Financial Peace University Week 8: Being mortgage-free
(This post is part of my Finance Peace University Review series from 2019, and updated in 2021 with additional content!)
This review covers the 8th lesson in Dave Ramsey’s Financial Peace University Flex online course.
Week 1 covers the starter emergency fund and budgeting (Baby Step 1).
Week 2 teaches how to pay off debt using the Debt Snowball method (Baby Step 2).
Week 3 talks about how to build up a fully-funded 3 to 6-month emergency fund (Baby Step 3).
Week 4 focuses on the topic of building wealth (Baby Steps 4-7).
Week 5 is all about spending wisely and protecting your wealth.
Week 6 covers the role that insurance plays in our defensive strategy.
Week 7 teaches more strategies about saving for retirement and building wealth.
In this next review of the lesson from Financial Peace week 8, Dave takes an extensive look at Baby Step 6, which is paying off the mortgage. He talks about the right way to buy a home, what to look for, what to run from, and having a plan.
I learned so much going through this series on my own. Each video provides a worksheet to help you follow along and take notes, and each session has a checklist so you can stay on track with the program.
Let’s dive in!
Sometimes it’s best to rent
In some situations, it can be an unwise choice to keep giving your money to a landlord month after month. In fact, most people think it’s a bad decision because you don’t build any wealth by renting.
But, there are some circumstances when renting is a smart option. It all depends on your stage in life, and how much you have saved up.
Dave recommends renting (for a little while) if you’re in one of these situations:
- Newly married: Wait a year before buying a house. You’ll need this time to save up for a down payment and figure out how to work together as a newly married couple.
- Newly divorced or widowed, or in a crisis situation: Never make a big decision like buying a house when you’re grieving.
- In the military: If you’re serving and moving every couple of years then you will probably not have enough time to build up enough equity in your home to sell at a profit.
- Moved to a new city: Take some time, even up to a year, to get to know the neighborhoods in your area. Take the time and do the research so you can find a location that will meet your needs and maximize your investment.
Even after you’ve rented for a little while, don’t jump into buying until you’ve completed Baby Step 3. This would mean you are out of debt and have a 3 to 6-month emergency fund in the bank.
You can choose to start saving for your down payment after this step, or you can save while you’re building your emergency fund.
The main goal is to not buy a house when you’re broke and in a lot of debt!
The Why, What, and How of buying a home
There are a lot of emotional reasons to buy a house, like wanting a place to call your own and making it “yours”, having a place to raise your kids, celebrate life’s milestones, and make lasting memories.
But there are some very practical reasons to invest in your own home as well:
- You have a “built-in” savings plan as you pay down the principal and increase equity.
- You benefit from inflation and increase your wealth as the value of your home rises.
- Your investment grows tax-free, as long as you’ve owned and lived in the home for 2 of the 5 years prior to selling. So when you sell you don’t have to pay taxes on the first $500K of profit if you’re married (or $250K if you’re single).
These are all good reasons why it’s a good decision to buy, but knowing what to buy will help you maximize your investment:
- You’ll see the most appreciation if you buy in the lower to mid-range of a neighborhood. This means don’t buy the most expensive house in that area and don’t overbuild with extensive home additions and improvements.
- Always buy in a good location. Try to find a home close to the water, or has a nice view, and you’ll sell it at a better price later on.
- Give more attention to the structure and floorplan. Don’t let the little things that you can fix yourself deter you from considering a less-than-appealing house. Bad carpet and ugly paint can keep other buyers away and give you more leverage when buying, but they are also things that are easily replaced at a low cost.
Thirdly, knowing how to buy will help make the buying process easier, and protect you from making a bad decision:
- Hire a realtor! This investment is too important to leave to a non-professional.
- Shop on the internet – your search will be a lot faster.
- If you’re not buying in a typical subdivision, make sure you get a land survey. It’s the best way to know the exact size of the lot you’re considering.
- Get a home inspection. This will uncover expensive issues such as mold, roof leaks, and poor heating & air systems.
- Hire an outside party to get an appraisal.
- Get title insurance, which will protect you in a situation where your ownership is being questioned.
The Good & Bad of mortgages
In America, most people who own a home have a mortgage. You may even think there’s no way out of not having a mortgage; it’s just something we all have to live with.
Of course, this isn’t true. Anybody can pay off their home or even pay 100% cash for a new one – if they just commit and be patient.
