Dave Explains Paying off the House

by | Jul. 05, 2010

Finances

Dear Dave,

My wife and I are following your plan, and we're in the middle of paying off our debts using the debt snowball. When we told my mother-in-law that by doing this we'd be able to pay off our house within 10 years, she told us that would be a stupid move. She couldn't give us a reason why she thought it was stupid, but we couldn't convince her otherwise. How can we explain things to her?

Jason

Dear Jason,

Okay, she's telling you it's a bad idea, but she has no idea why it's a bad idea? It sounds to me like she's the dumb one if she thinks you should behave a certain way, but can't even tell you why. If someone can't tell you why they have an argument against something, then they have no argument in the first place!

A lot of talking heads think it's smart to not pay off your home. They'll tell you things like it's better to borrow money against your house and invest it in the stock market. What they won't tell you is that there's virtually nothing there by the time you adjust for risk and taxes. Why in the world would you take a chance on losing your home over something like that?

Another line they'll throw out is that you don't want to lose your tax deduction. This one's really silly! If you have a $200,000 loan at five percent interest, you'll pay about $10,000 a year in interest. Now, let's also say you make $70,000 a year, and you're in the 25 percent tax bracket. That $10,000 tax deduction is saving you $2,500 in taxes. In essence, you're sending $10,000 to the mortgage company to keep from sending the government $2,500. That's pretty stupid! You'd be better off to be debt-free and give $10,000 to some charity or your church. That way, you'll save on taxes and do some good with the money.

By paying off your home, you decrease risk and gain a ton of security!

-Dave

* For more financial help, please visit daveramsey.com.

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