Dave Ramsey on Mortgage Loans: A Beginner's Guide to Home Financing

Dave Ramsey's approach to mortgage loans is centered around the idea that homeowners should aim to pay off their mortgage as quickly as possible, ideally within 10 to 15 years.

This aggressive approach is based on the idea that paying off a mortgage quickly can save homeowners thousands of dollars in interest over the life of the loan.

Dave Ramsey recommends paying 15% to 20% of your gross income towards your mortgage each month, which can help you pay off your mortgage faster and avoid debt.

To achieve this goal, you'll need to create a budget that prioritizes debt repayment and builds an emergency fund to cover 3 to 6 months of living expenses.

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A mortgage loan is a type of loan where a lender provides money to a borrower to purchase a home or property.

The loan is secured by the property itself, which means that if the borrower defaults on the loan, the lender can seize the property to recover their losses.

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Most mortgage loans have a fixed interest rate, which means the interest rate remains the same over the life of the loan.

A 30-year mortgage is a common type of mortgage loan that allows borrowers to pay off the loan over 30 years.

The monthly payment on a 30-year mortgage can be lower than other types of mortgages, but it also means the borrower will pay more in interest over the life of the loan.

Dave Ramsey recommends paying off your mortgage quickly by making extra payments or refinancing to a shorter loan term.

By paying off your mortgage quickly, you can save thousands of dollars in interest payments and free up more money in your budget for other expenses.

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A conventional loan is the most common type of mortgage, making up more than 70% of all mortgages, but it requires a higher down payment (typically at least 5%) compared to government loans.

Conforming loans, on the other hand, meet guidelines set by Fannie Mae and Freddie Mac, and the main guideline is your loan amount, which must be no more than $548,250 for 2021.

You'll want to avoid mortgages like adjustable-rate mortgages (ARMs), FHA loans, VA loans, USDA loans, and 30-year conventional mortgages, as they can lead to higher interest rates, fees, and longer debt repayment periods.

Here are the main types of mortgage loan categories:

By choosing the right loan, you can save money on interest and fees, and get out of debt faster. A 15-year fixed-rate conventional mortgage is often the best option, as it offers lower interest rates and fewer fees compared to other types of mortgages.

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A conforming loan is a mortgage that meets guidelines set by the government and good ol' Fannie and Freddie. The main guideline is your loan amount, which must be no more than $548,250 for 2021. Lenders like conforming loans because they can sell them to Fannie Mae, Freddie Mac, or other companies.

Suggestion: Non Conforming Mortgage Rates

You'll pay a lower interest rate compared to non-conforming loans with conforming loans. However, conforming loans come with strict limits on how much money you can borrow.

If you're considering a mortgage, you're better off avoiding most of the mortgages out there. Adjustable-rate mortgages (ARMs) have a premise that sounds great, but often leaves you with a bigger monthly payment than you can afford. FHA loans are designed for people who want to make a tiny down payment, but they're full of fees, including an upfront Mortgage Insurance Premium (MIP) totaling 1.75% of your loan amount.

The right kind of home loan is a 15-year fixed-rate conventional mortgage. It's a ticket to paying less interest and fewer fees while getting out of debt way faster.

There are four main types of mortgage loan categories: Conventional Loans, Government Mortgages, Mortgages by Interest Rate Type, and Other Types of Mortgage Loans. Conventional Loans include 15-year fixed-rate mortgages and 30-year fixed-rate mortgages.

A 15-year fixed-rate mortgage has a lower total cost compared to any other type of mortgage. It keeps you on track to pay off the house fast, and usually has a lower interest rate and costs less total interest compared to longer term loans.

The 15-year fixed-rate mortgage is the best type of mortgage and the only one we at Ramsey ever recommend to home buyers because it has the lowest total cost compared to any other type of mortgage.

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Jumbo Loans can be a great option if you're looking to purchase a higher-priced home. They allow you to borrow more money than traditional mortgage programs, which can be a game-changer for those who need a larger loan.

However, jumbo loans come with some strings attached. You'll typically need to have excellent credit and a larger down payment, which can be a challenge for some buyers. Plus, jumbo loans often have higher interest rates than conforming loans.

Here are some key pros and cons to consider:

Subprime Loans can be a costly option, designed to help people with bad credit or no money get a house. Lenders know there's a risk in lending to these individuals, so subprime mortgages come with crummy terms like high interest rates and stiff prepayment penalties.

These loans often have a big catch: the interest rates are much higher than what you'd pay with a conventional loan. For example, a conforming conventional loan with a 20% down payment will be your lowest total cost option.

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Subprime mortgages were created to help people who experience setbacks, like divorce, unemployment, or medical emergencies, get a house. However, this doesn't change the fact that these loans come with steep costs.

If you're considering a subprime loan, be aware that it's a rip-off. There are better options available, like a conventional 15-year fixed-rate mortgage, which is the only mortgage we recommend.

Consider reading: Fair Value Accounting and the Subprime Mortgage Crisis

To prepare for a mortgage, it's essential to set your budget first. Your monthly house payment should be no more than 25% of your take-home pay, which includes principal, interest, and other costs like taxes, HOA fees, and homeowners insurance.

You'll also need to save enough to cover closing costs, which can be as high as 4% of your home's purchase price. This will help you avoid borrowing for them and paying more on your monthly mortgage payments and interest payments for the life of the loan.

A good rule of thumb is to save around 1% of your home's value per year for maintenance, so you're ready for big expenses that come up. Consider starting a special home repair fund to cover these costs instead of raiding your emergency fund every time something breaks.

Here's a quick checklist of what you'll need to get preapproved:

Setting a budget is a crucial step in preparing for a mortgage. Your monthly house payment should be no more than 25% of your take-home pay, including principal, interest, and other costs like taxes, HOA fees, and homeowners insurance.

This might not seem like a very big number, but spending more than that on a house can lead to a super tight budget. You want enough breathing room to comfortably cover your monthly expenses and have plenty of money left over to save for other important things, like retirement.

To determine your budget, consider using the 25% rule: multiply your take-home pay by 0.25 to get the maximum amount you should spend on your house payment each month.

Here's a simple breakdown of what you should consider when setting your budget:

Remember, it's up to you to decide how much house you can afford, not mortgage companies. Stick to your budget and don't let lenders talk you into a bigger loan than you can handle.

Covering closing costs can be a challenge, especially if you're not prepared. Closing costs can total as much as 4% of your home's purchase price.

You'll want to save enough to cover these costs outright, to avoid borrowing and increasing your monthly mortgage payments. Borrowing for closing costs means paying more on your mortgage for the life of the loan.

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