Dave Ramsey Described This Mortgage as 'One of the Worst Options Out There.' Here's Why

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  • There are many different types of mortgages available.
  • Dave Ramsey believes adjustable-rate mortgages are one of the worst types of loans.
  • He cautions against taking out an ARM due to the risk this loan presents.

Should you listen to Ramsey and steer clear of this kind of mortgage? 

If you are buying a home, you're likely going to need to take out a mortgage. There's not just one type of home loan, though. There are many options, some of which are better than others.

Personal finance expert Dave Ramsey recommends a 15-year mortgage because it enables you to become debt-free faster, which is one of his major priorities. 

However, he has also provided advice on other types of loans that many people might consider. And there's one specific kind of mortgage he's issued a stern warning against, calling it one of the "worst types of mortgages out there."

So what's the loan that Ramsey has cautioned against?

Dave Ramsey doesn't think taking out this type of loan is a good idea

The loan that Ramsey warned about is called an adjustable-rate mortgage, or ARM. As Ramsey explained, "ARMs offer a lower interest rate -- at first. But that's just how they lure in potential home buyers."

Essentially, what an ARM does is offer an attractive starting rate that is locked in for a set number of years -- such as five years or seven years. These types of loans would be called a 5/1 ARM, or a 7/1 ARM. 

At the end of this initial period, the rate you had from the start will begin adjusting. It's tied to a financial index (such as the prime rate) and as a result, your rate could become higher over time. 

"Their intention here is to transfer the risk of higher interest rates to you and, in return, the lender gives a lower rate up front," Ramsey explained. 

While Ramsey acknowledges that the low starting rate might make this kind of mortgage seem attractive to borrowers -- especially if they are reaching to get into a property -- he warns that the risks simply are not worth it because, "It's going to go up eventually. And then it'll keep fluctuating throughout the life of the loan."

Unfortunately, as Ramsey explains, when the rate does go up, this can cause all kinds of problems. Your loan payment could become unaffordable if it climbs high enough -- and you may not be able to sell or refinance your home if you end up not being able to afford the payments in the future. This could put you at risk of foreclosure. 

Should you listen to Ramsey? 

While Ramsey is wrong that the 15-year mortgage is the best type of home loan, he is absolutely right that an ARM is a very high-risk loan that most people should steer clear of.

The bottom line is, even if you hope to move or refinance before your rate begins adjusting, there's no iron-clad guarantee that will happen. You'll be betting your house on your future ability to make a payment of an uncertain amount, and you could find yourself paying much more over the life of the loan than if you had a fixed-rate loan. Since your home is such a valuable asset, there's no reason to gamble with losing it just to save a little bit upfront. 

For most people, the best way to borrow to buy a home is to take out a 30-year fixed-rate loan. This provides predictability, and it is a good balance between affordable monthly payments and a reasonable repayment time.  

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