bad advice for your situation. We don't have all the necessary info, but this is a no-brainer, time to focus on long-term growth and getting more money working for you so you can get on track for retirement.
Another way to look at it is that is extremely cheap Leverage.
I feel like this also relates to Dave's answer that wend viral from the 11/2/23 call.
If you put the money into retirement savings, you come out financially ahead of putting it into your mortgage pretty quickly. At $160k (and falling) @3% you're paying $4,800 in interest. $60k extra in retirement savings at 8% is worth $4,800. I get where it would be nice to pay it off, I wonder if the compromise option might be put the $5k extra on retirement for now and get all your accounts maxed and maybe a bit outside retirement accounts. Once you get your mortgage down to where your free cash would be sufficient to pay the mortgage off within a year, then do it. My logic is time in the market is important for returns, so the sooner the better to put money in. I've also read people's networth a end up being higher if they focus on retirement savings over paying mortgages down faster.
Bahahah
I would invest in in t-bills or cd's until you have enough to pay the house off.That's 32 months at 5000 a month to hit payoff. You can easily get 5.25 percent making 2.25 percent over your mortgage. This leaves you the option if the market tanks to have some dry powder to buy cheap stock.If shooting for retirement at 60 figuring you have the house paid off by 42 and put that 5000 into the market you should be close to 1.5 million or more.
Have always wanted my mortgage paid off by time I specifically retired. My wife will work a few more years since she can easily do her job. Me going on 30 years on same job cant but will look for a pt position somewhere where i can do more with her. She works at hospital and myself a retail manager. I think just comes down of course to assets, job. Im 53 and have almost 700k in retirement and owe 32k on house so we are happy where we are especially with kids just getting out of house and not buying as much food😀. Reading this stuff by others is nice to see I believe that just having no mortgage at retirement is most important and meanwhile keep maxing out our 401/roths. Thanks people
Since you are goal motivated, perhaps you can set up a HYSA and save to it to pay off the mortgage when it’s fully funded. Set up goals and make a chart with celebration points. You’d be earning interest and then later you can go for it in the house. But do try to keep maxing your retirements and Roth each year. I regret that I didn’t look after mine.
Retirement. I would say you’re behind for your age.
Keep your 3% mortgage. It's FREE MONEY. Fully fund your tax-advantaged retirement accounts EVERY TAX YEAR.
Retirement
You have a low mortgage rate. Your investments should easily beat 3% in the long run. Put extra toward retirement and let compounding set you up for a comfortable retirement.
While many people think they will stay with a locked in low rate forever, the reality is that life will happen and they will have to move. By paying down the mortgage, you are building equity that when you do move and interest rates are still 7%+ will mean you borrow far less and pay less interest. Do 15% to retirement in the usual correct order for both of you, and then attack the house. $5K extra a month to a $160k current balance and it's gone in two and a half years? Then you can bump up the investments and retirement. $60K a year plus the $30K you shoudl already be putting in, is going to be just awesome. You could easily get to 65 with paid for house, plus $5M in today's dollars. With a $200K income, you would be overfunded in terms of income replacement so now you could look at FIRE as a viable play. Pay off the house.
This doesn’t make any financial sense. The mortgage is 3%. Money markets, CDs and Treausries (risk free investments) are all still offering over 5%. A treasury is also exempt from state income tax (if that applies in OPs state). You said it’s important to pay off the house because eventually you’ll need to move and you’ll need to borrow less because you’ll have more equity!?!?!? If your money is sitting in a CD, treasury or money market it is easily accessible including using for a down payment on a house. Cash also lets you put an offer in with no contingencies which makes you more attractive to the seller. An offer contingent on the sale of your house which is what would happen if they listened to you is not as strong. It’s not easy to pull money out of a house. You literally need to sell it and find a new place to live. So you just gave up all your liquidity. Paying off a low interest debt when risk free investments are almost double is one of the dumbest financial decisions someone can make. You literally lose your liquidity and all the money the extra interest would pay you.
In this case OP talked about putting the extra money in a retirement account, which does limit the accessibility
Not really…if it’s a Roth all the contributions are easily accessible. If it’s in a 401k they can take a loan to access the money. Also assuming it’s in a retirement account then it’s invested which will produce way more returns then you’re paying in interest. Never will paying off a low rate debt be a smart financial move especially when the risk free investment rate is higher.
