Baby Step 6 of Dave Ramsey’s Plan is to pay off your home mortgage early and be completely DEBT FREE. 

Similar to Baby Step 2, where you pay off all of your debts except for your home, you should use focused intensity and throw a good portion of your discretionary income (above your 15% retirement contribution and kid’s college funds) toward extra principal payments on your mortgage and knock it out as quickly as possible.  The more intense you become and the more that you are willing to sacrifice, the faster you will pay off your home.  As Dave says, when you own your home free and clear, if you take off your shoes and walk through the back yard, the grass will feel different under your feet.

There are some so-called experts out there who will tell you that it is not wise to pay off your home early.  They usually use one of two arguments to back their false cliams:

Argument #1:  Because mortgage rates are at an all-time low right now (4-5%), they say that you should keep your mortgage and invest your discretionary income in things that could earn you a higher rate of return like mutual funds and stocks.

Rebuttal #1:  They may be correct in their assertion that your could earn a higher rate of return in mutual funds and stocks, but they forgot to factor two things into their equation:  Risk and Taxes.

Risk comes when you still have a mortgage and your company downsizes.  Think about it…  If your company lays you off tomorrow and you have a paid-for house and no payments of any kind in the world, your stress levels would be completely different from someone who would immediately be worried about losing the home where their family sleeps at night.

Also, you will owe capital gains taxes if you invest in mutual funds or stocks and make a profit.  Capital gains taxes are around 15% for most people.

After factoring risk and taxes into the equation, your rate of return on that investment will come closer to the 4-5% that you would earn by not having a mortgage. 

Finally, if you are still not convinced that paying off your mortgage is a good idea, then ask yourself this question:  If you had a completely paid-for home, would you borrow money against it to invest in a mutual fund or the stock market?  If the answer to this question is “No”, then you should pay off your mortgage as quickly as possible and never look back!

Argument #2:  It is not wise to pay off your mortgage early because you will lose the tax deduction.

Rebuttal #2:  I have written a complete article about this argument.  Basically, with a tax deduction, for every dollar that you pay in interest to the bank, you save 25 cents on your taxes (this may be higher or lower depending upon your tax bracket) in the form of a tax deduction.  Trading whole dollars for quarters is unwise.  If you really want a tax deduction, then give the amount that you would be paying in interest to your local church or qualifying charity and you will earn the exact same tax deduction without having to stay in debt to do so.

My wife and I are set to start Baby Step 6 this year.  We are very excited about owning our home free and clear.  We can’t wait to walk through the back yard and see how different the grass will feel under our feet when it belongs to us and not the bank!