Dave Ramsey Says 'Smart People' Don't Take Out 30-Year-Mortgages — If You Can't Afford A Home On A 15-Year, Then You Can't Afford It.

Dave Ramsey, the renowned financial guru known for his unfiltered and bold advice, strongly believes in 15-year fixed-rate mortgages.

Ramsey responded to a question from Julie asking, "Is there ever a time when a 30-year mortgage is better than a 15-year mortgage?"

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His advice was straightforward and firm. "Let’s see, how should I put this? No! If you can’t afford a home on a 15-year mortgage, it means you can’t afford the house. Period," he declared.

According to Ramsey, the only scenario in which a 30-year mortgage might be advisable is to prevent foreclosure or bankruptcy, but even then, it doesn’t make it a better option. He declared, "You'll never hear me recommend a 30-year mortgage."

Ramsey's critique of the 30-year mortgage is rooted in its financial inefficiency. The allure of lower monthly payments doesn’t justify the prolonged debt period and the higher total interest paid. He challenges homeowners with a rhetorical question, "Why would you want to stay in debt for 30 years? Do you have a fear of winning with money?"

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Drawing on data, Ramsey notes that the average millionaire in America pays off their mortgage in just over 10 years, suggesting that following financially successful practices involves avoiding prolonged debt. He strongly advises, "Do what smart people do, Julie. Do what people who win with money do. A 15-year, fixed-rate mortgage is the only kind of home loan I recommend."

Ramsey Solutions provides comparative data between the two types of mortgages in an October 2023 post. For a $300,000 house with a 20% down payment, the difference in total payment between a 15-year and a 30-year mortgage is dramatic. A 15-year mortgage at a 3.5% interest rate results in total costs of $309,000, while a 30-year mortgage at a 4% rate results in payments totaling $412,000.

The significant savings stem from the lower interest rate and the shorter repayment period of the 15-year mortgage. This allows homeowners to build equity faster and homeownership sooner.

Despite the higher monthly payments required by a 15-year mortgage, Ramsey argues that this is beneficial as it contributes more toward the principal early on, reducing interest costs significantly over time. He cautions against choosing a 30-year mortgage simply to lower monthly expenses, as it often leads to purchasing a home beyond one’s means.

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Ramsey's 2023 data is somewhat irrelevant now. With the current home price set at $402,000 for 2024 and considering the respective interest rates for 30-year (7.705%) and 15-year (6.909%) mortgages, the financials play out as follows:

  1. 30-Year Mortgage Payment: The monthly payment for a 30-year mortgage amounts to approximately $2,293.99. For this payment to remain below 30% of a homeowner’s monthly income, an annual income of at least $91,759.57 is required.
  2. 15-Year Mortgage Payment: For the 15-year mortgage, the monthly payment increases to about $2,874.29. The required annual income is approximately $114,971.79 to ensure this expense does not exceed 30% of the monthly income.

According to data from the U.S. Bureau of Labor Statistics, the average U.S. annual salary as of the fourth quarter of 2023 was $59,384, while the average household income was $74,755. This income level suggests that many households may not qualify for a 30-year mortgage, making a 15-year mortgage an even less viable option.

So, while a 15-year mortgage is undoubtedly a financially sound choice, it’s crucial to acknowledge that it might not be feasible for everyone. It raises the question: Is Dave Ramsey’s advice promoting financial responsibility or perpetuating a housing market accessible only to high earners?

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