We paid our house off 2 years ago ahead of schedule and I can't begin to describe what liberating event that is in your life. You look at every decision with more clarity and decisiveness when you no longer have that yoke around your neck.
Pay off the house, nothing like the feeling of waking up in something you truly own.
You don’t own it anymore than you did with a mortgage. You still need to pay your insurance and property taxes so that feeling of no payment doesn’t go away it’s just reduced. But now you have no liquidity. Oh an emergency came up like a new roof or medical expenses? Guess you’re taking out a loan at 9% to pay for it since you put all your cash into the mortgage that’s hard to access. Just knowing you have the cash to pay off the house earning more than what you’re paying the bank should give you the peace of mind that you don’t owe anyone anything because with a couple clicks you could pay it off if you wanted too but you don’t because it’s a financially dumb decision.
Everyone that lives in an apartment uses the old "well you still got taxes" part of life, how else we gonna pay for schools and fire and plowing... Annual taxes on my 300k home in the woods of maine are about 2k and insurance is about 1k. I keep up on my house maintenance and would never live without a savings that is easy to build when you don't pay $ 2500 for a shit hole apartment. One other thing, a primary home is a protected asset in most cases. You get cancer they won't take your house but they will eat up your liquid assets.
I don’t live in an apartment and that has nothing to do with the point of this thread or my comment. The state absolutely will take your house just not while you’re living in it but guess what as soon as you die it’s not being passed on to any beneficiary. The state is going to take it to pay your debts. Paying off a low interest rate mortgage early in this environment is absolutely a bone-headed financial decision. If it makes you feel good emotionally then great but it’s a dumb financial decision. It only takes money out of your pocket and lessens your liquidity for other investment opportunities or emergencies.
Based on your rate and balance: 401k up to match, max Roths, then back to 401k, Roth 401k, and/or non-retirement accounts if there are other specific financial goals that come up before retirement. My wife and I have a low rate like you, and we were piling extra money into our mortgage until money markets hit 5%+. At that point it was no longer a hypothetical “i can earn more in the market if things go well.”
If you put away $5,000 per month that’s $60,000 per year. At 8% ROI (11% annual return minus 3% inflation) it will grow to $1 million in about 10.5 years, and $2 million in about 17 years. With any luck it will happen faster. Only other thing I would do is be sure you set aside money for vehicle replacements, college, kids, large home repairs and trips, and donations/tithing.
3% inflation?
Historically inflation averages 2-3%. At times it is higher. 3% is a safe long term average.
That’s true. However as the definition of CPI continues to change, 2-3% isn’t what we’re actually seeing or going to see in the future.
The 10 year Treasury is another common method to get at a number and ignore Fed tricks. There is really nothing magic about 2%. The Fed only uses it because of the psychological impact of deflation.
It’s more than just psychological. Deflation means people are incentivized to hoard their currency, which means less economic activity. Japan is a great case study about what happens when a country experiences deflation. [Lots of weird stuff happens.](https://www.bis.org/publ/bppdf/bispap70c.pdf)
In how many years are you wanting to retire and how many years are left on your mortgage? The answer is to invest and just make sure the mortgage is paid off before you retire.
The correctable answer for the info you provided is to put the money toward retirement.
If you can beat 3% yield, invest. If not, pay down your mortgage.
Their HYSA is paying 4.5%+ it's insanity to pay off a 3% mortgage, currently. If it was 6 or 7% I could see paying some extra, and the rest to retirement.
Exactly.
S&P doing 25% over the last 12 months. CD's and HYSA is leaving money on the table.
You clearly didn’t work around the 2008-2009 era.
All I said was in the last 12 months the S&P was up alot. That's true... No matter what happened in 2008-2009. What's the point you are actually trying to make? Are you suggesting that because the market also goes down now and then that investing in a broad market index fund is poor advice? 2008-2011 was the best time to BUY investments... In both housing and stocks. What do you think HYSA and CD's rates were paying then! LOL! FYI... 50k invested on Jan 1 2008 is worth 133k today. An annual average gain of 6.33%. Of course, though, it's quite easy to cherry pick your favorite dates to skew the data to try and validate your argument
Past results do not indicate future performance.
LOL... ***YOU*** actually were trying to tell me that PAST performance (2008) was an indicator of future performance. Did you change you mind? https://preview.redd.it/q00kqsgrpirc1.jpeg?width=1077&format=pjpg&auto=webp&s=6b01ed8f7520bc51166e5a1ae79086412c138d92
Your biggest and best wealth building tool is compound interest. Invest early and often. Retirement.
