I say Horse Hockey!" As Ramsey says, only his "broke financial advisers" teach that. Let me try to explain to you the truth as both Ramsey and Cummuta tell it. First let me ask what tax bracket are you in? Let's say you, as Cummuta was, are in the 28% tax bracket. That means for every one dollar ($1) of interest you pay to your bank, you get to save 28 cents in taxes."
Now, let me say you will still get your tax deduction the entire time you are paying off your mortgage. It only ends when the mortgage is paid off. OK back to my explanation.
Each dollar of interest you pay to the bank (or mortgage company) is deductible from your taxable income, which saves you the 28 cents you would otherwise have paid to the government on that dollar as income tax. But think about that. You're giving up a full dollar to save 28 cents. Whereas, if you pay off your mortgage, you will indeed have to pay 28 cents federal income tax on each dollar not going to mortgage interest...but your getting to keep the other 72 cents (72%)! Ask yourself, would you rather pay a dollar (mortgage interest) to save 28 cents, or pay 28 cents (tax) to keep the dollar?
Does it still sound like a good deal? If so you can send me $100,000 and I will send you $28,000, as soon as your check clears in my bank account.
In the typical scenario, a full dollar is leaving your life on its way to the bank and Uncle Sam is giving you a 28-cent tax break to ease the pain. However, in this scenario, the only thing leaving your life is the 28 cents. You ARE 72 cents ahead on every dollar.
Paying off the mortgage early is better, because 72 cents will always be more than 28 cents.
Kevin, you're exactly right...I've never heard it said like that. Good analogy.
ReplyDeleteWe're a couple weeks away from the Dumping Debt lesson where Dave tackles this subject...it's pretty entertaining. Basically says the same thing just in a different set of numbers.
Our goal is to pay off our house as soon as we can. I really don't understand why people don't see this as an option.
ReplyDeleteCan you image the wealth you can build if you had no payments :o)
I love Dave Ramsey! He changed our lives!
I love the way you have explained this. I also don't understand why people don't see the value in paying off the mortgage early. I am planning to have our paid off in 5 years and then I can put invest.
ReplyDeleteTony W.
ReplyDeleteShow me an investment that gives me a guaranteed rate of return of 9% for the next 30 years and I'll re-mortgage my paid-off house to invest in it! The key word is, of course, "guaranteed."
Tony probably has them invest in whole life as well!! HA!! Here is the problem, just like DAVE says, you CANNOT compare guarenteed numbers and non-guarenteed together.
ReplyDeleteWe are paying off our house next week (20 years early), but it looks like we are only saving $500.
ReplyDeleteWhat am I missing?
TONY, No THANKS! Okay, if someone has a mortgage with an 8% interest rate, why would they invest money that could pay the mortgage down and give a sense of financial freedom at the same time to invest that extra money at 9% and pay income taxes on THAT makeing the investment not truly equal to the 8% of savings they would achieve.
ReplyDelete