Saturday, September 17, 2011

Why Dave Ramsey is an Epic Fail Part 2

So if you haven't read Part 1, you should check it out. In Part 2 I will list yet another reason why Dave Ramsey is an epic fail. Dave does a great service helping a lot of people out of debt. He can help you get on a budget and get your expenses under control. I'll give him that much, but only that much. What I want to talk about today is paying off your home.

Some people try to pay their home off faster. In fact, Dave says that after you pay off all other debt you should start throwing everything at your mortgage in the form of extra principle payments. He aslo recommends 15 year mortgages over 30 year mortgages for the same reason. The problem is that by paying off your mortgage early you are killing your partner Uncle Sam. You see, parts of the interest paid on your first and second home is tax deductible. If you were instead to put the extra principle payments (or the difference in 15 and 30 year payments) in a secure, liquid investment you would have the money needed to pay off your home years earlier.

So, instead of paying off your mortgage faster you put the extra money in a side fund. Lets say that after 12 years you have saved in enough to pay off the remainder of your mortgage. As far as I'm considered you are out of debt, but I wouldn't recommend you use that money to pay it off. If you did you would loose the tax deduction. Instead keep that money in a secure, liquid investment and in another 15-18 years later you'll have thousands if not hundreds of thousands of dollars that you would not have any other way.

There are a few keys to this strategy. One, you must be disciplined enough to put the extra money into a side fund. Second, the side fund MUST be liquid and secure. Stock, bonds and mutual funds do not qualify. I would never risk money that you have allocated to pay off your house if ever needed. Third, the investment must earn a consistant return equal too or greater than the interest on your mortgage. As long as you choose the right place for your side fund you will be fine.

A few other reasons why you shouldn't pay off your home at a faster rate:

1. The equity in your home comes and goes with the market. And at any time is an asset earning 0%. There is a way to lock in your equity when the value of your house appreciates.

2. If your home is destroyed by a flood or earthquake that is not covered by your home owners insurance you loose EVERYTHING!

3. In the even of financial troubles, the bank will forclose fastest on home that have a higher equity to loan ration. They won't tell you that, but it's true. So while you are paying extra payments on your home, all that money can easily be lost in a matter of three months.

4. Home equity is not liquid. The only ways to access it are to sell your home or take out a loan. In a financial emergency you may not be able to get a loan because might have lost your job. Don't think it can happen to you? It can. Instead you may have to sell your home at a discounted rate in order to sell quickly.

5. If you are ever sued your home equity is not safe. Don't think you'll be sued? Do you ever work with children? Is there ever dirt, snow or cracks on your sidewalk? It can happen. Don't be paranoid, be prepared.


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