How Much Should My Mortgage Be Dave Ramsey

How much should your mortgage be according to Dave Ramsey? He recommends that your monthly mortgage payment should not exceed 25% of your take-home pay. For example, if you bring home $4,000 each month, your mortgage should ideally be around $1,000. Additionally, he advocates for a 15-year fixed-rate mortgage instead of a 30-year term, which can save you a significant amount in interest over time.

Understanding Dave Ramsey’s Mortgage Philosophy

Dave Ramsey is known for his straightforward approach to personal finance. His teachings emphasize living within your means and avoiding debt. When it comes to mortgages, he has specific guidelines to help you make smart financial decisions.

The 25% Rule

One of Ramsey’s core principles is the 25% rule. This suggests that your mortgage payment should be no more than 25% of your monthly take-home income. This percentage includes your principal, interest, taxes, and insurance (PITI).

Calculating Your Maximum Mortgage Payment

To apply the 25% rule, start by determining your monthly take-home pay. Let’s break it down:

Calculate monthly income: If you make $5,000 a month after taxes, your maximum mortgage payment should be $1,250 (25% of $5,000).
Include other costs: When budgeting for your mortgage, remember to factor in property taxes, homeowners insurance, and possibly mortgage insurance.

Why a 15-Year Mortgage?

Ramsey strongly advocates for a 15-year fixed-rate mortgage over a 30-year mortgage. Here’s why:

Lower Interest Rates: Generally, 15-year mortgages come with lower interest rates than 30-year loans. For example, if you secure a 3.5% rate for a 15-year loan versus a 4.5% for a 30-year loan, you’ll save thousands over the life of the loan.
Less Interest Paid: You’ll pay significantly less interest overall. For instance, if you borrow $200,000 at 3.5% for 15 years, you’ll pay about $137,000 in interest. On a 30-year loan at 4.5%, you’d pay around $164,000 just in interest.
Build Equity Faster: With a 15-year mortgage, you pay down your principal quicker, building equity faster. This can be advantageous if you need to sell or refinance in the future.

Real-World Example: Sarah’s Decision

Let’s say Sarah, a 35-year-old teacher in Denver, makes $4,000 monthly after taxes. Based on Ramsey’s guideline, she shouldn’t spend more than $1,000 on her mortgage.

Scenario Analysis:
- After looking at homes, Sarah finds one for $300,000.
- She puts down 20%, which is $60,000, so she’s borrowing $240,000.
- With a 15-year mortgage at 3.5%, her monthly payment would be about $1,700 (including taxes and insurance).

This payment exceeds the 25% rule, so Sarah needs to reassess her budget or consider a less expensive home.

The Importance of Down Payments

Dave Ramsey emphasizes saving for a down payment to avoid Private Mortgage Insurance (PMI).

Recommended Down Payment Percentage

20% Down Payment: This is the sweet spot. If you buy a $300,000 home, a 20% down payment would mean $60,000 upfront. Not having PMI can save you $100-$200 monthly.

Real-World Example: Mike’s Experience

Mike, a 28-year-old software engineer in Austin, wanted to buy his first home. He earned $6,000 per month after taxes. According to Ramsey, he could spend up to $1,500 on his mortgage.

Mike’s Calculation: He found a $350,000 home and saved for a 20% down payment of $70,000.
Monthly Payments: With a 15-year loan at 3%, his monthly payments were around $2,200, which exceeded his budget. He decided to save more and look for properties in the $250,000 range.

The Debt Snowball Method

Ramsey’s debt snowball method is another critical concept. While it doesn’t directly relate to mortgages, it can influence how much you should borrow and how aggressively you should pay it down.

Applying the Snowball to Mortgages

Pay off smaller debts first: Before taking on a mortgage, Ramsey recommends clearing all other debts. This way, you can allocate more of your monthly income toward your mortgage without feeling financially stretched.
Building an Emergency Fund: He also suggests having an emergency fund of 3-6 months of expenses. This provides a safety net for unexpected costs associated with homeownership.

Choosing the Right Lender

Your mortgage lender can make a big difference in your overall costs.

What to Look For

Interest Rates: Shop around for the best rates. A difference of just 0.5% can save you thousands over the life of your loan.
Fees: Look out for origination and closing fees. Some lenders charge more than others, so be sure to read the fine print.
Customer Service: You want to work with a lender who’s responsive and helpful. Ask for referrals from friends or family.

Real-World Example: Jess’s Lender Experience

Jess, a 40-year-old nurse from Seattle, was ready to buy her first home. She followed Ramsey’s advice and got pre-approved with three lenders.

Finding the Best Deal:
- Lender A offered a 3.75% rate with $2,000 in fees.
- Lender B offered 4% with no fees.
- Lender C had the best rate at 3.5% but charged $1,500 in fees.

Jess chose Lender C, ultimately saving money on interest and fees.

FAQs

1. What’s the best mortgage for first-time buyers?

A 15-year fixed-rate mortgage is generally recommended. It allows you to build equity faster and costs less in interest over time.

2. How do I calculate how much house I can afford?

Take your monthly take-home pay and multiply it by 25%. Your maximum mortgage payment should not exceed this amount. Factor in additional costs like property taxes and insurance.

3. What if I can’t afford a 20% down payment?

If you can’t afford a 20% down payment, you can look into government programs like FHA loans which allow lower down payments. However, you may need to pay PMI.

4. Is it better to rent or buy?

It depends on your financial situation and housing market. If you can afford your mortgage payment and plan to stay long-term, buying can be beneficial. If you’re unsure about staying put, renting might be better.

5. Can I pay off my mortgage early?

Yes, many lenders allow extra payments toward the principal. Just check if there are any prepayment penalties with your mortgage.

Conclusion

Understanding how much your mortgage should be according to Dave Ramsey can set you on the right track to financial stability. By adhering to the 25% rule, favoring a 15-year mortgage, and saving for a substantial down payment, you’re likely to find a mortgage that fits within your budget.

Start by calculating your monthly take-home pay and remember to factor in all costs associated with homeownership. And don’t hesitate to shop around for the best mortgage lender that aligns with your financial goals. Happy home hunting!