There are people who understand how to save and those who don’t. If you don’t understand how to save, it is better to pay off your home mortgage. Dave Ramsey is correct, “Most people are gonna take that lower payment and just buy crap they don’t use.” He recommends a 15-year fixed rate mortgage and says you shouldn’t get a 30-year fixed mortgage. He suggests that at a 4% interest rate, a $175,000 30-year fixed mortgage will cost you $68,000 more over the life of the loan than a 15-year mortgage will cost. For the majority of people who don’t understand finance and who would “just buy crap,” he is correct.
On the other hand, most of our millionaire clients are frugal super savers. They follow the “Millionaire Next Door” and live very humble lifestyles. Even with their riches, they benefit from having a house with as large of a mortgage as they can get.
My wife and I purchased our house in 1990, thirty years ago. Our first mortgage was $170,000. Thirty years later, we just finished refinancing for the fourth time. This time, we refinanced for $190,000 for 30 years. Over the past 30 years, our home has appreciated, we’ve diligently paid our mortgage each month, and we’ve gone backwards, owing an additional $20,000 over a new 30-year time period.
About ten years ago, we refinanced and took an additional $100,000 out of our house equity. When we did, the mortgage company representative conversationally asked, “What are you going to do with the money?” I told them I was going to invest it into the stock markets. The mortgage representative told me that was not an acceptable option. Acceptable options included remodeling, paying for a college education, or going on a vacation. I hung up the phone.
I called back and started the process again. When I was asked what we were going to do with the money, I said my wife was thinking about remodeling, my daughter was in college, and we were going on a vacation that summer. The representative said “Great!” and we refinanced our house. Then, I took the extra $100,000 and put it in the markets with my other savings. From those savings, we did pay for college, go on vacation, and eventually put an addition on our house. However, taking money out simply to invest should have been an acceptable answer.
If you think about $170,000 invested since 1990, we have made out much better by not paying off our home than any advantage gained by being debt-free.
Over the past 30 years, the S&P 500 composite total return has gone up over twenty times in value. As Dave Ramsey suggests, I may have paid an additional $68,000 in interest, but having that money invested in the markets over the same time period could have earned over $3.4 million in stock market returns. Being “debt-free” comes at a high opportunity cost.
Dave Ramsey is selling peace of mind, but the cost is too high. If your are capable of generating wealth through diligent saving, having a 30-year fixed mortgage at these rates is the best hedge against inflation.
Here I am 30-years later, I still have a 30-year fixed mortgage. Without another refinance, I will be 90 years old when my current mortgage is paid off. However, in reality, I will probably die with a mortgage. Even if the world was ending, I still want to have a mortgage.
Photo by Tierra Mallorca on Unsplash