Dave Ramsey's Best and Worst Mortgage Advice

by Christy Bieber | Published on Aug. 20, 2021

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You should listen to Dave Ramsey about some things, but not about this.

When you're buying a house, you can't afford to make bad financial decisions. You will likely be committing to a mortgage loan, which comes with a big monthly payment that you'll be responsible for making for decades.

You'll also be spending a ton of money on your home, and your property will likely end up being your most valuable asset -- if you make good choices about your home purchase. On the other hand, if things go wrong, it could lead to financial disaster.

Since the decisions you make about your home loan will have such a big impact on your financial life, you may research and pay careful attention to what personal finance experts say about buying real estate. Dave Ramsey is one of the best known personal finance experts, and he's got a lot to say about mortgage loans.

But while Dave has a tendency to offer some great insight, he also gives some advice that many borrowers probably shouldn't listen to. Here's the best -- and worst -- piece of mortgage advice he's provided.

Best: Know how much house you can really afford

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

See, banks will look at borrowers income and current debts and decide how much they are allowed to borrow. In many cases, lenders apply a 28% front-end debt to income ratio and a 36% back-end debt-to-income ratio.

That means borrowers are allowed to spend up to 28% of their monthly income on housing costs. This includes:

Borrowers are also allowed to have total debt payments, including their mortgage and other loans, that adds up to 36% of their monthly income.

Some lenders allow people to go even higher, taking on total debt payments valued at up to 50% of their monthly take-home pay.

The problem is, you may not want -- or be able to afford -- to borrow as much as the bank allows you to. As Dave's website, Ramsey Solutions, points out, "Too much of your income will be going out in payments, and that will put strain on the rest of your budget."

As Dave cautions, the last thing you want to do is end up house poor -- so you should make your own independent assessment of what amount you are comfortable borrowing and limit your loan to that amount rather than to what the bank will permit.

While Dave recommends keeping housing costs to no more than 25% of income, it's up to you to decide what really makes sense for you given your financial goals. And to help you decide, check out our guide to see "How much house can I afford?"

Worst: Avoid 30-year mortgages

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

Ramsey suggests avoiding 30-year mortgages and instead opting to either pay cash for a house or take out a 15-year mortgage loan. There are a few problems with this advice.

First, there's a huge opportunity cost to doing this. Mortgage rates are extremely low right now. You can probably get a mortgage for somewhere around 3.00% interest if you're a well-qualified borrower. There is no reason to pay cash for a house when you can borrow for such a low interest rate since you could easily earn more than double that rate over time by investing in a safe S&P 500 index fund.

Why tie up hundreds of thousands of dollars in a home loan when you could get a far better return on investment elsewhere? You can't easily get access to the money you've tied up in your house when you need it. And since inflation is high right now, your mortgage payments get less expensive. That's because your payments don't change, even as the real value of the money you are paying them with falls.

And as far as taking a 15-year mortgage, you'd have to commit to making much higher monthly payments to do that. That comes with the same opportunity cost mentioned above. You're tying up your money and accepting a very low return on your investment.

Even worse -- committing to higher monthly payments also increases your risk of being foreclosed on if something happens. If you choose a 30-year mortgage loan and you have the money to pay the loan off early, you can always do so if you want. But if you've taken out a 15-year loan and made your mortgage costs much higher, you can't just pay less if you run into financial trouble. While Dave says on his website that "the really interesting thing about 15-year mortgages is that they always pay off in 15 years," that's only true if things go right.

A 30-year loan gives you more flexibility so you can make lower monthly payments if your finances aren't working out perfectly or if you decide to invest your money in something that provides a better return.

Ultimately, your best bet is to buy an affordable home using a 30-year mortgage. That way, you can make sure your monthly payments don't ever become a financial burden, which maximizes the chances that your home will end up being a great purchase that builds your wealth over time.

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