Dave Ramsey is a popular personal finance guru who has helped millions get out of debt through his books, radio show and Financial Peace University program. One of the key tenets of Ramsey’s philosophy is becoming debt-free, including paying off your mortgage early. Here is a quick look at Ramsey’s stance on paying off your mortgage:
- Ramsey strongly recommends paying off your mortgage as soon as possible as part of his “debt snowball” method.
- He views mortgages as “bad debt” and maintaining a mortgage for the long-term goes against his philosophy.
- Paying off your home frees up cash flow to build wealth, invest and be more generous, according to Ramsey.
- While he acknowledges there can be some financial benefits to keeping a mortgage, Ramsey firmly believes the psychological win and freedom of being debt-free far outweigh any potential mathematical benefit.
So in short, the answer is a resounding yes – Dave Ramsey unambiguously recommends paying off your mortgage as fast as you can. But why exactly does he feel so strongly about this and is it the right move for your personal finances? Keep reading for a thorough breakdown.
Dave Ramsey’s Views on Mortgages and Debt
To understand Dave Ramsey’s position on paying off your mortgage, it helps to first understand his general philosophy regarding debt and mortgages:
- Ramsey views all debt as bad: Ramsey makes no distinction between “good” and “bad” debt. In his opinion, all debt – mortgages, student loans, car loans, credit cards – is bad debt because it carries risk and robs you of future wealth.
- Mortgages tie up your wealth: Money spent on mortgage payments could be invested and grow your net worth. Mortgages prevent you from building real wealth.
- Owning a home free and clear is true financial peace: Being tied to mortgage payments for 30 years prevents you from having the freedom and flexibility that comes with outright home ownership.
- Mortgages make you a slave to your house and your job: Having a large monthly mortgage obligation forces you to stay chained to your 9 to 5 job for decades to pay it off.
As you can see, Ramsey’s core philosophy is about gaining financial freedom by eliminating all debt. Mortgages are the biggest and longest form of debt most people carry, so it’s no surprise Ramsey makes demolishing your mortgage ASAP a central part of his advice.
Why Dave Ramsey Says to Pay Off Your Mortgage Fast
Now that you understand Dave Ramsey’s philosophical stance on mortgages and debt, let’s explore his specific reasons for prioritizing mortgage payoff:
1. Paying off your mortgage gives you a guaranteed “return”
Ramsey likes to point out that paying down your mortgage essentially gives you a “return” equal to your mortgage interest rate. For example, if your mortgage rate is 4%, then any extra money you put toward the principal is earning you a guaranteed 4% return on your money.
In Ramsey’s view, that’s a better and less risky use of your money than potential returns from investing in the stock market. As he puts it: “Why would you want to keep a long-term loan at 4% while trying to earn 8% in mutual funds? Doesn’t it make more sense to pay off the loan and never have a house payment again?”
2. It allows you to build wealth faster
Once your mortgage is paid off, all the money that used to go toward your monthly house payment is now freed up. Ramsey advocates taking most or all of that freed up cash flow and investing it so you can really grow your net worth.
Without a mortgage payment, it’s much easier to max out retirement contributions, save up for college for your kids or grandkids, and invest in other wealth-building goals. As Ramsey says: “If you didn’t have a house payment, you could choose to invest even more, and your money could grow even faster.”
3. Paying off your mortgage reduces risk
Having a paid-off house also provides a sense of stability and reduces financial risk, according to Ramsey. If you lose your job, have unexpected medical bills, or face other income disruptions, having no mortgage payment provides a lot more wiggle room.
In Ramsey’s words: “A paid-for home reduces a lot of risk that life will throw at you. All kinds of things could happen, but you’ll still have a roof over your head no matter what.” This added financial security is a key part of being able to sleep easy at night.
4. It can help free up cash flow in retirement
For those approaching retirement age, paying off the mortgage can be especially beneficial. Heading into retirement mortgage-free allows you to live comfortably on less income.
According to Ramsey: “Retirement is easier if you don’t have a mortgage payment. Think about it — if you head into retirement mortgage-free, you instantly remove a huge monthly expense.” This can make retirement more feasible and reduce reliance on your retirement savings.
5. There’s a psychological benefit
Finally, Ramsey often cites the emotional and psychological benefits of owning your home free and clear. There’s an immense feeling of pride, security and relief that comes with having zero mortgage debt.
As Ramsey puts it: “It’s a huge weight lifted off your shoulders. You’ll sleep better at night. You’ll feel happier and calmer. There’s something life-changing about looking at your home and knowing it’s all yours.” For Ramsey, this intangible benefit may be the biggest perk of all.
