Should I Pay Off My Mortgage Early? Dave Ramsey’s Take

Paying off a mortgage early is a common financial dilemma. While some see a mortgage as “good debt” due to potential tax benefits or low interest rates, others seek the freedom of full homeownership. Financial expert Dave Ramsey advocates for aggressively eliminating all debt, including a home mortgage. His philosophy offers a structured approach for achieving financial independence.

Understanding Dave Ramsey’s Stance on Mortgage Debt

Dave Ramsey’s philosophy asserts that debt impedes wealth and financial peace. He views a mortgage as a substantial debt that should be eliminated quickly. He believes true financial security comes from being debt-free, allowing individuals to control their income without creditor obligations.

A paid-off home provides immense peace of mind, freeing homeowners from their largest monthly payment. This reduces financial risk, especially during economic uncertainty or job loss. Ramsey calls interest saved by early payoff a “guaranteed return,” unlike uncertain market investments. Eliminating the mortgage also frees up cash flow for wealth-building activities.

Strategies for Mortgage Elimination

Dave Ramsey advocates for strategies to accelerate mortgage payoff through diligent budgeting and applying extra funds to the principal. The “Debt Snowball” method, central to his debt elimination plan, applies to the mortgage as the final debt. This method involves listing debts from smallest to largest, regardless of interest rate. The smallest debt is aggressively paid off first, while minimum payments are made on others. Once a debt is paid, its payment amount “snowballs” into the next smallest debt, building momentum until all debts, including the mortgage, are eliminated.

Homeowners can expedite mortgage elimination through several steps. Making extra principal payments is a powerful strategy, as each additional dollar reduces total interest paid. This can be done by adding a fixed amount to each monthly payment or making one extra principal-only payment annually. For instance, paying half the monthly mortgage payment every two weeks results in 26 bi-weekly payments annually, equivalent to 13 full monthly payments, effectively adding one extra payment per year. Financial windfalls like tax refunds, bonuses, or inheritances can also shorten the loan term. Crucially, specify to the lender that extra funds apply directly to the principal, not future interest or upcoming payments.

Refinancing to a shorter loan term, such as a 15-year fixed-rate mortgage instead of a 30-year term, is another recommended strategy, provided the monthly payment remains manageable. Though a 15-year mortgage has a higher monthly payment, it often has a lower interest rate and saves substantial interest. For example, on a $240,000 mortgage at a 7% interest rate, switching from a 30-year to a 15-year term could save nearly $200,000 in interest. Homeowners can also make payments equivalent to a 15-year term without refinancing.

Financial Considerations for Early Mortgage Payoff

The financial advantages of paying off a mortgage early are significant. The primary benefit is eliminating future interest payments, which Ramsey calls a “guaranteed return.” A 30-year fixed mortgage can accrue hundreds of thousands in interest over its lifetime. By reducing the loan term, homeowners save a substantial portion of this interest. For instance, paying an extra $300 per month on a $200,000, 30-year fixed mortgage could save over $64,000 in interest and shorten the payoff by more than 11 years.

Once the mortgage is paid off, the monthly payment becomes available cash flow. This income can fund retirement, investments, or college savings. Increased cash flow offers financial flexibility and reduces future debt needs. Psychologically, being debt-free, especially from the largest debt, provides security and freedom, reducing stress. While some highlight mortgage interest tax deductions, Ramsey prioritizes debt elimination over tax benefits. He believes the peace of mind and guaranteed savings from avoiding interest outweigh potential investment gains or tax advantages.

Integrating Mortgage Payoff with Broader Financial Planning

Paying off the mortgage early is a milestone within Dave Ramsey’s comprehensive financial plan, the “Baby Steps.” This sequence builds a solid financial foundation before tackling the largest debt. First steps include a $1,000 starter emergency fund and paying off non-mortgage debt via the Debt Snowball. This includes credit cards, car loans, and student loans, which have higher interest rates.

After becoming consumer debt-free, the plan calls for building a fully funded emergency fund, typically covering three to six months of essential living expenses. This provides a buffer against unexpected hardships, preventing debt reliance. Only after these foundational steps are complete does Ramsey recommend focusing on Baby Step 6: paying off the home mortgage early. By this point, individuals have disciplined habits and significant cash flow from previous debt payments.

Once the mortgage is paid off, the financial journey progresses to Baby Step 7, which focuses on building wealth and giving. The amount previously for mortgage payments can now be invested for retirement, college savings, or other long-term wealth goals. This sequential approach ensures individuals are debt-free and positioned to build lasting financial security. Eliminating the mortgage is an integral part of a broader, long-term financial strategy.