If you’re considering purchasing a home, there are several ways to finance the purchase. You may take out a 30-year loan, which is popular among borrowers, or you may choose a shorter-term home loan, such as a 20 year loan or even a 15-year loan.
The benefit of taking out a 30-year mortgage is that your monthly payments are lower. However, there is a disadvantage to taking out a 30-year mortgage, and it’s one that financial expert Dave Ramsey claims people should avoid.
Why Dave Ramsey isn’t a fan of a 30-year mortgage
The trouble with taking out a 30-year mortgage is that you will be stuck paying interest on your home loan at a higher rate than if you took out a shorter-term loan. In fact, Ramsey is adamantly opposed to paying mortgage interest. He believes that the best method to buy a house is to put down 100% of the purchase price and not use any debt financing.
However, most individuals are unable to purchase a house fully since property values have risen so much on a national level. That is why the normal buyer has to examine several sources of finance.
However, if you do take out a mortgage, Mr. Ramsey believes you should shoot for the shortest duration feasible. He also warns against taking out a 30-year loan in order to be debt-free sooner by making extra payments toward your mortgage.
That may appear sound in theory, but life happens. Repairs at home might occur. Vehicle problems can crop up. There are a number of costs you could incur that would prevent you from having to make those extra payments, even if you wanted to do so.
Because of this, Ramsey expects that if the typical borrower takes out a 30-year loan, they will be stuck paying off their home for 30 years. He thinks that borrowers should pretend that there is only a 15-year mortgage on the market – and pay down their debts in 15 years.
What’s the best mortgage decision for you?
Your financial situation may have you at the point where your only choice for purchasing a house is to take out a 30-year mortgage on it. While Ramsey may not appreciate this method, in the end, you must do what is best for your circumstances.
However, if you can make the bigger monthly payments that come with a 15-year mortgage, you may be better served by taking out a loan. That will save money on interest over the course of paying off your home and getting debt-free sooner. Ramsey is all for it.
Furthermore, though Ramsey may suggest purchasing a home in cash, it isn’t necessarily the greatest option. Homes are highly illiquid; if you put all of your money into your house and something goes wrong with your financial situation, you may get into trouble. Getting yourself a 15-year mortgage rather than a 30-year one might be a better choice regardless of whether you have the cash to buy an outright property – even if that means paying interest.
A historic opportunity to potentially save thousands on your mortgage
It’s highly probable that interest rates won’t stay at multi-decade lows for long. That is why now is the time to act, whether you are wanting to refinance and decrease your mortgage payment or you are ready to make a new house purchase.