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An Oregon man is facing a tough choice regarding a house he inherited from his grandfather.
During a call to “The Ramsey Show,” Jordan told host Dave Ramsey that the loan on the house carries an unusually low 1%interest rate with only five years left.
Despite having the cash ready to pay it off, friends — and even his CPA — say that paying it off would be stupid because the money would earn a higher return in a high-yield savings account.
But Jordan wants to pay it off to eliminate the debt he took on after the death of his grandfather, who originated the loan, which left a complicated relationship with his widow.
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Ramsey immediately dismissed the conventional advice and urged Jordan and his wife to eliminate the debt today.
“Who cares what everyone says? Everyone’s broke,” Ramsey said. “Don’t take financial advice from broke people.”
Ramsey and co-host John Delony counseled that while the simple math of a 1% interest rate versus higher savings returns might suggest keeping the loan, the formula ignores factors like risk and the psychological and relational strain of indebtedness.
However, the allure of those higher savings returns from a high-yield savings account is what drives the conventional advice to hold onto the 1% mortgage. Logic suggests earning up to 4% more elsewhere, according to Bankrate, to pocket a net profit — a scenario the caller’s CPA also endorses.
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The caller said his grandfather’s widow is not his grandmother, but rather, his step-grandmother, who has three children of her own, and that something in his gut is telling him to pay off the loan.
“You have a good gut,” Ramsey said.
Ramsey’s core argument centers on the biblical principle that “the borrower is slave to the lender” and that having a financial transaction with a family member — especially one who is a step-relative with her own children possibly monitoring the loans — changes the dynamics of the relationship and could create an unanticipated, unquantifiable cost.
“It is impossible for your step-grandmother to treat you the same as if you didn’t borrow her money,” Ramsey said. “Dinner tastes different when you eat with your master.”
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Mathematically, by keeping the 1% debt and letting the money grow in a higher-earning savings account locks in a guaranteed profit. From a purely numbers-based perspective, paying off the loan is not the right move.