Suze Orman and Dave Ramsey Have Both Given This Bad Mortgage Advice

You may not want to listen to these finance gurus on this issue.

Taking out a mortgage is a huge decision and it's natural to turn to financial experts to get advice on how to do it right. Suze Orman and Dave Ramsey are two of the most popular finance gurus out there, and both have given a lot of advice about mortgages.

Unfortunately, some of the advice that both of these two famous personalities have given is actually not very good advice for most people. Specifically, both Suze Orman and Dave Ramsey have recommended a particular type of mortgage that may not be the right fit for the majority of home buyers.

Here's the bad mortgage advice Orman and Ramsey have both given

Both Dave Ramsey and Suze Orman have made the same recommendation with regards to the type of mortgage loan most consumers should take out. They've both advised that it's a good idea to use a 15-year mortgage instead of a loan with a longer payoff time, such as the 30-year loan most consumers consider to be standard.

"I wish more people would take out a 15-year mortgage instead ," Orman said on her blog. Orman pointed out some of the benefits of a 15-year loan, including a lower interest rate compared with longer-term loans, as well as lower total costs over time.

Ramsey also made a similar suggestion. "If you decide to take out a mortgage, we recommend getting a 15-year fixed-rate conventional mortgage with at least 10% down," the Ramsey Solutions blog reads. Like Orman, Ramsey praised some key features of the 15-year loan including the lower total costs of the loan and the fact you become debt free more quickly.

Here's why it's bad advice

While Ramsey and Orman are both right about the benefits of the 15-year loan, there is a key downside that the two finance experts seem to gloss over and underestimate the impact of.

The big problem with a 15-year mortgage is that it requires you to commit to much larger monthly payments than loans that have a longer payoff time. Orman touches upon this issue, saying "Paying back a loan in 15 years rather than 30 years means the monthly payment will be higher."

While Orman points out that the monthly payment on a 15-year loan could be around $500 more than on a 30-year loan for a $250,000 loan (depending on interest rate), she goes on to explain away this big downside. She simply asserts that most people could easily find 10 items in their budget that could be cut by $50 per month.

The problem with this line of thinking, though, is that it ignores the opportunity costs and neglects to consider what else you could be doing with that money. The return on investment (ROI) of early mortgage payoff is the saved interest. That's usually only around 4% or less. By comparison, if you invest your money in a reasonably safe investment such as an S&P 500 index fund, you could earn an average annual return of between 7% and 10%.

Most people have choices to make when it comes to what they do with their money since they don't have an endless supply of it. Choosing to commit a ton of extra cash to paying off a low interest loan early in 15-years instead of 30-years could end up leaving you with less wealth than if you invest -- especially once you factor in that mortgage interest is tax deductible if you itemize.

Rather than signing up for a huge monthly loan payment, most borrowers will end up much better off if they opt for the 30-year loan and invest the money they save on payments each month compared with a 15-year mortgage. So before you listen to Orman and Ramsey, do the math yourself to see which decision makes the most financial sense for you.