FPU Week 12: Real Estate and Mortgages

"....Keeping the American dream from becoming a nightmare".

Now, Dave is all about you paying off your debt. He can't wait for you to be investing. But if you really want to see him get fired up, then watch this lesson on real estate. He's been in this business nearly all of his life. As you might expect, he has a lot to say in this lesson and way more than I could review here - How to sell, How to buy, What to buy, What not to buy, financing....

What I will do is focus on Baby Step 6 and why this is an awesome thing to do.

Baby Step 6 is: Pay off your home early.

If you are on this step, then congratulations - you've come a long way. I never imagined that this step would be or could be challenged. I mean really, why would you want a house payment???

But alas, there's always a few "sophisticates" out there with some fuzzy math.

Bogus excuse 1. With a low interest rate on my mortgage, I can invest that money instead of paying down my house and get better returns. Well not really. A good rate on a mortgage today is ~5%. Let's say you went nuts and invested those extra principal payments in good mutual funds and got something crazy like 12% returns. With the cost of your money at 5%, taxes and inflation clipping you at another 4-6%, that gives you weak at best returns of 3%. I'd rather continue to invest into my retirement as in Baby Step 4, pay off the house early, and then invest without the 5% handicap.

Bogus excuse 2. Paying off your house early means losing a big tax deduction. That's not a bad thing. Deductions are for money spent. Child care, charitable giving, mortgage interest all qualify for deductions on your taxable income. If you made $70,000 last year and payed $10,000 in mortgage interest, then the deduction means that you now pay taxes on $60k rather than $70k because of that $10k that you sent to the bank. That income would put you in the 25% tax bracket (assuming Married, filing jointly in 2009). The difference in taxes for having a mortgage vs. not is the difference between $70k of taxable income vs. $60k. 25% of the $10k difference is $2500. Meaning that you think it's better to pay $10,000 to a bank to keep from pay $2500 to the government. And people say Dave Ramsey can't do math!

Imagine you've gone through the Baby Steps - emergency funds, paid off all debt, invested for retirement and college, and now paid off the house. Wow. Imagine not owing anything to anyone. Imagine what you could do once your monthly expenses were little more than food, utilities and .... whatever.

What would you do?


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