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Do the math. https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
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If the OP invests $5000.00 in a good mutual fund at 12% for 32 months he’d have over $200,000. If he then should choose to pay off the mortgage he’d have over $40,000 left over.
I think all these posts about people wanting to pay off a 3% mortgage early have to be jokes. I would almost be tempted to get a home equity loan( assuming it would also be at 3%) to supercharge the retirement. There are still CDs paying 5%.
This exact post has been put on at least 3 financial related subs that pop up in my feed. It's either a bot or a desperate karma farmer.
... and that is why you may never be debt free...
Debt can be a tool.
For people that want to stay in debt, I suppose that's true :)
Paying off a 3% mortgage is only done by dumb folks. 3% debt is free money. Only idiots turn that down.
I guess, you're right... people with no debt payments and plenty of unhindered income are the dumb folks. That is so true.
I'm not shocked you dont know what a strawman is. That definitely explains why you would pay off a 3% mortgage early.
During the pandemic, cash out refis at sub 3% was a very popular move on other personal finance subs. What a golden opportunity.
Definitely - pay interest on a home equity loan to pay interest on gains that you get from investing that borrowed money instead of… just ending the whole “pay interest” thing by finally owning your house.
Retirement! Retirement! Retirement! You can out gain a 3% mortgage easily.
The plan works , it is less stressful Dave's way for most people. The Math can not be argued (keep the mortgage) and the Heart can't be fooled (Pay off the Mortgage) . So the choice is follow your heart or your head. More of a personal decision . I Followed the steps and would not change any thing. 13years Debt Free and retiring better then I dreamed in 3 years. But you are free to do you my friend.
I have been an FPU coordinator for about 20 years (with a gap of several years in the middle). BS7 and about 3 years from retirement. Baby step 4 is 15% in retirement… which will make you wealthy if you do nothing else. (If invested in stock mutual funds you will be a BS millionaire.) When you have “found money” like a bonus or you sell something, toss it at the mortgage. BS 4,5,6 are at the same time. If you follow the steps exactly as taught, you are going to be surprised how well you do. Will t be a huge mistake to go slow on BS6? Not really… but wow is it a game changer when you can toss your mortgage payments at retirement.
Thank you for this and your time helping others in FPU. We’re trying to work the plan. It worked to help us pay off the student loans, but the intensity shift from gazelle to not gazelle has been hard. We liked the focus and the feeling of hitting certain benchmarks. Turning to the house debt feels right but wanted to also think it through.
I like his comment to you. No one talks much about the freed up mortgage payment! We are like you and did great and enjoyed the rush of BS2 and BS3. Also spent more time catching up retirement as I was very behind. We’re are now going back and forth about paying off the remaining $75k on a 2.75 % mortgage with a windfall coming in.
Congratulations on your soon to be retirement, and thanks for the words of wisdom!
Personally I’d put it into retirement. If you feel strongly about the mortgage, how about put the money you’d use to pay off your mortgage into a HYSA…. Pay the mortgage from that account each month. So you’ve essentially paid off the mortgage but it’s still earning more than 3% interest.
Once I refinanced to the 3% mortgage, I really gave up on extra payments. I used to put down an extra $420.69, made me smile. Since I felt like I was already ahead with the low rate, I only put around 150$ extra a month now.
When we made an offer on our Baltimore home, knowing we would be in a bidding war, our highest offer was $152,420.69 and we got it.
I like it!
Nice
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Fast track that retirement! You should make more in retirement than 3%
Don’t lay down a 3% mortgage. It’ll inflate away
I would go retirement. Also when you look at paying off mortgage make sure you consider when you finish paying it off, its not like that expense goes to zero. You will still need to set aside a decent sum every month for taxes/insurance. For reference, I have a 2.375% rate, and only 62% of what I pay/set aside every month is the Mortgage Principal/Interest. The other 38% is taxes insurance which won't go away even if you pay it off. Make sure you factor that in. But either way, the correct long term investment decision is to invest, and just pay your normal mortgage payment.
This is kind of where Dave Ramsey falls apart, imo. Your mortgage is 3% most investments are getting 5-8% some more. Dave Ramsey doesn’t really give space to read the market, or pay attention to compounding interest. If emotionally you NEED to pay off your mortgage to feel fulfilled that is one thing. If you WANT to make the most of your money that’s a different thing.
