Should You Take Out a 30-Year Mortgage? Here's What Dave Ramsey Thinks

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  • Many home buyers opt for a 30-year mortgage.
  • A 30-year loan provides affordable, predictable monthly payments.
  • Finance guru Dave Ramsey has spoken out about 30-year loans.

You'll want to read this before deciding what mortgage loan is right for you.

A 30-year mortgage is an extremely popular option for home buyers. It offers the opportunity to borrow over a long time period, which makes monthly payments affordable. And if you opt for a fixed-rate loan, you have predictable payments for decades as you work on paying off your house.

But, what does finance guru Dave Ramsey think of this common loan type? Does the money-management advisor urge his readers and listeners to opt for a 30-year loan or does he have a different recommendation?

Dave Ramsey's preferred mortgage option

Despite the popularity and the advantages of a 30-year loan, Dave Ramsey actually does not recommend this mortgage type. Instead, Ramsey suggests paying cash for a home when possible. And if that can't happen, then he believes a 15-year home loan is a better bet than its longer counterpart.

Ramsey believes a 15-year mortgage is a better choice because you'll be debt free in half the time. While it's possible to obtain a 30-year loan and pay it off faster if becoming free of debt is your top priority, he doesn't believe this is likely to occur.

As he pointed out on his blog, 97.3% of people don't pay extra on their home loans. Based on this statistic, and his belief about the way people spend their money, Ramsey doesn't think most people will follow through on paying off their 30-year loan sooner even if they originally plan to do so when they borrow.

"The really interesting thing about 15-year mortgages is that they always pay off in 15 years," Ramsey's blog reads. "Thirty-year mortgages are for people who enjoy slavery so much they want to extend it for 15 more years and pay thousands of dollars more for the privilege. If you must take out a mortgage, pretend only 15-year mortgages exist."

The problem with Ramsey's mortgage advice

Although Ramsey firmly believes a 15-year mortgage is a better bet than a 30-year loan, the problem with this approach is that there's a huge opportunity cost to a shorter-term mortgage.

When you take out a 15-year mortgage, monthly payments are significantly higher than with a 30-year loan. You're committed to making these larger payments, so you’ll need a larger emergency fund and will face a bigger risk of foreclosure than if you had a lower monthly payment.

You're also committing a lot of your money to quickly repaying a low-interest loan that possibly has tax-deductible interest. This money could otherwise be used to pay other debt or to invest in assets that are likely to produce a higher rate of return.

The ROI from early mortgage payoff is the saved interest, which is almost always below 5% -- and sometimes much lower, depending on what rate you qualify for when you get your loan. An investment in an S&P 500 index fund could produce a 10% ROI over the long-term, based on its historical performance. You could end up with a much smaller net worth in the end if you take Ramsey's advice and prioritize early mortgage payoff rather than making smaller mortgage payments and investing the difference.

Ultimately, while some people will listen to this advice and opt for a 15-year loan because they subscribe to Ramsey's philosophy of virtually all debt being bad, many homeowners would be better off opting for a 30-year loan despite what the finance guru says.

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