Dave Ramsey said to get a 15-year mortgage, but you should probably ignore that advice.
Key points
- It’s important to plan carefully for a home purchase, as it’s likely to be the biggest one you’ll ever make.
- Dave Ramsey has some good advice about buying a home, including that you should keep housing costs to 25% of take-home pay or less.
- He also has some bad advice, including that you should get a 15-year mortgage.
Buying a home is a big decision and it can be hard to know how to do the process properly. Finance expert Dave Ramsey has offered many tips for success, but only some of his advice is worth following. Here are all the tips you should listen to — and ignore.
Listen to this Dave Ramsey advice when buying a home
Ramsey’s best advice on home buying focuses on ensuring you’re making smart decisions so your home purchase will not put your long-term financial security in jeopardy. Here’s Ramsey’s best advice about home purchases.
1. Figure out how much you can really afford
Ramsey’s first crucial piece of advice relates to setting and sticking to your home-buying budget.
“You absolutely have to know how much house you can really afford,” Ramsey urged. “Commit to staying within that budget no matter what — don’t cave to the pressure to buy because you’re tired of watching competitors pluck good homes off the market.”
While many people opt to borrow as much as the bank allows, Ramsey doesn’t want you to do this. Instead, figure out your budget based on what feels comfortable to you — especially given other financial goals you might have.
The bank is focused only on making sure you don’t default, while your focus needs to be on making sure your mortgage loan payment doesn’t prevent you from paying off debt, saving, or doing other things that matter to you.
The best way to figure out exactly how much you can afford is to look at your budget and see how much money is left over for housing costs after your other expenses — including saving for things that matter to you. If you have $1,500 to devote to housing, for example, you can work backward and ensure the total cost of your mortgage, utilities, and other expenses will be less than that.
You can also practice living with your mortgage payment to make sure it’s comfortable for you. If you are currently paying $1,200 in rent and utilities and are considering a $1,500 mortgage, put an extra $300 into savings each month for six months to see how it feels to live with a $1,500 payment. If it works for you, then move forward with the purchase.
Implementing this Ramsey advice — and not giving into pressure to purchase a house that’s too expensive — is going to make a huge impact on your purchase.
2. Keep your housing payment to 25% of your take-home pay or less
Ramsey also wants to make sure you do not end up “house poor,” which is what happens if you spend too much of your income on a property. He suggests keeping your total housing costs to 25% or less of the amount you bring home after taxes. This includes not just your mortgage payments, but other homeownership costs too.
“This payment includes principal, interest, property tax, home insurance, homeowners association (HOA) fees and, if your down payment is lower than 20%, private mortgage insurance (PMI) — an extra fee added to your mortgage to protect your lender (not you) in case you don’t make payments,” Ramsey explained.
3. Make a larger down payment
Ramsey suggests you save up a 20% down payment whenever possible to avoid having to buy private mortgage insurance.
PMI is insurance that you will be required to purchase if your down payment is below 20%. Lenders view low down payment loans as a greater risk. This is because you don’t have as much at stake and they may not be able to recoup the entire loan amount if they have to foreclose. As a result, they generally require PMI when you put down less than 20%.
The cost of PMI is typically between 0.1% and 2% of your loan amount. If you are borrowing $350,000, it could cost you as much as $7,000 per year or $583.33 per month.
While Ramsey said avoiding this cost is ideal, he acknowledged it’s not always possible. But, while you may not be able to put 20% down, he believes you need to put some money down.
“For first-time home buyers, a smaller down payment like 5% to 10% is okay too,” Ramsey said. And he issued a stern warning against loan programs that allow you to make no down payment at all.
“‘Special’ mortgage programs — ones that allow you to put next to nothing down — were designed for people who can’t get approved for a mortgage that meets traditional lending guidelines,” he said. “But remember, lenders who approve low-down-payment mortgages end up taking more of your money in the long run.”
In 2022, first-time home buyers accounted for 26% of all buyers purchasing properties — the lowest share since the National Association of Realtors began collecting this data. For the 75% of buyers who already owned homes and who were purchasing new ones, it may be easier to come up with a larger down payment by using equity from the sale of the previous property.
For both new and repeat buyers, the key is to save diligently and have a plan. Know when you want to purchase and how much you’ll need saved, and set up automated transfers of that amount of money into your savings account each month so you stay on track.
Ignore this advice
Ramsey also has some advice to ignore, including the following tips.
1. Choose a 15-year mortgage
Ramsey’s worst piece of home-buying advice is to get a 15-year mortgage. This is definitely a tip to skip.
A 15-year mortgage has higher monthly payments than the more popular 30-year counterpart because you are paying off your loan in half the time. This gives you less flexibility. If you want to pay off your mortgage earlier, you’re better off choosing a 30-year mortgage and making extra payments so you aren’t locked into such a big monthly obligation.
For most people, though, paying off a mortgage early doesn’t make sense. Even at today’s mortgage rates at around 7%, you can typically earn a better return on investment (ROI) by investing in relatively safe investments in a brokerage account (such as an S&P 500 index fund) than you would earn by paying off your mortgage early. There’s a huge opportunity cost to committing to large mortgage payments rather than choosing a more affordable 30-year loan.
As many as 78% of all recent buyers secured financing for their home purchase, according to the National Association of Realtors. So, think carefully about whether you would rather have a more flexible loan if you’re among this group.
2. Buy a house without a credit score
Ramsey also said it’s fine to buy a house without a credit score because you can just find a lender that uses traditional underwriting. This is bad advice.
You’ll have fewer options for lenders who don’t consider credit as a key factor. And without a good credit score, you’ll likely be seen as a riskier buyer and end up with a higher interest rate.
If you are thinking of buying a house, you should work on earning a credit score of at least 680, and ideally closer to 700 if you can. You’ll be able to get a much better rate and have a broader choice of lenders. You can improve your credit by getting a credit card and using it responsibly by maintaining a low balance and paying bills on time.
Make sure you’re an educated home buyer
Remember, a home purchase is one of the biggest of your life and you owe it to yourself to do the research necessary to make it a success — which means questioning any advice you hear, even from financial experts like Dave Ramsey.