In a recent YouTube video, Dave Ramsey spoke with a caller about paying off his mortgage early. For context, the caller and her husband earn a combined total of $250,000 a year and owe $633,000 on their home. They don’t have any other debts, and now they want to become debt free by paying off the rest of their mortgage.
The caller’s main question for Ramsey was whether it’s wise to pay off the mortgage in a large lump-sum payment and how they might go about it. Here’s what Ramsey proposed.
Establish an Emergency Fund
The first thing Ramsey advised is to establish an emergency fund. This is also a fundamental step in Ramsey’s 7 Baby Steps, though the goal there is to start with $1,000 and increase your savings until you have at least 3-6 months’ worth of living expenses saved up. Once you have a full emergency fund, the goal would be to pay off any other debts — excluding a mortgage. The mortgage shouldn’t be a priority until a bit later.
In the caller’s case, they don’t owe any other debts other than their mortgage. They also already have around $160,000 saved up. Although this might seem like a lot of money, the husband expressed his concerns that it isn’t enough.
Hearing this, Ramsey suggested that they use $100,000 of this amount for their emergency fund — the rest can be for other financial goals. This is because it’s unlikely that they’ll experience an emergency that costs more than this amount. Having $100,000 set aside for emergency cases also will give the husband and wife greater peace of mind should something happen to their finances.
Pay Early and Often
Once the emergency fund is fully established — as is the case with this particular family — Ramsey suggested paying more money each month on their mortgage. The more they can pay, and the more frequently they make their payments, the more quickly they can reduce how much they owe.
As Ramsey pointed out, paying more than the minimum amount due each month can cut down on the total amount of interest paid. This is because more of your hard-earned money is going toward the principal balance rather than the interest. Paying early and often also can lower the overall loan term.
In the video, Ramsey did not say exactly how much the couple should spend on their monthly mortgage payment. Instead, he recommended paying as much as they can afford — something that can work for other homeowners as well.
Consider Using Investments
In the video, Ramsey asked whether the couple had any investments. Although the caller didn’t directly answer this question, Ramsey inferred that it’s likely that they have some investments, such as retirement accounts.
With this, Ramsey referenced a study that indicated how many billionaires used the majority of their non-retirement investments to pay off their homes. After becoming debt free, they then refocused on their investments.
While using investments can help you pay off your mortgage, Ramsey suggested avoiding tapping into any retirement accounts. This is because drawing from your retirement accounts could set you back or make it harder for you to retire as planned.
Create Room in Your Budget
Ramsey’s blog has several articles discussing the importance of making more room in your budget to pay off your mortgage and other debts. By eliminating certain non-essential expenses, you can create some wiggle room in your budget and free up money for other essentials or paying off your mortgage.
If you don’t have a budget already, Ramsey suggested creating one and going over it each month. This can help you determine what your major expenses are and how much money you’re earning. It can also help prevent overspending.
Consider Refinancing Your Loan
When it comes to mortgage financing, there are many types of home loans available. This includes conventional loans, FHA loans, VA loans, Jumbo loans and more. Each of these loans comes with its own loan term — usually 15 or 30 years — and interest rate.
Ramsey recommended getting a 15-year mortgage for several reasons. Although the monthly mortgage payment will typically be higher than a 30-year mortgage, the shorter term can save you money on interest charges.
If you currently have a 30-year loan, Ramsey suggested refinancing it for a shorter term. This can get you out of debt faster. However, if your current mortgage has a very low interest rate, you might want to stick with what you have and simply make larger monthly payments to pay off your mortgage early.
Ultimately, there are many ways to pay off your mortgage early — as illustrated in the video and in several articles on Ramsey’s website. Start by establishing a solid emergency fund. Then, pay off any other outstanding debts you may have before focusing on your mortgage.
Once you’ve done all of that, you can weigh your options as to whether you want to use your investment accounts — excluding retirement accounts — to help get out of debt faster. At the same time, you can run the numbers and determine whether you should make larger or more frequent payments to pay down the principal balance sooner.
And if you still have a lot of years left on your mortgage, you might want to consider refinancing your loan for a shorter term and lower interest rate.
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