Nick’s sitting on a classic money dilemma: take the $150,000 his wife has in a stock portfolio from her old job and knock down their mortgage, or stash it away as a safety net. The Boston couple is torn between peace of mind and the satisfaction of wiping out debt.
Nick called into The Ramsey Show [1] for advice. He explained that they have an 18-month-old, another baby on the way and a budget that feels “very tight right now.” That’s why they’re debating whether to keep the money as backup.
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At the same time, he’d like to get a jump start on their mortgage. They owe about $329,000 at a 2.875% rate. He said they’re already saving for retirement, have $30,000 in an emergency fund and another $100,000 in a high-yield money market account.
Here’s what Dave Ramsey told Nick to do — and why it may not make sense for everyone.
Should you pay down your mortgage sooner?
You generally have two options: invest your extra cash and aim for returns that outpace your mortgage interest, or pay off your mortgage early to save thousands in interest and free up more income for other goals.
Ramsey’s seven baby steps to building wealth include paying off your home early at step six. A 2022 Ramsey Solutions study [2] found that the average millionaire pays off their house in just over 10 years.
That advice makes sense if you’ve covered the basics. According to Experian [3], paying off your mortgage early may be smart if you already have an emergency fund, you’re contributing to retirement and you don’t carry high-interest debt.
On the other hand, if you’re light on savings and your mortgage is manageable, it may be better to save or invest instead. And if you’re paying steep interest on credit cards or other loans, Experian notes those should take priority.
Emergency savings also matter. Since home equity isn’t liquid, financial experts suggest saving three to six months of living expenses before throwing extra money at your mortgage.
Nick and his wife are in a unique spot: they already have $130,000 in liquid savings. Adding the $150,000 stock portfolio would give them $280,000 more to set aside.
“How much backup do you need?” Ramsey asked. “This is insanity. If I woke up in your shoes, I would put $250,000 down on that house and have a $30,000 emergency fund.”
Read more: I’m almost 50 and have nothing saved for retirement — what now? Don’t panic. These 6 easy steps can help you turn things around
How to pay off your mortgage faster
There are plenty of ways to speed up your payoff, whether you have a windfall like Nick’s wife’s $150,000 portfolio or just a little extra in your budget.
- Make a lump-sum payment using a tax refund, bonus or inheritance.
- Increase your regular mortgage payments if you earn more through a raise or side gig.
- Switch to biweekly payments. That adds up to 13 monthly payments a year instead of 12.
- Refinance into a shorter-term loan or lower rate if it makes sense.
Just watch for prepayment penalties. According to Debt.org [4], the fee can range from 0% to 2%, often higher in the first year of the loan than later on.
Finally, take an honest look at whether you can afford your home. Spending more than 30% of your income on housing is considered “house poor,” and a LendingTree study [5] found more than 18 million Americans fit that description.
If your mortgage payments eats up too much of your budget, downsizing might free up the cash you need for savings and investments.
At the end of the day, the best move depends on your specific situation. A conversation with a financial advisor can help you decide whether to pay down your mortgage early or put your money to work elsewhere.
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Article sources
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[1]. The Ramsey Show. “Why It Doesn’t Make Sense To Delay Paying Off Your Mortgage”
[2]. Ramsey Solutions. “The National Study of Millionaires”
[3]. Experian. “How to Pay Off Your Mortgage Early”
[4]. Debt. “How to Pay a 30-Year Mortgage In 15 Years”
[5]. Lending Tree. “Over 18 Million Homeowners Across US Are ‘House Poor’”
This article originally appeared on Moneywise.com under the title: ‘Insanity’: Dave Ramsey tells Boston couple to sell stocks and put $250K into their mortgage. Is that wise?
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