Posted on 05/02/2025 9:30:32 PM PDT by where's_the_Outrage?
When we hear money experts talking about how the accumulation of debt seriously hinders our ability to build wealth or comfortably retire, they’re usually talking about high-interest debt, like that associated with credit cards. Usually, they’re not talking about mortgage debt, which many money experts go so far as to call “good debt.” Why?
Mortgage debt is sometimes called good debt because it’s associated with an investment that is expected to appreciate in value over time. Additionally, the vast majority of mortgages in the U.S. (92%, according to the Federal Reserve Bank of St. Louis) are fixed-rate, meaning the interest rate remains the same over the life of the loan and don’t, for example, change when inflation goes up.
The general consensus may be to not be in a hurry to pay off your mortgage — unless, of course, you have a ton of excess cash and are already well ahead of your retirement savings goals. Rachel Cruze is one of the few famous financial experts who doesn’t agree with this thinking. And actually, her father, fellow financial expert Dave Ramsey, doesn’t either. They both passionately argue the importance of paying off your mortgage ASAP. Why does Cruze, in particular, believe you should pay off your house early?
In a recent video posted to her social media channels, Cruze shot down the common retort she hears when advising people to pay off their mortgage early. They say something along the lines of, “But why not invest that cash in the market and make 10, 11% returns on it?”
This argument seems to make sense if you locked in a low-rate mortgage for, say 2% or 3%. But there’s a flaw in it that Cruze sums up perfectly in her reply.
(Excerpt) Read more at msn.com ...
I was a number cruncher by profession—but still paid off my mortgage early even though the numbers did not support that decision.
I may be considered totally irrational but I sleep like a baby at night.
“I was empowered because my house was paid off.”
That’s a great way to put it. We paid off our home around 2000 by making extra (sometimes double) on the principal every month. That involved long stretches of years of “doing without”, living below our means, and other sacrifices, but it was so worth it.
Since then, always cash. It’s a great feeling. Not that you’re entirely free considering all the costs involved in actually living in the house.
A house that you live in is your home. I you really want complete peace of mind, pay off the mortgage on your home, make it yours and then use your strategy on your first investment property. Pay that off and never go into any kind of debt again. Keep in mind always that interest rates on any kind of debt are not investment opportunities unless you're the one lending the money.
One of my occasional criticisms of the Ramseys is that they are not consistent about how they approach different facets of personal finance. They advise against buying new cars because they consider it a poor investment (when car is NOT an investment), but then ignore one of the most important investment considerations — personal liquidity — when advising people to pay off their mortgage early.
Suppose you have a 30-year fixed rate mortgage with a very low interest rate, and it costs you $2,000 per month to pay it off over the full term of the loan. And suppose you want to pay it off early by adding $500 to your monthly payment to pay down the principle faster.
I don’t think this is a good idea. Instead, you’d be better off investing that $500 every month in a relatively conservative mix of investments and let it grow over time. At some point years down the road the balance in your investment account will exceed the balance on your mortgage. THIS is when you make the decision about whether to pay the mortgage off entirely or do something else with the money.
The advantage of this approach is that it helps maximize an important personal financial metric that is often overlooked even by financial experts: your LIQUIDITY. Once you make that extra $500 principle payment you can’t get that money back if you need it later. But if you invest it instead you will continue to keep your options open about what to do with it later.
You are actually losing money due to COLA/COI.
Should trade those taxable, low yield (yes safe) Treasuries for tax free municipal bonds backed by ad valorem taxes and quadruple or quintuple your cash flow.
Anyways, lots of 5% coupon muni's out there at a slight premium, say 101-109 price. 4s at par or discount all over. That kicks the TEY north of 7 all day long in highest tax bracket.
Been there-done that.
When we retired, we moved our IRAs out of the regular market for a guaranteed 6% (4.8% after fees) where if the market goes up we earn more - but if the market tanks, we don’t lose a penny of principal.
Could have made a lot more in the market during the first Trump years but we couldn’t afford a 3rd hit after we retired..
Current mortgage is small and we pay cash for our cars.
Different situations call for different strategies.
“In fact, some counties/cities have income tax exempt status and those would be called “triple tax exempt”
I live in a broken State, Kalifornia. So muni’s from here certainly have some risks.
The Ramsey ideas work best for people who are living “on the edge” and struggling to get rid of consumer and auto debt. Paying off their mortgage early is not an option for them—it is the best they can do to make their mortgage payments on time.
The Ramsey advice is less applicable to prosperous folks who have a lot of good options available.
Very few of us are in the highest tax brackets.
I would not recommend my state’s (CT) munis to anyone. Our best and brightest (and wealthiest) are leaving the state and the Democrats who run the place are kooks with no common sense.
While the risk of default is low in any given year it is very real in the medium term.
I would be the first to admit that leveraging debt for investments is not a good idea for most people, but if what you’ve said here is true then we wouldn’t see banks fail.
Well said.
Yes, paying off a mortgage early is the thing to do, if you can. After all, is there really any such thing as “good’ debt?
Would they actually charge you 22% on the entire amount, or just the portion of it in that bracket like regular income?
“When we retired, we moved our IRAs out of the regular market for a guaranteed 6% (4.8% after fees) where if the market goes up we earn more - but if the market tanks, we don’t lose a penny of principal”
So annuities. The two I have are geared for retirement income and not much increase in principle. They do have downside principle protection in bad market years which there have been a few due to covid. But the life Ins. rider does reduce principle in bad market years. But meantime income is appreciating by 10% a year until I start taking the annual income provision. Fortunately it doesn’t look like I will need so I believe I can let it ride until I’ve aged out and forced to start the annual withdrawl. Annuities aren’t great investments, but comfort in knowing you have sustained income coming in for life. Just a piece of my retirement puzzle.
Rather than pay off the mortgage, invest the cash earning ore than the cost of the mortgage interest.
It’s not really that hard to do
All good points!
I thought Ramsey was big on Mutual Funds.
Me? Not so much. Real estate has done us quite well.
& our insurance & taxes on our home are almost $1k/month. So it’s like our county owns us.
We thankfully have investment rental property that has no mortgage.......
It depends on whether or not one understands the application of “opportunity cost” and “liquidity” in personal finance.
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