Many people considering buying a home were encouraged in December 2023 when average mortgage rates fell below 7%.
Personal finance personality Dave Ramsey has weighed in with some advice on how (and how not to) approach the opportunity for those planning to buy a home.
Related: Dave Ramsey Has Strong Words About What to Do with Your Money Now
Beyond December's mortgage rate development, expectations that the Federal Reserve will cut interest rates in 2024 are rising, further fueling the feeling that it may be the right time to buy real estate.
Lower rates should also encourage home builders to borrow money, which should lead to greater housing supply.
In 2024, mortgage interest rates could average 6.3%, according to the National Association of Realtors.
Ramsey emphasized that there are many options available and multiple ways to buy a home, but he has some essential guidelines he suggests people follow.
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Ramsey's Recommended Math for Buying a Home
Ramsey starts with his belief that the best way to pay for a house is with cash. This, of course, is not an option available to most people, but establishing it as the most desired method (even in theory) helps inform other decisions to be made.
“If that's not feasible for you, the best option is a smart home loan,” he wrote in Ramsey Solutions. “It can be easy to dive head first into the mortgage option that will allow you to purchase a home with little or no money down.”
“But a bad mortgage product can be a liability in your financial portfolio,” he added. “A home should be a blessing to the family, not a financial nightmare.”
The best-selling author and radio host suggests three preconditions that a potential buyer must meet before purchasing a mortgage.
First, Ramsey said, make sure you're completely debt-free.
Second, save three to six months of expenses in an emergency fund.
Third, it is important that you have saved for a large down payment.
“We recommend at least 10%, but 20% is even better as it will allow you to avoid PMI payments,” Ramsey wrote.
Private mortgage insurance (PMI) is a type of mortgage insurance that you may need to purchase if you apply for a conventional loan with a down payment of less than 20 percent of the purchase price, according to the Consumer Financial Protection Bureau. PMI protects the lender, not you, if you miss payments on your loan.
The best type of mortgage
Ramsey then explains what he believes is the best mortgage option.
“Your mortgage loan must be a conventional fixed-rate mortgage with a term of 15 years (or less),” he wrote.
“Don't get a 30-year mortgage!” she emphasized. “A $175,000 30-year mortgage with a 4% interest rate will cost you $68,000 more over the life of the loan than a 15-year mortgage. That's a lot of money you could use to build your retirement fund or save for college. your children.”
The Ramsey Show host has another tip on the size of a potential mortgage payment.
“Your monthly payment should not exceed 25% of your take-home pay. More than that will tie up much of your income,” he wrote.
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