How Dave Ramsey Says You Should Pay Off Your Mortgage
Dave Ramsey doesn’t just recommend paying off your mortgage – he provides a specific plan for doing it as efficiently as possible:
1. Save a small emergency fund first
Before tackling your mortgage, Ramsey advises saving a $1,000 starter emergency fund. This ensures you don’t get blindsided by an unexpected expense that could derail your mortgage payoff goals. Once your mortgage is paid off, he then recommends building up a full 3-6 month emergency fund.
2. Use the debt snowball method
Next, Ramsey instructs followers to list out all debts (except the mortgage) from smallest to largest balance. He then recommends attacking the smallest debt first using the debt snowball method.
This means putting any extra money possible toward the smallest debt while making minimum payments on the rest. Once the smallest is paid off, roll that payment amount into the next smallest debt. Repeat until you’re debt-free except for the mortgage.
3. Attack your mortgage with intensity
With all other debts demolished, Ramsey says it’s time to blitz the mortgage using the debt snowball’s intensity and singular focus. At this point, he advocates throwing every possible dollar at the mortgage by:
- Making biweekly mortgage payments instead of monthly to accelerate payoff
- Consistently paying extra each month
- Cutting expenses drastically and funneling all savings toward the mortgage
- Taking on extra work and directing that income to your mortgage
- Cashing out any equity built up via a refinance and putting it toward the principal
Ramsey wants followers to get obsessed with paying off their mortgage FAST rather than just making normal monthly payments over 30 years. Quick wins motivate people to keep pushing, he says.
4. Celebrate! Then invest like crazy
Once the mortgage has been vanquished, Ramsey tells followers to celebrate and enjoy the feeling. But the job isn’t done yet. Next he recommends taking all the funds that were going to the mortgage and investing heavily so you can really grow your wealth after becoming mortgage-free.
Criticisms of Dave Ramsey’s Mortgage Advice
While Dave Ramsey’s mortgage payoff advice is inspiring for some, it’s certainly not universally accepted financial wisdom. Here are some common criticisms of Ramsey’s philosophy on early mortgage payoff:
Investment returns may exceed mortgage rates
Critics point out that Ramsey’s “guaranteed return” from mortgage paydown is often lower than potential stock market returns, even factoring in volatility and risk. The long-run historical average return of the S&P 500 is around 10%, much higher than most mortgage rates. Investing extra cash rather than prepaying a low-rate mortgage can build wealth faster in some cases.
It ties up too much cash
Ramsey’s intense mortgage payoff plan requires pouring huge amounts of cash toward the mortgage that cannot be accessed in an emergency. This leaves some families cash poor and living without a financial safety net. More balanced approaches advocate investing some while paying extra on the mortgage.
It limits flexibility
Without a mortgage, it can be difficult to access your home equity for emergencies or other financial needs until you build substantial assets. Having a manageable mortgage with a HELOC or home equity loan provides more options.
Foregone tax deductions
Paying off a mortgage early can mean forfeiting thousands in potential tax deductions for mortgage interest and property taxes each year. This benefit disappears when you become mortgage free.
Opportunity costs
Paying off a low-rate mortgage early has the opportunity cost of being unable to invest that money into assets with higher return potential. This could limit your ability to meet other financial goals.
The Case for Keeping Your Mortgage
Given the legitimate criticisms of Dave Ramsey’s radical anti-debt stance, is keeping your mortgage the smarter financial move? Here are some of the top reasons why holding onto your mortgage may be better than paying it off early:
Lower monthly payments free up more cash flow
Keeping mortgage payments low by stretching out the term provides more room in your budget for investing and other priorities. You can make minimal mortgage payments while building liquid assets.
Interest rates are low
With historically low rates below 5%, paying off a mortgage early provides very little “guaranteed return” benefit. Money may be better spent or invested elsewhere.
Mortgage interest and property tax deductions
The tax deductions for mortgage interest and property taxes save homeowners thousands per year. These valuable deductions go away when you pay off your home early.
Flexibility and emergency fund access
Having available credit on a HELOC or home equity loan provides low-cost access to emergency funds. Paying off the mortgage limits this flexibility.
Investment upside
Long-term returns from investing tend to be higher than mortgage rates. Keeping a mortgage to have more money to invest may build wealth faster.
Inflation eases the burden over time
The real cost of mortgage debt is reduced over time by inflation. This makes holding a long-term mortgage at a fixed rate more palatable.
