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Paying off the mortgage early is a critical element of Dave Ramsey’s plan, but now that we have paid off all of our non-mortgage debt, we are contemplating when and if this step will be part of our financial goals.

Be sure to download our How to Pay Off My Mortgage Faster Calculator below.

As empty nesters, Rob and I are alarmingly aware of how rapidly time passes and how our decisions today impact our future.

We may have been pretty dense in our younger years as we thought we would always have more time.  Now that we are fully cognizance of the fact that we will continue to age, we want to make sure that paying off our mortgage early is indeed in our best interest.

Rob and I currently have 229 payments remaining on our mortgage.  If we do not pay a penny more on our monthly mortgage payments, Rob will be 65 years old once this bad boy is paid off!

Yikes!!

The burning question we have is:  Should we pay off our mortgage early?

Find out about our financial goals:  Our 7 Steps to Retirement | 41% of Retirees Live on Less than $25,000

Paying off the mortgage

In this article, we will explore the financial benefit of paying off the mortgage early versus investing the money.  

We will not explore any fancy debt repayment ideas that use debt to pay debt.  Instead, we will just look at the repayment of home loans from the simple idea of increasing the monthly payment by a specified dollar amount with the goal of paying the mortgage off by a specific date.

Our review of accelerating mortgage pay off is not one of those complicated, somewhat sketchy ways of paying off debt.  If you are up for that kind of thing, we highly recommend the video below:  How to Pay Off A 30 Year Mortgage in 5 Years


In this post we will cover:

  • Dave Ramsey and paying off the mortgage early
  • Should we pay off our mortgage or should we invest?
  • Paying off the mortgage early vs investing the money
  • How to pay off my mortgage faster?
  • What will your mortgage payment need to be to pay off your mortgage fast?
  • Our current financial goals and paying off our mortgage fast
  • The cost of paying off our mortgage early
  • What is the benefit of paying off the mortgage early?
  • Download our How to Pay Off My Mortgage Faster Calculator



Dave Ramsey and paying off the mortgage early

To pay off our consumer debt, Rob and I followed Dave Ramsey’s 7 Baby Steps Plan.  We had reached that point in our life that we were finally sick of being in debt.  To accomplish this debt pay off, we started paying attention to our money, and we were able to tackle $50,000 of debt within a very short period.

As we were going through this process, we dreamed about our next step of paying off our mortgage by the time Rob turns 50.  To be able to accomplish this, we would have to pay this baby off in four years.

That’s taking 229 payments and turning it into 48 payments! 

Yikes (again)!

Our Debt Pay Off Story: Pay Off Debt Fast | 11 Things We Did to Pay Off $50,000 6 Months

Next Step…Pay Off Our Mortgage?

By following the Dave Ramsey Baby Steps, Rob and I are on track to start Baby Step 6 – Mortgage Repayment.

If you are not familiar with the Dave Ramsey and his baby steps, here is a quick rundown.

The Baby Steps…

Baby Step 1 – $1,000 Emergency Fund – – – > DONE!
Build up a $1,000 emergency fund.  If you are used to having cash in savings while carrying debt, this step may scare you.

If you have money in your savings:  Use all but $1,000 to pay your debt off.  The remaining $1,000 will serve as your emergency fund until you pay all of you balances in full.

If you do not have money in savings: Get resourceful and scrape up $1,000 fast.  $1,000 will be your emergency fund until all your balances are paid in full.

After completing the program, I can say this is the step of commitment!  You will either feel vulnerable because you only have $1,000 on hand or you with feel empowered because you have $1,000 on hand.

Baby Step 2 – Non-mortgage Debt Pay Off – – – > DONE!
Paying off your debt fast is step two.  Dave promotes the snowball debt repayment plan.  The debt snowball plan is where you take your smallest debt and pay it off FAST!

You then take the monthly payment from that debt and apply it to the next smallest debt.

You repeat this process until all debts are paid in full.

It is a crazy process that has nothing to do with math.  The reason it is successful is that it teaches you to be aware of your money and be intentional with your spending.

Related:  Dave Ramsey Budget Tips to Successfully Pay Off Debt

Whew…Now that the debt is gone…



Baby Step 3 – Build an Emergency Fund of 3 to 6 Months of Expenses – – – > DONE! 
Now that the debt is paid off, the time has come to stash away enough cash to pay for three to six months of expenses.

The goal is to stash this cash and never have to use it.  It will just sit there in a savings account and provide you with peace of mind.

Learn what an emergency fund is:  What Is An Emergency Fund and Why Do You Need One?

Investing in the Future Baby Steps…

Baby Step 4 – Retirement Investing – – – > DONE! 
Once you have built up a healthy emergency fund, it is time to invest in your retirement.  Dave recommends 15% of your gross income for this step.

We are breaking this step a bit since our goal is to retire ahead of schedule.

Now that we are not putting all of our money toward our debt payments, we can focus on our retirement savings goals.  As an empty nester, retirement feels like it is right around the corner and so we are a bit more aggressive then what Dave recommends.

  • We are contributing 15% of our gross pay into our 401k accounts
  • Our employers are adding another 7.5% of our total salary to our 401k accounts
  • We are opening ROTH IRA investment accounts for each of us, and we will fully fund those accounts
  • We are maxing out our Health Savings Account (HSA) and will utilize that money in retirement

Baby Step 5 – Save for College – – – > SKIPPED! 
Rob and I can skip this one.  Our daughter is 100% financially independent as she is currently serving our country and we are helping our son out with a few expenses that are already included in our budget as he earned a full-ride scholarship.

Baby Step 6 – Pay Off the Mortgage Early – – – > EVALUATING BENEFIT
Paying our mortgage off early is the step that has us stumped right now.

