This is the first of a series of posts Steve Stewart is sharing on various sites as he counts the days left until he and his wife pay off their house!
My wife and I started our financial journey in 2005. We followed Dave Ramsey’s Baby Steps – sort of.
This week, we are cheating the Baby Steps to pay off the house early!
Working Through Dave Ramsey’s Baby Steps
Dave Ramsey, national radio host and best selling author, is known for teaching people how to get out of debt and build wealth using his Baby Step process:
Step 1: Save $1,000 for emergencies
Step 2: Pay off all consumer debt
Step 3: Save 3-6 months of expenses in a bigger emergency fund
Step 4: Invest 15% of household income for retirement
Step 5: Save for your kid’s college expenses
Step 6: Pay off your house early
Step 7: Build wealth and give
My wife and I were married in February 2000 and were somewhat responsible with money. However, we didn’t have a plan.
We used credit cards, had some car loans, and saved a little in our 401(k)s. However, our net worth was a negative ($70,000) because of our house.
In 2003(ish) I bumped into Dave Ramsey on the radio. I quickly realized he had an easy-to-follow plan that even I could understand.
We organized our finances, started tackling our debt, and arrived at Baby Step 6 (saving for our daughter’s college) by the end of 2008. Oh, and our net worth was finally positive too!
It is extremely important to remember that an emergency fund is only to be used for emergencies. If we dipped into our emergency savings for a trip to Disney and had an accident driving home, we might not have enough to cover repairs and medical bills.
For this reason it is important to follow the rules faithfully, except for this one time.
Paying Off Your House Early
This week, I am going to cheat Baby Step #3 and take money out for a non-emergency: Paying off our house early.
In Dave Ramsey’s world, this sounds like blasphemy – but it isn’t.
If your monthly household expenses, including a mortgage, came to $5,000 then you would want at least $15,000 in savings (5,000 x 3 = 15,000).
However, if you house payment was $1,000 a month (principle and interest) but you pay it off; your monthly expenses would drop to $4,000 a month (5,000 – 1,000 = 4,000).
In other words, your emergency savings would only need to be $12,000 to be a 3-month emergency fund (4,000 x 3 = 12,000).
So we are going to the bank on December 14th, dropping our emergency fund down by a few thousand dollars, and getting rid of that pesky monthly mortgage payment.
It sounds like a trick – but it’s legit! We would have to re-evaluate our emergency fund after paying off the house on-schedule anyway – this just moves our monopoly piece ahead a few spaces without sacrificing a turn.
There are always changes in household expenses and family needs. This little trick will PAY OFF OUR HOUSE SOONER and won’t put any additional risk on our family.
What would your emergency fund need to be without a house payment? Take a look at your situation, follow the process, and I hope you get to pay off your house early too!
Steve Stewart has been teaching and encouraging others how to eliminate debt and build wealth for almost a decade.
This year he left his day job, used cash to buy a car and new windows for his house, and is paying off the house as a Christmas gift to his wife.
Your mortgage can easily be your biggest monthly expense. Depending on your situation, you may be able to reduce that burden by refinancing your mortgage.
It’s not complicated, but it takes time to get it done so it’s smart to go over the numbers and see if it the right move for you.
Reasons to Refinance Your Mortgage
Refinancing is a basically replacing your current mortgage with more favorable terms and rates.
Some practical reason to want want to refinance include:
Lower Interest Rates: You can drastically reduce the amount of interest you pay over the term of mortgage. That money saved can be used for other financial goals, like investing or starting a business.
Lower Monthly Payment: Refinancing can help you if you’rd on a tight budget. Please keep in mind that there are closing costs to consider (though it’s possible with some lenders to roll them into the new loan). For those with 20% or more equity, you may want to refinance to not only save money on interest, but to also get the PMI remove. You don’t have to refinance to get the PMI removed though.
Pay off the mortgage sooner: Cutting down on the length of the mortgage can also save you a ton of money in the long run. The trade off is that you may have to pay just a bit more each month.
When we were looking to refinance years ago, we loved the idea of paying the lower interest rate.
Any time you can save ten of thousands in interest payments it’s worth taking a look!
However there is more to the refinance progress that you two will need to talk about.
Should You Go Ahead Refinance Your Mortgage?
No one is going to care about your hard earned money like you do, so while it’s nice to have a lender run the numbers, you always want to do that yourself as well.
Interest Rates Between The Old and New Mortgages
You may feel that lower interest rate is automatically better, but you may not get much benefit.
A small drop in your interest rate may mean that the refinance is more hassle than it’s worth.
If you can shave a percentage point or more you may be able to keep the same payments with your bill pay, but apply the difference towards your principle.
Proposed Mortgage Terms
Sometimes we forget that refinancing can reset mortgages to another 30 or 15 years (meaning plenty of your payments goes towards interest for those first few years), so it might not be prudent to jump into another one.
‘On the other hand, if you have ARM mortgage, getting a stable fixed rate one can allow you two to plan your finances a little easier.
Estimated Closing Costs
This is another mortgage, so there will be closing costs. Some lenders will roll that into the new mortgage, but you still need to factor that in before you choose to move forward.
Once you two weigh these costs along with the benefits, you can then decide if refinancing is a good deal or if it’s better to hold off until another time.
If you decide to refinance, one of the biggest things you can do to save money is to shop around to make sure you’re getting the best rates.