Here is the response I posted in response. It is a bit more lengthy than I normally post but the fourth and final example seemed to require a bit of a lead in, to illustrate the power of paying off the house early.
I am going to assume that fact that you are going to save more than $250,000 in interest payments isn’t enough for you; so let’s look at what Dave Ramsey who spawned this question had to say in an excerpt published on his website about this topic. It is only an excerpted summary but years of listening to him will reveal what Paul Harvey calls “the rest of the story”.
QUESTION:Why should a listener pay off his home if he can put the money in a 12% annual increase mutual fund?-SHORT ANSWER:With this plan you’re not considering the taxes that you pay on the investment, which will bring your investment down to about 9%. You’re also leaving out risk. An investor who fails to factor risk into the equation is naive. A borrowed home adds substantial risk to your portfolio versus a paid-for home. - Dave Ramsey
"Remember, the borrower is slave to the lender." - Dave Ramsey
There is a lot more to this answer but it was unavailable when I tried to retrieve it from the server. So I will answer this instead. Dave stated that it adds “substantial risk to your portfolio”. Here is why.
Investing in quality opportunities requires that you be able to properly compare two or more competing investment strategies and to do so you must factor in each investment’s Risk Profile. A Risk Profile is referred to, as a Beta. It is in simple terms factoring in an investments’ volatility into your projected return calculation. If you watch the Stock Market at all you know it is a volatile.
The fact is if you ignore the Beta you are 85% more likely to lose money over the long term in the volatility of the market. Lets compare four financial activities / investment / opportunities.
The first is playing the roulette wheel in Vegas, a pass time of many, and by far the RISKIEST. If you bet $100,000 on Red 23 what is your risk? I am not very good at calculating the House odds but I am confident that you have 99.7 or more percent chance of loosing EVERYTHING, unless Danny Ocean and the gang are helping you. Never forget the HOUSE ALWAYS WINS. Granted this isn’t an investment I would consider but there are a few that I have met who have suggested it is a viable way of creating wealth. If you own the House then you are correct in that belief.
Next an investment in an oil/uranium/gold/silver/whatever the flavor of the month is stock recommended to you by an email guru you have never heard of before you opened the email. First you should realize they are using the Internet to inflate the volume and price of a finite commodity, which is governed by the law of supply and demand. However if you disregard your feeling of this is risky and plunk down $100,000 on that stock and hang on like this guru suggests you will find that you now own about $25,000 dollars in spite of the one time unrealized gain of $200,000 at which point the guru sold and failed to inform you. Thus you are left holding the bag so to speak. If you don’t sell out before 30-years has come and gone perhaps you will see that stock get purchased by a big competitor and realize some growth as a result but still your net result is not great and more than likely it is still a net lose. Not a very good plan as it is only slightly better than betting on the roulette wheel in Vegas, but only because you still have some of your money.
Third is the standard S&P Stock Market Index Fund. If you put $100,000 into it at the average of 12% per year gain, where do you end up in thirty years? You end up with $1.5MILLION in your account! What are the odds that you have enough for retirement now?
Why did I choose the $100,000? I chose it, because the average American owes TWICE that on their mortgage balance. Early payment of your mortgage can result in a substantial gain as a result of interest not paid, for the average mortgage that has 20 to 25 years left that is a savings of nearly $250,000.
If you didn’t pay it off early and continued to do what you have read or been told that you should investing while are paying off your home or that you should be using the equity your home has given you. Fair enough, lets look at that often recommended investment strategy. Let say you are the average American and you manage to achieve $50,000 worth of investment over a 30-year period, instead of using it to pay off your home early. That means you keep your $1500 per month house payment and invested the $50,000 you borrowed from your house at 6% and are making an additional $300 or more a month. By the end of that period you could have earned as much as $400,000 on that money. However you paid at least $250,000 in interest on your home loans.
SO, LET US DO THE MATH….
I will be merciful and not mention the taxes due or interest costs associated with your HELOC. Let’s just use the best-case return as so many other slick sales folk so often do.
$400,000 in your investment account
-$250,000 on your home loan
-------------
+$150,000
So in summary a large amount of risk was carried over 30-years and only gained $150,000. YEAH!!!! You made money this time, but at what cost? You could have had nearly TEN TIMES that amount if you had paid off your house in ten years and invested the $1800 per month in a 12% Mutual Fund, possible if you follow the Baby Steps. The following chart is just a rough example of what is possible.
As you can see from these four options that their risk profile was different. Each of these holds the possibility of gains and losses in the short-term, yet only two hold long-term growth and only one is true wealth generation. That is why you must factor in the Risk Profile. This is why paying your house off early rather than investing makes good solid financial sense. If you fail to calculate risk you are not a savvy investor, plain and simple. I think you will find that there is a SUBSTATIAL difference between these investments options.
There is one more factor that MUST be considered, Peace of Mind. It might not be that important to you but I guarantee it is for your wife.
Risk is a very serious factor to consider when you are investing your money. Don’t be naive. Ultimately, it is your choice. You have likely heard a dozen differently short game only versions of advise from accountants and or tax preparers, that you are giving up tax savings if you pay it off early. They are right, but you are EARNING MORE by doing so A LOT MORE! Just remember that they too are living paycheck to paycheck and while they may drive a nicer car, but they are STILL BROKE. Yes I know they tell you that paying off you house isn’t a good idea.
I for one am not buying their “tax savings” Baloney Sandwich. I will let you make your own decision on how that sandwich tastes.
P.S. Lest you think is just this crackpot Dave Ramsey who recommends paying of your home early… Here is what the AARP says about paying off your house early.
“ Paying off your mortgage has some advantages, such as:
Providing Emotional Security. Paying off your mortgage provides emotional relief from the anxiety of owing money. You may simply feel more secure owning your home free and clear. This sense of security may matter a great deal if you plan live in your home when you retire. Also, you may desire to leave a debt-free home to your heirs.
Investing for the Future. Without a mortgage payment, you'll have more money to invest for the future. Your retirement savings can grow more quickly. Mortgage interest on a large or high-rate loan may be costing you a hefty sum. Instead of paying interest, you could be earning interest with your funds.
Meeting Retirement Needs. If you are already retired, paying off your mortgage can free up your money for other things. Experts recommend accumulating enough retirement savings to have at least 70 percent of your working income. If you're short of this goal, eliminating mortgage payments will free up monthly income for living expenses. This approach is especially helpful if you have a large mortgage with high payments.
Reducing Loan Stresses. Paying off your loan removes loan-related stresses, too. Houses gain and lose value, depending on local conditions. These market changes affect the equity you've built in your home. Without a loan, you remove the risk of "owing more than you own." Also, you avoid being hit by climbing rates if the interest on your loan is variable. You may also want to pay down part of a loan if it is large. “
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