Dave Ramsey’s Baby Steps: Step 6 – Pay Off the Mortgage Early

by Derek Clark

Prince
Creative Commons License photo credit: freeloosedirt
The grass in the backyard feels different between your toes when the mortgage is paid off and you really own it. I can’t wait to get past this step. It opens so many possibilities.

Just think how much easier your budget would be without a mortgage payment. Moms can stay home with their kids like they really want to instead of having to work. Dads can take a job because they love it and it fulfills them instead of having to chase the highest paying job they could possibly get.

I don’t know about you but when I think about my budget without a mortgage it is really exciting. My wife and I wouldn’t both have to work. I could start a business and I wouldn’t need a loan to do it. I wouldn’t have to worry about finding investors. My wife’s salary as a teacher could easily cover all of our expenses.

Shouldn’t I keep the mortgage because of the tax advantage?

For some reason a lot of people think they should keep the mortgage because they get tax breaks because of it. This is pretty silly. Let’s go over the math behind this. Mortgage interest is deductible on your taxes. As an example, pretend that you are in the 25% tax bracket, and you paid $10,000 dollars in interest on your mortgage this year. In this case you get to deduct $10,000 from your income which saves you $2,500 in taxes. If you ask me, it seems silly to send Bank of America $10,000 to avoid sending Uncle Sam $2,500.

The other argument that gets made for keeping the mortgage is that you could make more money investing it. This may be true, but the market right now is pretty unpredictable. The S&P 500 hasn’t really made any money for the last 10 years. I think it will do a little better for the next decade, but there are still no guarantees. You can’t go wrong paying off the debt. If you don’t pay off the debt, it is like borrowing at 5 or 6% to invest. Most people would never consider borrowing money to invest, but that is what you are doing if you keep the debt.

I can’t wait to get past this step, as step 7 is my absolute favorite.

Step 1: $1000 Emergency Fund
Step 2: Get out of Debt
Step 3: 3-6 Months Emergency Fund
Step 4: Start Saving 15% for Retirement
Step 5: Save for Kid’s College
Step 6: Pay off the Mortgage as Fast as You Can
Step 7: Give, Save, Spend!

{ 3 comments… read them below or add one }

youngandthrifty March 25, 2010 at 11:54 pm

Yeah, don’t have a mortgage yet, but am looking forward to fast tracking the payments.

you have to make sure the bank you deal with will accept either lump sum payments and won’t penalize you for putting in too much (some penalize after 20% of total mortgage per year is contributed).

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Derek Clark March 26, 2010 at 7:17 am

Yeah you have to watch for that. I made sure I got a mortgage with no prepayment penalties.

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Jules Nelson July 17, 2010 at 3:11 pm

FYI, the reference to dads and moms should not have apostrophes as they are plural and not possessive.

We too are working hard to pay off a 1 1/2 year old mortgage. God willing, we will have it paid off by 12/12.

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