Dave Ramsey’s best and worst mortgage advice

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When you buy a home, you cannot afford to make bad financial decisions. You are likely to commit mortgage loanthat comes with a large monthly payment that you will be responsible for for decades.

You will also spend a ton of money on your home, and your property is likely to be your most valuable asset – if you make the right choices when it comes to buying a home. On the other hand, if something goes wrong, it could lead to financial disaster.

Since the decisions you make about a home loan will have a big impact on your financial life, you can study and pay particular attention to what personal finance experts have to say about buying a property. Dave Ramsey is one of the best-known personal finance experts and has a lot to say about mortgages.

But while Dave tends to offer some useful information, he also provides some advice that many borrowers probably shouldn’t heed. Here is the best and worst mortgage advice he gave.

Best: Know How Much Home You Can Really Afford

The best and most important piece of advice that Dave Ramsey gives when it comes to mortgages is that homeowners should decide how much they can afford to spend on a home.

You see, banks will look at borrowers’ income and current debt and decide how much they are allowed to borrow. In many cases, lenders apply a pre-estimate of 28%. debt-to-income ratio and a domestic debt-to-income ratio of 36%.

This means that borrowers are allowed to spend up to 28% of their monthly income to pay for housing. This includes:

Borrowers are also allowed to pay the total amount of the debt, including mortgages and other loans, which is up to 36% of their monthly income.

Some lenders allow people to go even higher by taking on total debt payments of up to 50% of their monthly paycheck.

The problem is that you may not want – or you may not be able to afford – to borrow as much as the bank allows you. According to Dave’s website, Ramsey Solutions, indicates: “Too much of your income will go towards payments, and this will put a strain on the rest of your budget.”

As Dave warns, the last thing you want to do is be poor at home, so you should do your own independent assessment of how much you can borrow and limit the loan to that amount, not what the bank will allow.

While Dave recommends keeping housing costs at or below 25% of income, it’s up to you to decide what really makes sense for you given your financial goals. And to help you make your decision, check out our guide to see “How much home can I afford?

Worst: Avoid 30-year mortgages

While Ramsey is right about the importance of estimating how much you can comfortably borrow, he has another mortgage advice that I believe is definitely wrong – and even potentially dangerous for some borrowers.

Ramsey suggests avoiding a 30-year mortgage and choosing instead to pay the house in cash or a 15-year mortgage. There are several problems with this tip.

First, it requires a huge opportunity cost. Mortgage rates are now extremely low. You can probably get a mortgage at anywhere near 3.00% per annum if you are a highly qualified borrower. There is no reason to pay cash on your home when you can borrow at such a low interest rate, as you can easily earn more than double that rate over time by investing in a reliable S&P 500 index fund.

Why invest hundreds of thousands of dollars in a home loan when you can get a much better return on investment elsewhere? You cannot easily access the money you have tied up in your home when you need it. And since then inflation is high now, your mortgage payments become less expensive. This is because your payments don’t change even when the real value of the money you pay them drops.

As for Mortgage for 15 years, for this you will have to make much higher monthly payments. This is due to the same missed opportunities discussed above. You limit your money and agree to a very low return on your investment.

Worse, higher monthly payments also increase your risk of being foreclosed if something happens. If you choose mortgage loan for 30 years and you have the money to pay off the loan early, you can always do that if you want. But if you took out a loan for 15 years and increased the cost of your mortgage significantly, you cannot simply pay less if you run into financial problems. Although Dave says on his website that “the really interesting thing about 15 year mortgages is that they always pay off after 15 years,” this is only true if all goes well.

A 30 year loan gives you more flexibility so that you can make lower monthly payments if your finances are not in order or if you decide to invest your money in something that provides a higher return.

In the end, your best bet is to buy an affordable home with a 30-year mortgage. This way, you can be sure that your monthly payments will never become a financial burden, which will maximize the chances that your home will end up being a great purchase that will contribute to your well-being over time.

Historic opportunity to potentially save thousands on mortgages

Interest rates will likely not stay at multi-year lows for much longer. That’s why taking action is critical today, whether you’re looking to refinance and cut back on your mortgage payments or are ready to pull the trigger when buying a new home.

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