Here are Dave Ramsey’s top mortgage tips
Buying a home is a huge financial step – one you can’t afford to skip. Fortunately, there is a world of great home buying advice, so if you’re new to the process, you don’t have to go it alone.
Dave Ramsey is a financial guru that he can pay to listen to when buying a home. Ramsey has a long history of sharing financial advice to help people make smart decisions and avoid unhealthy debt. Here are some of Ramsey’s best mortgage tips for home buyers.
1. Evaluate your finances
Before buying a home, make sure you’re in a financial position strong enough to take the plunge. Ramsey says you should tick at least two boxes:
- Have an emergency fund with enough cash to cover three to six months of essential bills.
- Have enough money for a 10% down payment on a home, although 20% is ideal, as it allows you to avoid private mortgage insurance, an expensive premium added to your monthly payment.
Taking these steps should help you approach the home buying and mortgage application process with more confidence. Equally important, they help you manage your mortgage payments, even if you are struggling financially with life.
2. Don’t let a lender decide how much home you can afford
The amount you are allowed to borrow for a house may not be an amount that you are comfortable borrowing. Ramsey says you shouldn’t rely on a mortgage lender to determine how much home loan you can afford. Instead, figure out a few numbers yourself and see what works for you based on your income and non-housing expenses.
Ramsey recommends that you take out a mortgage with a monthly payment of no more than 25% of your take-home pay. Other financial experts say your total predictable housing costs, including your property taxes and home insurance premiums, shouldn’t exceed 30% of your take-home pay. You can use whatever formula you are comfortable with or use your own. You might want to keep total housing costs at 20% of take-home pay, and that’s fine too.
3. Get pre-approved for a mortgage loan
Getting pre-approved for a mortgage won’t guarantee you a loan. But it does help get you started on a more focused home search, and Ramsey says it’s a step worth taking.
When you get pre-approved, a lender looks at your finances and determines how much mortgage you can afford. This, in turn, helps you avoid looking at homes that are too expensive for your budget. Equally important, having mortgage pre-approval lets sellers know that you are a serious buyer, and it could help get you accepted for an offer in a competitive real estate market.
4. Avoid adjustable rate mortgages
When it comes to signing a mortgage, you have a choice. You could get a fixed loan, which guarantees you the same interest rate and the same monthly payment for the duration of your repayment period. Or you could get an adjustable rate mortgage (ARM), which typically rewards you with a lower initial rate.
The problem with ARMs, however, is that your lower interest rate is only guaranteed for a few years and then your rate may go up. That’s why Ramsey says adjustable rate mortgages are a terrible way to go. It is particularly beneficial to lock in a fixed loan when interest rates are low (which is the case today).
Buying a home is a big effort, and it helps to go into the process with as much information as possible. If you incorporate Ramsey’s advice when embarking on your home search, you may find that following his advice saves you a lot of money.
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