The Pros and Cons of Paying Off Your Mortgage Early
So should you pay off your mortgage ASAP like Dave Ramsey insists, or take a more balanced approach? There are reasonable points on both sides of the debate. Here’s an overview of the key pros and cons:
| Pros of Paying Off Mortgage Early | Cons of Paying Off Mortgage Early |
|---|---|
| – Guaranteed “return” equal to interest rate | – Lost tax deductions for interest/taxes |
| – More security | – Less flexibility and access to low-cost credit |
| – Builds wealth and net worth | – Opportunity cost of better investment returns |
| – Frees up large amounts of cash flow | – Ties up equity that may be needed for other goals |
| – Achievement of being mortgage free | – Can leave you cash poor during the process |
| – Reduces expenses in retirement | – May take longer to build assets |
As you can see, there are compelling benefits to both options. You need to weigh your unique financial situation including income, debts, assets, time horizon, risk tolerance and personality to decide which approach is right for you.
Alternatives to Paying Off Mortgage Early
Rather than fully commit to Dave Ramsey’s rapid mortgage payoff plan or choose to make minimum payments for 30 years, many financial experts recommend a balanced “middle way” approach:
Recast/refinance your mortgage term
You can refinance into a 15 or 20 year mortgage and benefit from built-in amortization to pay off your home faster, but still retain a lower required monthly payment than a short-term mortgage. This blended approach accelerates payoff without the intensity and cash burden of Ramsey’s full-on mortgage assault.
Pay extra each month
Making modest consistent extra payments each month can shave years off your mortgage. This allows you to chip away at the principal faster without completely sacrificing liquidity and flexibility.
Make one extra payment per year
Adding the equivalent of one extra mortgage payment per year can accelerate payoff by close to a decade over the life of the loan. This is an easy “set it and forget it” approach.
Pay down in 10 years, then recast
An effective compromise is paying off the mortgage aggressively for the first 10 years via extra payments. After 10 years, you can recast the remaining balance into a new 20 year term to lower payments and regain flexibility while still paying off well ahead of the original 30 years.
Talk to a Financial Advisor
While Dave Ramsey presents an inspirational message about becoming mortgage free, his one-size-fits-all approach may not be prudent for everyone. Speaking with a financial advisor can help you create a personalized mortgage repayment strategy that aligns with your entire financial situation and long-term goals.
A financial advisor can project the financial tradeoffs of different mortgage payoff approaches, incorporating factors like taxes, insurance, investing opportunities, liquidity needs, retirement planning and more. They can also help construct an optimal overall financial plan, not just advise on mortgage paydown in isolation.
Getting unbiased professional advice can help you make the smartest total financial decisions, rather than just following the rigid opinion of a single guru. While becoming mortgage free may be the right move, be sure to consider all options and what works best for your situation.
Other Dave Ramsey Money Tips
While Dave Ramsey is laser-focused on extreme mortgage payoff, he also provides a wide range of money and finance advice beyond just getting rid of your home loan:
Build an emergency fund
Ramsey stresses the importance of saving 3-6 months of expenses in an emergency fund before tackling debt payoff. This provides a critical financial safety net.
Live on a budget
He advises creating a zero-based budget each month to align expenses with your income and values. Tracking every dollar spent is key.
Pause investing and retirement contributions
Ramsey suggests temporarily halting extra debt payments and investing until debts are paid off, apart from employer 401(k) match contributions.
Do a debt snowball on all debts
Use the debt snowball method of paying minimums on all debts except the smallest, while aggressively paying extra on the smallest. Repeat as you pay off debts.
Save for college and pay cash
He does not recommend taking on student loans. Save for college using 529 plans and pay tuition in cash.
Use cash for all purchases
To avoid debt accumulation, Ramsey advocates using a debit card or cash for all purchases rather than credit cards.
Buy used cars with cash
He insists on paying cash when purchasing used vehicles and avoiding auto loan debt.
Conclusion
Dave Ramsey unambiguously believes paying off your mortgage as rapidly as possible is a key financial move. While reasonable arguments exist on both sides, Ramsey maintains that becoming 100% mortgage free provides unparalleled financial peace and wealth-building power.
His intense mortgage payoff plan may not be right for everyone, but Ramsey offers an inspirational message about the power of focusing your energy on eliminating debt. While his advice should be considered as part of an overall financial plan, Ramsey’s mortgage-free mantra provides food for thought on efficiently managing one of your largest and longest debt obligations.