Published: July 18, 2009
Myth: "I'll get a 30-year mortgage, but I'll pay it like a 15-year mortgage, so if something goes wrong I'll still have wiggle room.
Truth: Something will go wrong. Avoid 30-year mortgages.
If you say, "Cross my fingers and hope to die, I promise, promise, promise I will pay extra on my mortgage because I am the one human on the planet who has that kind of discipline," you are kidding yourself.
Sick children, bad transmissions, prom dresses, high heat bills and pet vaccinations come up, and you won't make the extra payments. The FDIC says that 97.3% of people don't systematically pay extra on their mortgages.
The ideal way to buy a house is the 100%-down plan. Sounds weird, doesn't it? But think how much fun that would be! I say don't borrow money. Period. If I can't get you to postpone the purchase that long, I strongly suggest you save a down payment of 20% or more, choose a 15-year (or less) fixed-rate mortgage, and limit your monthly payment to 25% or less of your monthly take-home pay.
You can probably qualify for a much larger loan than what 25% of your take-home pay will give you. But it's not wise to spend more on a house because then you will be what I call "house poor." Too much of your income will be going out in payments, and that will put strain on the rest of your budget--so you won't be saving and paying cash for furniture, cars and education.
The really interesting thing I have observed is that 15-year mortgages always pay off in 15 years. Thirty-year mortgages are for people who enjoy slavery so much they want to extend it for 15 more years and pay thousands of dollars more for the privilege. If you must take out a mortgage, pretend only 15-year mortgages exist.
Many people hang on to their mortgage instead of paying it off early because they're convinced they will get a tax advantage. If you're keeping your mortgage in order to get a tax cut, that's just dumb. Don't fall for that myth; the math just doesn't add up. Watch this video to discover why keeping your mortgage for a tax deduction is a bad idea.
And, whatever you do, never buy a trailer, mobile home or timeshare. The value of these properties drops like a rock. You will never get back what you put into them.
Dave Ramsey is a personal money management expert, an extremely popular national radio personality and best-selling author of The Total Money Makeover. Dave is changing the face of America by helping people get out of debt and build wealth.
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