Should I pay off my mortgage or save the cash? Dave Ramsey weighs in on this hot topic

Recently, a caller to the Dave Ramsey show had an important question to ask. The caller indicated he has paid off all of his consumer debt already and he will soon have an emergency fund built up. Once he gets that emergency money saved, he is trying to decide between aggressively paying off his mortgage to make the loan disappear in two to three years or saving up a large amount of cash to make a down payment on a future home. 

Ramsey and his co-host, Jade Warshaw, were both very clear in the advice they provided. Here’s what they told the caller to do. 

Pay off your mortgage early as a form of forced savings

The main advice the caller received was to pay off the mortgage early. Specifically, Warshaw recommended that the caller make extra payments over time as extra money came in, rather than waiting until he’d saved up a good amount of cash and making one big payment. Ramsey agreed with this advice as well, explaining that paying extra on the mortgage is essentially a type of forced savings. 

Both Ramsey and Warshaw shared the same concern about saving up the cash instead of paying down the mortgage. The issue is that if the money is just sitting somewhere in a savings account, it is much more tempting to spend it on something else — like a vacation or some other unnecessary splurge. Once the mortgage payments have been made, though, the money is not likely to be used for anything else. That’s because, as Ramsey explained, refinancing to get the funds out for “fun” purchases like a fishing boat is a whole lot of trouble to go to. 

Ramsey said that he’s automated everything for a long time and that it’s a good idea to “trick yourself into smart things,” which is essentially what you are doing when you make extra payments on the home. You’re tricking yourself into saving more and growing your net worth since the money is helping you to build equity in your home. 

“It feels like the money is gone, but it’s not,” Ramey said. “It’s just saved in the equity in the house. It’s not gone. I like the forced aspect of it.”

Is Ramsey right?

Ramsey is correct that paying down a house is a form of forced savings. And, in the case of this caller, if he’s deciding between saving a larger down payment for a bigger house or paying off the mortgage on his current home, then it probably makes sense to pay the mortgage. After all, this money will come back when the home sells, which means it will become available at the correct time to purchase a new home — but not before. 

However, as a general rule of thumb, paying off a mortgage early is typically not going to be as good for your net worth as investing. Most people who got mortgages during or before the pandemic have rates around 4.00% or below. If this is the case, then there’s really no reason to pre-pay a home loan — especially if you itemize and can deduct the interest.

Instead, you should pay as required and invest the rest since you can earn a higher return. You can automate your investing too by setting up automatic transfers to a brokerage or retirement account on payday. 

Because it can be complicated to determine how to prioritize money goals when deciding between investing and paying off low-interest debt, it’s often best to talk with a financial advisor in these circumstances to get personalized advice that’s right for you. 

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