However, most people are not that patient. They don’t want to rent for years while they raise a family just so they can dodge a mortgage payment.
And that’s okay.
If you’d rather get into a house sooner and take on a payment, there are ways to do it that will help you pay it off faster:
- Get a 15-year fixed rate loan
- Put at least 10% down (the more, the better!)
- Make sure your monthly payment is no more than 25% of your take-home pay
There are also several choices that you’ll want to stay away from, like these:
- Adjustable Rate Mortgage (ARM) – this keeps your money fluctuating and your payments rising. You need consistency, so stick with a fixed-rate loan.
- Interest-only loans – you’re only paying interest, so you don’t make any progress on paying down the principal. In other words, you’re only benefiting the bank, and not yourself.
- Reverse Mortgages – these can be very expensive and have high fees. Besides that, you have to be over 62 to qualify. But think about it, do you really want to start going backward after years of moving forward?
- Accelerated bi-weekly payoff programs – you don’t need to pay anybody to help you accelerate your payments – you can do that all by yourself.
- Tax-advantage – this isn’t really an option you’ll be presented with when shopping for a mortgage, but it’s a reason that lenders will give you for staying in your mortgage. *Bottom line*: the tax benefits of owning a home will never outweigh the income you keep without one.
Don’t forget: your home is your biggest asset!
Have a plan, and do the research to protect yourself from a bad investment.
Like Chris Hogan says, “be cautious, be careful, and be coherent.”
Video: Am I Ready To Buy A House?
Challenges & Opportunities of real estate
In this final segment of the lesson, Dave talks about some of the challenges you might come up against, and the opportunities you can take advantage of when you buy real estate.
One of the first challenges may arise if you’ve done everything right. Meaning, you’ve done the baby steps, you’re all out of debt, and you’re no longer borrowing money.
This could potentially mean you’ve been “off the radar” for at least 6 months. If there’s no credit to report, your credit score will essentially disappear.
So how do you buy a house with no credit score?
Find a lender who will manually underwrite your mortgage.
This is a good thing, but it may take some effort to find a lender who will do it.
This doesn’t mean you can be living in a van down by the river. You’ll still need to have a job and be paying bills. But just because you don’t have a credit score doesn’t mean you can’t buy a home.
Another challenge that all homebuyers are vulnerable to is having the market turn against their favor, and then the house ends up being worth less than what’s owed on it.
Unless you have to move, your best bet is to sit tight and wait it out. Eventually, the market will shift upwards again and you’ll recoup that loss as your equity starts to rise.
If for some reason you have to move (maybe you’re being transferred in your job), then rent it out until the market recovers and the value is greater than your mortgage.
Sometimes there’s no getting around selling at a loss, such as if you lose your income. In this case, you can avoid foreclosure by doing a short sale. A short sale is when you sell your home for less than what you owe on it. The bank accepts the proceeds from the sale as payment in full, and you are not at risk of being sued for the remainder later on.
This is better than foreclosing, but not by much. Your credit will still get damaged – so never short sell strictly out of convenience. Do it only as a last resort when there’s no way to get around selling.
If you’re on the other side and you’re in a great position to sell, there are some things you can do to get the best response and the best price:
- Think like a retailer. You are selling an item worth hundreds of thousands of dollars. Make it look as appealing as possible! Clear out the clutter and make it look spacious. Have it well lit so it looks bright and inviting. Light a scented candle or bake some cookies so your house has a homey “feel” to it and is pleasant to be in.
- Pay attention to curb appeal. Trim the trees and bushes, edge the lawn, dust the shutters, sweep away the cobwebs. You never get a second chance at a first impression.
- Put it on the internet. 90% of buyers start their home shopping on the internet. Make sure your listing and your photos look professional.
- Hire a realtor. And not just any realtor. Especially not a friend or family member. Find one who is at the top of their game, is successful and knowledgeable, and acts professionally. Interview at least 3 before you choose one. Make sure they do a Comparative Market Analysis so they can determine the real value of your home. Hiring a good realtor will get you the highest price for your home.
Buying a house can be stressful, but it can also be exciting.
The important thing is to have a game plan, be aware of the pitfalls, and be patient.
It will probably be the biggest investment of your lifetime, but also the most meaningful. Your home is where you build relationships, create memories, and find solace.
So it’s important that your home doesn’t turn into a burden for you.
It’s worth it to take your time and do it right. Have a good down payment, then pay it off as quickly as you can.
Then you’ll be one step closer to financial freedom!