As a recent rise in mortgage rates Add $ 400 For a typical borrower’s monthly payment, Dave Ramsey gives some advice to potential homebuyers.
“If you can’t afford to pay 15 years, fixed rate mortgage, I can’t afford to buy a house, “said the radio host, financial personality, and best-selling author, tweeting more than 900,000 followers.
Ramsey’s suggestion suggests that you shouldn’t buy a home if you can’t afford the monthly payments that allow potential buyers to be debt-free in 15 years. A 15-year fixed-rate mortgage borrower has a lower interest rate, but usually pays off the debt in half the time it takes. 30 years FRM — Increase monthly payments, but save thousands of dollars over the life of your loan.
— Dave Ramsey (@DaveRamsey) July 7, 2022
However, this type of mortgage lending is in line with Ramsey’s philosophy of debt avoidance,
Mark Moffitt, an associate professor of real estate at the University of North Texas, told insiders that Ramsey’s remarks are “not true,” and the 30-year FRM is a far better measure of a borrower’s affordability.
“If you can’t afford a home with a 30-year mortgage, you can’t afford a home,” Mofitt told insiders. “Mr. Ramsey likes to pay off his debt quickly, which is not a bad thing, but avoiding debt at any cost is not necessarily a sound financial decision for everyone. There is none.”
Realtor.com data National median listing price The average monthly payment for FRM for $ 450,000 for 15 years is 4.45%, which is 20%.
— Equivalent to $ 2,745. This means that if a borrower does not want to spend more than the recommended 30% of their income on their home, the annual takeaway wage should be around $ 110,000.
Conversely, if the borrower applies the same logic to a 30-year fixed rate mortgage at a rate of 5.30%, a monthly payment of $ 2,000 would require approximately $ 80,000 in take-out annual income.As Median household income At around $ 90,000 in the United States, the 15-year FRM is not affordable for the median households that apply the 30% rule.
For this reason, Realtor.com Chief Economist Danielle Hale says it’s not suitable for everyone and has a lot to do with income levels.
“A mortgage term shorter than 30 years makes sense for older households who have previously owned a home,” Hale said. “But first-time young homebuyers, who tend to be around 30 years old, will be able to buy homes for longer mortgages, so start building fairness for themselves, not the landlord. You will notice that the low income required to make long-term payments. “
Mofit says that ultimately, the ability of a borrower to afford a home depends on their income and their long-term financial goals.
“If the buyer wants to accelerate debt repayment, a 15-year mortgage is a good option,” he said. “The problem of” affordability “results in the debt-to-income ratio. The more buyers you have, the less financially you can afford. “