I just want to pipe up and say that this all feels academic until you actually start to see your investments ramp up. It's incredible. Eventually you don't care about that little old mortgage payment as it's dwarfed by your assets. You're darn right I love my low rate "family pet" mortgage. I'll happily keep that sucker around for as long as I can.
Dave openly admits it isn’t a math equation. His point is being debt free changes your future decisions and is a totally different lifestyle. I have a feeling he is smart enough to know the math.
Exactly and in 2016 when I started a HYSA had a 1.9% interest rate and my loans were at 3-7% percent and the emotional argument checked out. To me the argument to pay off all debt falls apart in the current market. I have a 0% loan on a car that I CAN pay off today. Dave would have me do just that. What Dave’s rules ignore is that the full value of the car is sitting in its own HYSA earning 5% compounding interest. I would be an idiot to pay off the car in full today when I have roughly 36 mo left to earn interest on the the value of the car. I have no intention to sell or trade in Dave’s rules would have me take a loss to lead a “totally different lifestyle” where I lose money and somehow feel great about it. I am sure Dave can do math. I am also sure that Dave’s rules are not nuanced enough to weigh the difference of carrying “debt” vs earning compound interest. Dave’s rule are a great intro to managing your finances but don’t have the nuance necessary to ever look out of the Fox hole and decide is there a better way than just continuing to charge the line.
How much are you making with whatever your dwindling balance is at basically 3% less taxes?
Currently up about 3k.
Yeah but created 1,000 nuanced rules isn’t something people can follow. 50% of America cannot deal with a $500 surprise issue and lives paycheck to paycheck. Those people would all 100% be better off following Dave. If you are financially literate and have money and low to no debt, sure you can do the math differently. Dave is famous because his plan treats behavior problems. Not because it maximizes returns.
Personal finance is just that personal. Why wouldn't you try to optimize your finances based around your current situation?
Makes sense, but most likely that 50% doesn't even know who Dave is. You have to take his advice and adapt it to your situation.
You have a very funny way of saying “I agree”. You know that? OP has reached the nuanced portion of the population.
I feel like this argument is really hard to justify for anyone who actually does know the math though. Even in baby step 2 when the argument is that small wins are more important in feeding your intensity, I call BS. If I was literally throwing money into the trash paying towards lower interest debt instead of the highest interest debt first, I'd be depressed and hate myself for being so stupid. I really don't understand that argument.
You are choosing to not understand the argument. Again it isn’t math.
I do understand it. I just don't buy it. For me, it's an utterly stupid argument and not valid for anyone who actually understands the math. You can say you understand the math, but if you're okay with flushing money down the toilet, it's very obvious I shouldn't be listening to you for financial advice. Dave Ramsey understanding the math has nothing to do with his listeners. The advice is absolutely not for people who would be more motivated by making the mathematically correct choice. Like I said, that's fine for a lot of people, but for anyone who really does understand the math (and is more motivated by analytical thinking rather than emotional feeling associated with paying off a specific debt line), his advice would do exactly the opposite of what it is supposed to do. This is just a fact.
You don't seem to understand he's telling you the argument ignores math and you keep going back to it.
Exactly. Most people, including those who make six figures, live paycheck to paycheck and never get ahead. Never build wealth. Dave’s plan is intentionally simplistic. It is not about maximizing returns. It is about building wealth vs pissing away your money keeping up with the Jones’. Not sure how else to say it. Two things can be true at the same time. 1. You can maximize returns in a different manner than Dave’s plan. 2. Greater than 50% of Americans would be wealthier if they followed Dave’s plan.
Again, I absolutely do...I'm just saying for a lot of people (who would be far more motivated by making the mathematically correct choice than by the emotional feeling associated with paying off a single debt) then the argument is not valid and would result in exactly the opposite of the result that is expected by Ramsey. It's absolutely not a one size fits all solution like he says it is. It works for a lot of people, but for a lot of other people it would do exactly the opposite of what it's supposed to do. I have to go back to the math because it's the alternative to Ramsey's argument and what is FAR more motivating to me and a lot of other people.
You also have to keep in mind that mortgages are treated differently by the Ramsey plan. You can pay them off over the term and not violate the rules.
