I'm pretty conservative and have always liked the idea of getting my mortgage retired quickly. However if you read Ric Edelman's book "Ordinary People, Extraordinary Wealth" you might look at the mortgage differently. Edelman advocates 30 year mortgages and as much mortgage as you can carry on the property, or at least the minimum amount of cash investment. The key to Edelman's strategy is to have money for investment. The lower monthly payment will leave more cash for investment and regular investing over the long term will provide a greater return. If you're investing for retirement and can make a maximum contribution to a 401K plan or a Roth IRA (or both) and carry a smaller monthly mortgage payment, the long term payoff is superior to making big mortgage payments and saving on interest payments.

Mike, what's your personal stance on Dave's conservative approach? My wife and I are planning on buying a home next year, once I graduate. We're on Dave's baby step 4 I think - but saving madly for a down payment at the moment. I've been battling exactly how I want to proceed..

It's not that I advocate Dave's approach, necessarily. But people keep hitting my site because they Google-search for "Dave Ramsey mortgage advice" or some such, and so I'm just providing his suggestion.

In my case, my wife and I bought our first home in 1997. We refi'd to a 15-year, fixed-rate loan a few years back. It's not a big mortgage, relatively speaking, and I like the idea of having the thing paid off as quickly as possible ... like before my kid's a sophomore or junior in high school. (Although we're likely to move by then.)

I understand Edelman's advice entirely. It requires, however, something that 98 percent of people do not possess: unfaltering discipline. You have to have the discipline to ALWAYS invest the difference in payments (30yr vs. 15yr). If you can make that happen, then rock on.

As a rule, mortgage debt should usually be the last to go, IMHO. However, I consider all debt (no matter the form) as risk, and thus it should be dispatched with due haste. It's just a weird element of my personality, I guess: I love eliminating risk whenever I can.

I just wonder how great it must feel to have a "paid for" house.

I've got a Dave Ramsey book I got from a friend, though I haven't read it yet, so I was interested to learn from your post that he advocates the 15-yr fixed mortgage, with monthly payment comprising 25% of net monthly salary. That's what I do! And I thought I was a bit of a weirdo for being so conservative.

In my case, I sold my condo in NYC a few years back when I could no longer afford my monthly mortgage payments after being out of work for almost a year. That pretty much chastened me regarding mortgage debt.

I learned my lesson: after then moving to (relatively lower-cost) Seattle, I purposefully plowed most of the proceeds from my condo sale into my new house, resulting in a pretty small mortgage. The low housing debt really is freedom -- when the situation at my previous employer became untenable, I was able to leave without having another job lined up, because the increased savings from not having to put all my free money into a mortgage payment each month provided me with the necessary financial cushion.

Even though I had money from my previous housing sale, the key for me was buying a cheap, somewhat small house in an up-and-coming area still close to the city center. I could have afforded something much larger, in a nicer, established neighborhood. But I didn't want to be that much in debt, even if it would be at a "normal" level.

While it would be wonderful if we could all follow this advice, I'm not sure how practical it is. I've been looking at buying houses for a while, and if we were to stick to this plan it would be YEARS before we could afford a home. This is not due to any lack of saving, but because DH simply doesn't make that much. Assuming that one can afford to make the payments, wouldn't it make more sense to begin investing in the equity (and convenience) of a home even without this, IMHO somewhat unreasonable for some people, cushion?

Dave's conservative plan sure seems wise considering the real estate slump of 2008. Big mortgage and no equity sounds like a foreclosure waiting to happen now.

Dave's advice is very bad. I'll use my own situation to explain why.

My wife and I want to buy a $650k house (which is downright modest in Silicon Valley), while putting down $100k. A 15 year mortgage at 5.5% would cost $4500 a month. Therefore, according to Dave, we should not buy this house unless we have a take home of $18k a month...or a yearly salary of nearly half a million.

What if we followed Dave's plan and continued renting until we were able to save up enough to buy it outright? We can save $2700 a month, or $32k a year. If housing prices go up by even 5% a year, that house's price would increase faster than we would be able to save. Dave's advice would put us further behind every year.

What if we bought today, while following Dave's advice? A quarter of our take-home would let us spend $1560 a month on housing, which will get us a $200k 15 year fixed mortgage. Putting down the same $100k, we could buy a $300k...refrigerator box, since there is nothing to buy for $300k where we live and work.

So if we followed Dave's advice, we would never be able to buy anything. But in fact we can easily afford the house from the first example with a 30 year fixed on our yearly combined income of $150k.

Anon,

I'm not going to get in a flaming match on whether Dave's advice is good or bad. It just is.

With his plan and current Wells Fargo rates:

15-year note @ 4.625% / $4,242 mo. payment / $213k paid in interest total

Your plan:

30-year note @ 5.25% / $3,037 mo. payment / $543k paid in interest

In my case, when Lisa and I first purchased this house, we used a 30-year fixed-rate mortgage, put down 3 or 4 percent, and borrowed roughly 2.5 times our income at the time. (We refi'd to a 15-year FRM 8 years later.)

Your scenario would have you putting down 15 percent, and borrowing roughly 3.7 times your income on a 30-year fixed. Not way out of line, IMO.

Particularly since Uncle Sam has made it painfully clear that he won't hesitate to use future taxpayers' funds to prop up housing prices whenever possible.

good advise here!

Its helped us put a plan together to save for a recording studio in our home!

Thanks

Brandi & Eddie
Nashville, TN

http://www.myspace.com/brandikayeandeddiesash