Dave Ramsey's Baby Step 6 - Pay Off Your Mortgage Early (2024)

FAQs

Dave Ramsey's Baby Step 6 - Pay Off Your Mortgage Early? ›

Baby Step 6: Pay off Your Home Early

Low-interest rates might make it tempting to stretch out your payments over the course of the entire loan. The Dave Ramsey mortgage plan encourages homeowners to aggressively pay off their mortgages early, however. One recommendation Ramsey makes is to convert your 30-year mortgage into a fixed-rate, 15-year home loan.

Orman said she doesn't recommend this strategy if you're 35 and know you're going to move in three or four years. But she does believe that if you are older and your goal is to gain financial security and safety, paying off your mortgage as quickly as possible is a wise idea.

Making extra payments of $500/month could save you $60,798 in interest over the life of the loan. You could own your house 13 years sooner than under your current payment.

Understanding Prepayment Penalties

You also may want to avoid paying your loan off early if it carries a prepayment penalty. This is a fee your lender charges if you make all payments your mortgage prematurely. Prepayment penalties are usually equal to a certain percentage you would have paid in interest.

Not only is there huge freedom in being completely debt-free and living in a paid-for house, but it's also a great way to build wealth—getting rid of your house payment leaves you with a ton of extra money each month to save for retirement. In fact, the average millionaire pays off their house in just 10.2 years.

“Shark Tank” investor Kevin O'Leary has said the ideal age to be debt-free is 45, especially if you want to retire by age 60. Being debt-free — including paying off your mortgage — by your mid-40s puts you on the early path toward success, O'Leary argued.

O'Leary's Take on Paying Down Mortgages

To O'Leary, debt is the enemy of any financial plan — even the so-called “good debt” of a mortgage. According to him, your best chance for long-term financial success lies in getting out from under your mortgage by age 45.

You might miss out on investment returns: If your mortgage rate is lower than what you'd earn on a low-risk investment with a similar term, you might consider keeping the mortgage, paying it off gradually, and investing what extra you can.

What happens if I pay 3 extra mortgage payments a year? ›

You might find that making extra payments on your mortgage can help you repay your loan more quickly, and with less interest than making payments according to loan's original payment terms.

When you pay an extra $100 on your monthly mortgage payment, that entire amount goes to principal. You'll reduce your total balance much more quickly when you make an extra payment that goes directly to repaying your balance. You could cut around four years off your repayment time with just an extra $100 per month.

When you pay extra on your principal balance, you reduce the amount of your loan and save money on interest. Keep in mind that you may pay for other costs in your monthly payment, such as homeowners' insurance, property taxes, and private mortgage insurance (PMI).

Amortization extra payment example: Paying an extra $200 a month on a $464,000 fixed-rate loan with a 30-year term at an interest rate of 6.500% and a down payment of 25% could save you $115,843 in interest over the full term of the loan and you could pay off your loan in 301 months vs. 360 months.

You have high-interest debt.

Rather than make extra payments toward your mortgage principal, consider paying down high-interest debt first. This can include credit card, student loan, medical, and car loan debt, just to name a few.

You might want to pay off your mortgage early if …

You want to save on interest payments: Depending on a home loan's size, interest rate, and term, the interest can cost hundreds of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses.

It's also a good way to take advantage of low interest rates: paying off as much as you can while interest rates are low means there'll be less of your mortgage remaining to pay off when interest rates are high.

It's typically smarter to pay down your mortgage as much as possible at the very beginning of the loan to avoid ultimately paying more in interest. If you're in or near the later years of your mortgage, it may be more valuable to put your money into retirement accounts or other investments.

From a financial perspective, it's usually best to invest your money rather than funneling extra cash toward paying your mortgage off faster.