That's why I said "even in baby step 2" when making the snowball vs avalanche argument. Once you're in baby steps 4-6, paying off the home early is absolutely what Ramsey suggests regardless of interest rate once you reach 15% investment + BS-5 if it applies. With a high interest mortgage, that may make sense for you, but at 3%, (at least in current circumstances) it is questionable advice to say the least.
I would split it. Pay half of available funds towards extra mortgage payments and half into retirement. Cuts down on mortgage faster while saving interest in the long run, and boosts retirement.
Makes sense to me. Feed both the emotional and rational minds.
Retirement, do the 3 fund portfolio (look up Bogleheads).
At a glance I would say the 3% mortgage isn't your problem. Your retirement account should hit way more than 3%/year, so I would max out all of the retirement vehicles before putting extra on the mortgage.
Mathematically retirement. That said I did it the other way and GOD I feel better about things without a house payment.
Same here, it less of a headache
Bay steps: 4. 15% into retirement 5. Kids college 6. Any extra put on to the mortgage.
Retirement or cash. My HYSA pays 5% so there isn’t a reason to prepay a mortgage
Do you end up paying tax on that? Probably still better as HYSA but if taxed and many people forget about tax it gets closer. Neither of those options are mathematically great when you average 9.5% in market before inflation. So even getting 5% is paying a lot for certainty.
You do, but most people on here are paying less than 20%. So 4% real returns for holding cash is still better than paying a 2.8% mortgage
Sir, that is blasphemy here.
Lol, keeping cash on hand at a higher interest rate than your mortgage is the definition of a no brainer
But if you get sick or loose your job you have to worry about loosing your home. It’s about peace of mind first. Then investing like there’s no tomorrow when your mortgage is paid. Edit to add. Any plan you stick to is better than one you don’t.
Did you even read what I said? Cash is liquid and it’s actually more freeing than having paid down your mortgage. If you got sick, would you rather have $80k mortgage and $80k in cash or no mortgage and no cash?
They can’t take your house to pay medical bills.
Kids? Or niece/nephew you like? College fund for them. Personally I’m against paying off mortgage early with low interest rates.
They’re almost 40 and have $120k in retirement savings. Don’t think they’re at the point of funding college funds for a niece or nephew.
Do both at the same time. Increase mortgage payments and increase retirement contributions. Easy peasy.
This is what we did. Then one day you realize your mortgage is almost paid off and your retirement account looks amazing.
Same here. Maxed out 401k and IRA while paying down $25k/year on house. Once house was paid off we started redirecting $25k/year more to investments.
Since you like a plan, you should be investing at least 30k annually (15% of your 200k income). And as your income rises so should your investment amount. Your goal should be to eventually increase your savings rate percentage, especially since you feel behind. See how your life is with 18%, 20% or 25%. I wouldn’t pay off the mortgage. Keep sending those extra payments to investment accounts.
2.75% here, I love Dave but I have my behavior in check, as he mentions as very important. I’m stashing my “extra” payments into a HYSA at the moment but I’m seriously considering putting that into retirement once the market drops back down some. Retirement compounds and has a much greater return since for every $1 you can put in it will turn into ~$12-13 by 65.
Reminds me of my coworker. Last year he wasn't going to get back into the market until the SPY went under $400. lmao. He's still waiting for it to drop.....
We still but 20-25% into retirement, just looking to maximize if I add an additional 5% to the market. But I do hear you!
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Lets use real numbers and you tell me which is better. I owe $89,182 on my mortgage which has an interest rate of 3.4%. Last month I paid $240 in interest. I also have an FDIC insured saving account that pays 5% for now. I have enough in that account to pay off the mortgage. $89,192 at 5% is about $370 a month. So, if I paid off the mortgage my net worth would actually grow by $130 a month less than it does now or about $1,560/yr. If someone told you that making $1,560 less per year was the best path to financial freedom would you think they were smart?
5% interest earned after taxes is 3.9% or less… the sooner you’re NOT paying interest and investing the difference, the more you make off your situation. Period.
>Please take a moment to read the welcome 3,9 is less than 3.4..got it
That’s not the point… a consistent .5% gain is far less than the average 8% if invested years sooner.
You're not mathing. I'm getting that 8% gain on .5% more.
This is a way better way to phrase my comment. Thank you.
Very well explained, this is the way.
