How Should I Pay Off My House?

Summary

Ramsey Everyday Millionaires

Episode: How Should I Pay Off My House?
Host/Author: Ramsey Network
Release Date: January 1, 2025

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Introduction

In this episode of Ramsey Everyday Millionaires, the hosts delve into the financial quandary faced by Trent from Wilmington, North Carolina. Trent seeks advice on managing his investments and real estate holdings to optimize his financial health and reduce debt efficiently. The discussion provides valuable insights into balancing investments with debt repayment, particularly focusing on real estate assets.

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Listener's Financial Situation

Trent’s Financial Overview:

• Investments:
  • Trent: $260,000 in an index mutual fund (brokerage account).
  • Wife: $360,000 in an inherited Roth IRA, required to take distributions of $500/month.
• Real Estate Holdings:
  • Paid-Off Rental Property: Worth approximately $230,000.
  • Mortgaged Rental Property: Owes $180,000 on a property valued at around $430,000.
  • Primary Residence: Recently purchased with a mortgage of $500,000 and a monthly payment of $3,000.
• Additional Details:
  • Age: 37 (turning 38 soon).
  • Debt: No consumer debt.
  • Employment: Self-employed.

Transcript Excerpts:

• [00:34] Trent: "I got some money in the stock market and so does my wife. And I was wondering if I should take that money out to pay off some of this house debt."
• [02:07] Trent: "I have 260 in mine [mutual fund]. And then my wife has an inherited Roth IRA and she's got 360 in hers."

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Hosts’ Analysis and Recommendations

Rachel Cruze’s Guidance:

Rachel Cruze carefully analyzes Trent’s situation, considering his investments, real estate, and financial goals. Her primary focus is on advising whether Trent should liquidate his investments to pay down mortgage debt or continue letting his investments grow.

1. Roth IRA Considerations:

   • [02:24] Rachel Cruze: "But I wouldn't liquidate the Roth IRA because you're going to have a penalty, I believe if you do."
   • Advice: Do not liquidate the Roth IRA due to potential penalties, especially since it is required to take distributions.

2. Mutual Index Fund Assessment:

   • [04:22] Rachel Cruze: "Unless you're self-employed. I would be trying to invest in my 401k at work. I'd be looking at a Roth IRA instead of just a brokerage account."
   • Advice: The mutual index fund is a non-retirement brokerage account. Since Trent is self-employed, she suggests exploring options like an individual 401(k) or Roth IRA to maximize retirement benefits.

3. Real Estate Strategy:

   • [03:06] Rachel Cruze: "I wouldn't touch this. You don't have any other retirement. If I were going to do anything, I would liquidate the other paid for rental in order to do this, to clear some of this out."
   • Advice: Sell the rental property with debt ($180,000 owed) to pay down the primary residence. This approach maintains the paid-off rental property, which can continue to appreciate and serve as a significant asset for future financial stability.

4. Balancing Investments and Debt:

   • [04:41] Rachel Cruze: "In your case, let's get rid of that rental and start knocking out this house."
   • Advice: Prioritize eliminating mortgage debt on the primary residence to reduce financial obligations and increase cash flow, allowing for greater investment opportunities in the future.

Ken Coleman’s Support:

Ken Coleman reinforces Rachel’s recommendations, underscoring the soundness of the proposed financial strategy.

• [04:43] Ken Coleman: "Yeah, there you go. You know, if it ain't broke, don't fix it. I got nothing to add over here. Nothing going to say. I concur."

• [04:50] Ken Coleman: "There's a lot there that you did a great job."

Rachel’s Final Thoughts:

• [04:54] Rachel Cruze: "Thank you, Ken. I'm sorry."

Their collaboration emphasizes the importance of consolidating assets and focusing on debt reduction to build a robust financial foundation.

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Key Takeaways and Insights

1. Prioritize High-Interest Debt Reduction:

   • Eliminating mortgage debt, especially on properties with significant loans, can free up monthly cash flow and reduce financial stress.

2. Strategic Liquidation of Assets:

   • Selling under-leveraged or mortgaged properties to strengthen overall financial health is advisable. In Trent’s case, liquidating the $180,000 rental to pay down the primary residence is recommended.

3. Optimize Retirement Accounts:

   • Avoid liquidating retirement accounts like Roth IRAs due to penalties. Instead, explore setting up more advantageous retirement plans suited for self-employed individuals.

4. Maintain Appreciating Assets:

   • Keeping the paid-off rental property allows Trent to benefit from property appreciation without the burden of debt, contributing to long-term wealth building.

5. Investment Growth vs. Debt Repayment:

   • Balancing investment growth with debt repayment is crucial. In situations where debt is manageable and investments have high growth potential, maintaining investments might be beneficial. However, excessive debt can hinder financial progress.

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Conclusion

In addressing Trent's query, the Ramsey Everyday Millionaires hosts provide a thoughtful, strategic approach to managing debt and investments. By recommending the liquidation of a mortgaged rental property to reduce primary residence debt, while preserving and allowing growth of the fully paid-off rental, Trent can enhance his financial stability and continue building wealth. Additionally, optimizing retirement accounts tailored to his self-employed status ensures long-term financial security without incurring unnecessary penalties.

This episode serves as a guide for individuals juggling investments and real estate debts, emphasizing the importance of strategic asset management and debt prioritization to achieve and sustain millionaire status.

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Notable Quotes:

• [02:24] Rachel Cruze: "But I wouldn't liquidate the Roth IRA because you're going to have a penalty, I believe if you do."

• [03:06] Rachel Cruze: "I wouldn't touch this. You don't have any other retirement."

