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How to Fund a Small Mortgage

By Dave Ramsey

Dear Dave,

We are totally debt-free except for our house. We are moving down in house, going from a $73,000 mortgage to a $16,000 mortgage, so that I can quit my job and home school our children. We’re trying to figure out the best way to finance the $16,000. What’s your advice?
Jan in Louisville, KY

Dear Jan,

I love this! The problem is that you’re not going to find a mortgage company that likes this deal.

Typically, a mortgage company won’t touch a loan of $25,000 or less.

A credit union would be your best choice, Jan. Either that, or a small, local bank. You do not, however, want to let them get you on some home equity-type plan where they give you a three-year balloon or stick you with an adjustable rate mortgage. And no closing costs!

Your rate may be a little higher than the standard mortgage loan, simply because a loan of this size is not marketable. They’ll have to hold it until you pay it off. And put this loan on as short a term as possible – maybe five years, but definitely no more than 10 years.
-- Dave

Use Part of Retirement Fund for Down Payment?

Dear Dave,

I can use $10,000 of my retirement fund penalty-free for a first-time home purchase. Is this a wise plan?
Ted via email

Dear Ted,

Anyone can do this if they’ve had a Roth IRA for five years. Very few people have had a Roth IRA for five years, so unless you’ve already funded it this year you haven’t put $10,000 into it. The only way you can take it out is if you put it in, and that’s in actual dollars – you cannot take out any of your investment portion.

But you’re asking if taking the money out now is a smart plan. Let’s play with some numbers. At age 26, if you leave the $10,000 in there and save up for the house – which I recommend doing for a mortgage down payment, anyway – by age 66 you’ll have about $1,200,000 extra that’s all tax-free.

I know what my answer is, Ted. It’s not a good plan.
-- Dave

Pre-Paid Tuition, Do I Need It?

Dear Dave,

In your opinion what are the advantages and disadvantages of pre-paid tuition plans?
Elliott via email

Dear Elliott,

I don’t like pre-paid tuition plans, and I will not recommend them. I suggest, instead, the Educational Savings Account (ESA). The ESA can be a mutual fund, which I also recommend, that grows tax-free if used for college. You can put as much as $2,000 per child, per year, into an ESA.

The reason I don’t like pre-paid tuitions plans is that anytime you pre-pay something, your rate of return is only that of the rate of inflation. On average, the inflation rate on tuition during the last 25 years has been about 7%. In other words, you’re making 7% on your investment. This is a bad rate of return when you consider that 96% of all growth stock mutual funds have averaged 12% or more over the last 25 years.

Stay away from pre-paid tuition plans. It’s like savings bonds versus mutual funds. You can do much, much better.
-- Dave

Dave Ramsey is the bestselling author of The Total Money Makeover.

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