Finance expert Dave Ramsey is known for his blunt opinions on the money moves of the average American.
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This time he weighed in on a “homebuying hack” he said most homeowners aren’t following through on. Here’s what he said, and what real estate experts think about whether it’s a good idea.
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15 or 30 Years?
Ramsey said many people take out a 30-year mortgage with plans to pay off the mortgage in 15 years by making extra payments. The problem? Not very many people actually do it.
Instead, Ramsey said, you should just take out the 15-year loan instead.
Do experts agree? Not exactly.
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The Cons
“A 15-year mortgage is extremely non-forgiving. If you run into a health scare or a job you need to resign from because it’s become an unethical burden, the 15-year mortgage payment will restrict your options,” according to John Donlon, founder of Gold Coast Mortgage Service.
He suggested that when you look at “the hierarchy of life” and ask tough questions, such as where does paying off the mortgage rank? Are you willing to put it above your health or time spent with children? Most people find that they have other priorities, from funding a child’s college education to pursuing creative endeavors.
A 15-year mortgage is no guarantee of repayment, either, Donlon said. “We’ve seen many 15-year mortgage holders beholden to the payment then paradoxically rack up debt on a HELOC or credit cards … sinking even quicker into newer credit debt.”
The Pros
There is some truth in what Dave is saying, according to Carlos Scarpero, a mortgage broker at Scarpero.com.
He said, “It’s a matter of discipline,” in that having a 15-year loan forces the homeowner to actually pay it off in that time frame.
People with a 30-year loan do not make the extra payments, he said, and instead “spend that money supporting their lifestyle instead of prepaying the mortgage.”
However, he doesn’t see it as clear cut as Ramsey. “It’s not really one better than the other.” It’s very individual, more a matter of “the homeowner’s needs, wants, financial habits and desire to invest the money in other ways.”
A 15-year loan would not give the borrower as high of an approval amount since the debt-to-income ratio would be higher, Scarpero explained, “but the upside is the 15 almost always has a lower interest rate.”
Do This Instead
Donlon finds the 15-year idea rather “arbitrary” anyway. He said, “Why not set the new payment to coincide with retirement, say 21 and half years out for example?” He pointed out that almost all new modern mortgage can be set with a custom term.
Find Other Ways To Pay Down a Mortgage
Scarpero said there are other ways to pay off a mortgage early instead of increasing payments, such as tax refunds, bonuses or unexpected money.
This can help people budget more evenly and avoid going into lifestyle creep with any bonus money.
Considerations in Today’s Market
In today’s market, where affordability is a real challenge, the 30-year mortgage often makes more sense for the average buyer, according to Alex Shekhtman, CEO and founder at LBC Mortgage.
“It offers lower monthly payments and more flexibility, which is critical in an economy where people need room to breathe.”
While every homebuyer will have to decide what’s right for them, with a 30-year mortgage, you can always make additional payments when things are going well, but you’re not locked into a high fixed cost every month.
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This article originally appeared on GOBankingRates.com: Dave Ramsey: The Homebuying Hack People Don’t Follow Through On