• [04:41] Rachel Cruze: "In your case, let's get rid of that rental and start knocking out this house."

• [04:43] Ken Coleman: "Yeah, there you go. You know, if it ain't broke, don't fix it. I got nothing to add over here. Nothing going to say. I concur."

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This comprehensive discussion not only addresses Trent's specific situation but also offers valuable lessons applicable to a broader audience seeking to balance investments with debt repayment effectively.

Transcript

[Dave Ramsey]

This episode is sponsored by SmartVestor. Connect with an investing pro for free at RamseySolutions.com invest. You're listening to Ramsey Everyday Millionaires where we talk investing, retirement, building wealth and outrageous generosity.

[Ken Coleman]

Trent joins us now in Wilmington, North Carolina. Trent, how can we help today?

[Trent]

How you guys doing?

[Ken Coleman]

Good. How are you, sir?

[Trent]

Doing well, doing well.

[Ken Coleman]

What's going on? How can we help?

[Trent]

So I got some money in the stock market and so does my wife. And I was wondering if I should take that money out to pay off some of this house debt. I have a couple rental properties and a primary house. One of the, one of the rental houses is completely paid off and the Next one has 180,000 I owe on it. And then of course I just bought my primary residence a few weeks ago.

[Rachel Cruze]

Okay, so you've got a paid off rental. A rental where you owe 180. And what, what is that one worth it? If you were just to sell, I'm.

[Trent]

Just curious, it's probably worth about 430.

[Rachel Cruze]

Nice. And then your primary house, what's the mortgage on that?

[Trent]

It's about 3,000amonth.

[Rachel Cruze]

No, what do you owe? Like the big.

[Trent]

Sorry, sorry. That's okay. I owe about 500 on it.

[Rachel Cruze]

Okay.

[Unknown]

Okay.

[Rachel Cruze]

And tell us about this, these stocks, is it single stocks?

[Trent]

There is. Mine's in index mutual fund and I have 260 in mine. And then my wife has an inherited Roth IRA and she's got 360 in hers.

[Rachel Cruze]

Wow. Okay, so the Roth IRA, I. Is she required to take any distribution of that or not yet?

[Trent]

Yes, she has to take out, I believe it's like right at 500amonth.

[Unknown]

Okay.

[Rachel Cruze]

She's required to take 500amonth and you're talking about liquidating that. You said there's 360 in that?

[Trent]

Yeah. I didn't know if I should pay off that second rental with, you know, some of my money that's in the stock and maybe some of hers or should I just keep it all in there and just keep letting it grow as is? I just, yeah, I have a passion for rentals and stuff like that, so I'd like to get back into that.

[Rachel Cruze]

But I wouldn't liquidate the Roth IRA because you're going to have a penalty, I believe if you do. Now, the mutual index fund, it's, that's, that's non retirement. It's just a brokerage account.

[Trent]

Correct.

[Unknown]

Okay.

[Rachel Cruze]

And how much did you say again? Tell me again.

[Trent]

260.

[Rachel Cruze]

Okay. That one, if you wanted to do you have any other consumer debt?

[Trent]

No.

[Unknown]

Okay.

[Rachel Cruze]

So no consumer debt. Do you have any other retirement funds?

[Trent]

Just that one rental that's paid off.

[Rachel Cruze]

That's part of your retirement. You think?

[Trent]

Yeah.

[Rachel Cruze]

And what's that worth right now?

[Trent]

It's worth like 230 around there.

[Unknown]

Okay.

[Rachel Cruze]

And how old are you?

[Trent]

37. Sorry, I'll be 38 in a week or so.

[Rachel Cruze]

Listen, I just grilled you. I understand that. Yeah. I wouldn't touch this. You don't have any other retirement. If I were going to do anything, I would liquidate the other paid for rental in order to do this, to clear some of this out. I or I would keep the paid for rental and I'd liquidate the one that's worth 430 and get that and put that to 50 or whatever you gain from that onto the house. That's what I do. That way it keeps you with the paid off rental that you're hoping will continue to add value. And then when you're ready, you sell it for lots and lots of money one day and you're paying off half of your house by selling this other one that you had debt on anyway.

[Trent]

You're saying liquidate, sell the one that's, that I owe 180 on and pay down my current house.

[Rachel Cruze]

That we're saying that's what I do.

[Trent]

Okay. Okay.

[Rachel Cruze]

Because I don't want to keep around a rental that I've got debt on at the expense of me living in a paid off house. And I think that this, this mutual fund that you have, for all intents and purposes, I'm treating that as a retirement account. And from now on I would. Unless you're self employed. I would be trying to invest in my 401k at work. I'd be looking at a Roth IRA instead of just a brokerage account.

[Trent]

Okay. Yeah. I am self employed.

[Rachel Cruze]

Okay. Yeah. And even setting up something like an individual for a one case, something where you're getting more benefit than just this brokerage account, it's not a bad place to start. But even Roth IRA is good for you. So that's just a side note. But yeah, in your case, let's get rid of that rental and start knocking out this house.

[Trent]

Okay. Okay. Sounds great. Too easy.

[Ken Coleman]

Yeah, There you go. You know, if it ain't broke, don't fix it. I got nothing to add over here. Nothing going to say. I concur.

[Rachel Cruze]

Yeah.

[Ken Coleman]

There's a lot there that you did a great job.

[Rachel Cruze]

Thank you, Ken. I'm sorry.

[Ken Coleman]

America doesn't need to hear any more on that. You nailed it.

[Rachel Cruze]

Thank you.