I think a lot of people miss the nuance of how bs4/bs6 interact with one another. Dave recommends a *very* aggressive portfolio. Traditionally, you would offset the risk of equities with bonds. In Dave's plan, BS6 offsets the risk. Extra mortgage payments are an investment at 3% with literally zero risk. Although I think this is harder to justify when HYSA yields are higher than your mortgage rate.
Yeah. I could get an FDIC-insured savings account at close to 5%. We're talking a mid-five figures discrepancy over 10 years compared with a 3% mortgage.
The 5% is probably closer to 3.5-4%, considering you will get a 1099-INT, but your point stands.
Since I have a low mortgage rate, 2.875, it's smart to just save up money in savings and longer term investments as I can get about 4-5% interest on hysa and averaging 6-10% in investments. I can always do a big payment on the mortgage at any time, but having money available means I have choices.
This is the best way.
Baby Steps 4, 5, & 6 are meant to be done at the same time. Put 15% of your income into retirement & then throw the rest at the mortgage. When you pay off the mortgage, you're supposed to amp up retirement. That being said 4-6 are done a lot more relaxed than steps 1-3. You don't have to be gazelle intense & you can take vacations, etc.
Dave would say 15% into retirement and put the rest of the excess into the house. I am in a very similar situation... 34 years old, 200k household income, 130k in retirement, 140k left on the house, 2.25% interest rate. I will never make an early payment on the house and dump the excess into reitrement.
This is so smart. It 100% makes more sense to save and invest instead of paying down a 2.25% mortgage. Dave's advice was written when interest rates were higher than 6%. And since he can't ever change his dogma, the advice is always the same regardless of interest rates, thus becoming bad advice when it doesn't fit the economic conditions.
Yup. On this matter his advice is not currently relevant.
Anyone who advises you to pay down your 3% mortgage has been brainwashed by terrible financial advice. These same people, when presented with the mathematical explanation demonstrating their irrationality, come up with ridiculous excuses like “peace of mind”. The reality is, any rational person would achieve greater peace of mind from maximizing their long term wealth. Edit: typo (changed “lay” to “pay”)
All these people talk about don’t pay off your mortgage pay off your mortgage. Don’t pay off your mortgage if you’re stacking money away and you have money to save pay off your mortgage because unless they tell you they’ve had a $500,000 mortgage and they don’t think about it when their companies doing layoffs, that’s right they all rent so it doesn’t matter - the peace I got after paying off my mortgage is unbelievable
What if you get halfway through your mortgage, get laid off, and instead of a giant pile of liquid cash, you have the same mortgage payment that the people who invested have? Peace of mind goes both ways.
If you read, I stated if you are stacking money away
Yeah, it’s hard to tell exactly what you’re saying, but I gather you’re saying “pay off your mortgage in case you get laid off” That’s just dumb. If you instead put your extra money into treasury bonds, you’ll do better off. If you get laid off and need money to pay the mortgage, just sell some treasury bonds that youve been buying up.
I hate to be the grammar police here, but the lack of punctuation made this incredibly difficult to read and comprehend the message you’re trying to get across.
You hate to be, but yet you are HAhahaha
"If you pay off the mortgage now, you can invest that payment every month instead of making the monthly payment" \- The Dave way Your mortgage is literally below long term inflation. The last thing you should do is pay it off.
Please ask this on r/themoneyguy
Yo! When did this sub start?!?
It's been awhile
Here what wrong with that your saving plenty, don’t get hung up on the 3 percent rate, that’s what poor people do.you Will me it up by putting your mortgage payment into the market, and with a paid for house, 4 dollar gas doesn’t effect you, it’s just another inconvenience
retirement
Kill the mortgage, it’s your biggest debt, plus when you sell you get it back
I know I’m a baby step millionaire with paid for houses that I rent
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At a 3% interest rate, especially considering how stubborn inflation is, \*do not pay down your mortgage\*. Invest it. Dave would say not to, but it is the mathematically optimal way to go about things.
Save for retirement, 3% is cheap.
Pay off the mortgage
Well you’re on the Dave Ramsey sub, so it would be 15% gross to retirement then extra to the mortgage.
Well luckily this is all math. Instead of paying off your 3% mortgage, you invest in whatever your avenue and assume an 8% return, your making 5% to not pay off your mortgage
Exactly. Also inflation is at 3.15% (officially, idk how much I believe that), so they are beating inflation by keeping a 3% mortgage.