As of today Rob and I still owe $162,787.64 on our mortgage.  Our monthly payments are $1,006.90.  Our interest rate is 3.875% for the term of the loan.

To pay this off by Rob’s 50th birthday, we will have to increase our monthly payments to $3,666.49.  That’s increasing our monthly mortgage payment by $2,659.59.




Should we pay off our mortgage or should we invest?

To help us to make this decision, we reviewed our current mortgage numbers to see what works in our best interest.

Since we hate to gamble, we are performing the most conservative comparison.

In this exercise, we will find out what our remaining balance, if any would be if we continued to pay our mortgage on time.  We then took the additional money that it would require for us to pay our mortgage off in four years and either:

  1. Put the difference in savings:  As of the date, I am writing this post, our bank – Discover, is paying an interest rate of 2.08%.
  2. Cookie jar (Yep, nothing fancy there!)
  3. Then for entertainment purposes, we will use the historical return of stock investments in the S&P 500.  Since 1928, the return has been 10%.

Paying off the mortgage early vs. investing the money

EVALUATING BENEFITPaying our mortgage off early is the step that has us stumped right now. #finance #freedom #mortgagefree”> Following four years of paying our mortgage on time, our remaining balance will be $137,845.60. If we were to save the difference between the Scheduled Payment and the Accelerated Payment, the Monthly Investment of $2,659.59 at a 2.08% interest rate, we would have a healthy savings of $133,001.28 at the end of the four-year term. If we were to take that saved money and apply it our outstanding mortgage, we would only owe $4,844.32.




Following four years of paying our mortgage on time, our remaining balance will be $137,845.60. If we were to save the difference between the Scheduled Payment and the Accelerated Payment, the Monthly Investment of $2,659.59 and place it in a cookie jar, we would have a healthy savings of $127,660.32 at the end of the four-year term. If we were to take that saved money and apply it our outstanding mortgage, we would only owe $10,185.28.

Following four years of paying our mortgage on time, our remaining balance will be $137,845.60. If we were to save the difference between the Scheduled Payment and the Accelerated Payment, the Monthly Investment of $2,659.59 at sweet 10% interest rate based on the historical S&P 500, we will have a healthy savings of $156,177.75 at the end of the four-year term. If we were to take that saved money and apply it our outstanding mortgage, we would have $18,332.15 left over.

Paying Off Our Mortgage Early for Peace of Mind?

The difference between the first two outcomes was a bit surprising!  When thinking of paying off our mortgage one of the biggest reasons that we came up with was peace of mind.

Now when we know that our four-year peace of mind will cost us in the worst case scenario $10,185.28, it is time to dig in and review our current financial goals.




Our current financial goals & paying off our mortgage fast

  • Build up a one-year emergency fund: That’s right, we are going for a full year of expenses in cash.  The 12-month emergency fund is a big one for us since we are exploring entrepreneurial opportunities to support the next phase of our lives.
  • Invest in our Health Savings Account (HSA):  With the cost of healthcare rising, we are hoping to use our HSA as retirement funding.  Since this is tax-free money, we are looking at funding our occasional annual healthcare expenses with cash to allow our HSA to grow.
    Read More:  Health Savings Account (HSA) & Retirement Plan
  • Max Out a ROTH IRA:  To date, Rob and I have only invested in our 401k retirement plans.  Now that we are hellbent on being prepared, we have opened a ROTH IRA.  With us being in our mid-forties we do not have much time to mess around.  Therefore our goal is to fully fund our ROTH IRA until retirement or until we no longer qualify.  (Whichever comes first)
  • Be prepared with some sinking funds:  In 2018 our goal was to pay off $50,000 worth of debt.  Now that goal has been met we are making sure that we are prepared for upcoming expenses so that we do not ever get in debt again.
  • Employer Stock Purchase Option:  Rob’s employer offers a program that allows employees to purchase up to $1,800 worth of stock and they match 15%.  The program resets March 31st of every year.  Since this will be our first year participating, we will purchase $1,800 worth of stock between January 2019 and March 2019 then drop down to purchases of $140 every pay period.

The cost of paying off our mortgage early

To pay off our mortgage in the four-year timeframe we will need to come up with $2,659.59 a month or $31,915.08 a year which is 39% of our take-home pay.  To do that, we will definitely need to modify the numbers below.

CATEGORY PERCENT
Auto Gas & Maintenance 2.9%
Miscellaneous 3.2%
Employer Stock Purchase 3.9%
Sinking 5.9%
Dining and Entertainment 6.9%
ROTH 14.6%
Consumables 7.9%
Monthly Bills 31.7%
Savings 23.0%
Total 100.0%

** The amounts above are our 2019 goals for our take-home pay.  The numbers exclude our HSA and our 401k contributions as they are paid through our payroll deductions.

To be able to meet still the ambitious goal of paying our home off in four years we would have to sacrifice our goals of:

  • Purchasing stock with the employer match of 15%
  • Not invest in a ROTH IRA account for our retirement
  • Cut our savings contribution by $16,715.08

What is the benefit of paying off the mortgage early?

Here are a few things we came up with…

  • Eliminate years of payments to the bank
  • Once the mortgage is satisfied, your cash flow will increase greatly
  • Reduce retirement expenses
  • Save money on mortgage interest
  • Peace of mind of not owing money to anyone

The benefit of paying off the mortgage early varies from person to person and situation to situation.  For Rob and I to start accelerating our mortgage pay off this year to a four-year plan, we would have to forfeit three of our primary financial goals.

With the peace of mind that we are sure to gain from the employee stock purchase, ROTH IRA investment, and meeting our goal of having a twelve-month emergency fund on hand, Rob and I will forgo the peace of mind of accelerating our mortgage pay off this year.

As with all goals, especially financial goals, we will review this option in the future to see how it will help us to build wealth and peace of mind.

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