Real Estate the Ramsey Way - This Is the Ultimate Mortgage Hack

Episode Date: December 9, 2024

Your home should be a blessing, not a burden—but unfortunately, some people learn that the hard way. Get the answers you need with Real Estate The Ramsey Way, and learn what to avoid and how to do real estate the right way.   Next steps: 🏠Have questions about how real estate can help you reach your financial goals? Check out our Real Estate Home Base for free tools and resources to guide your next steps.   🏠And if you’re ready to buy or sell your home, connect with a RamseyTrusted® real estate agent. They’re experts who’ll help you confidently navigate homeownership the way we teach.     Listen to more from Ramsey Network 🎙️ The Ramsey Show   🧠 The Dr. John Delony Show 🍸 Smart Money Happy Hour 💡 The Rachel Cruze Show 💰 George Kamel 💼 The Ken Coleman Show 📈 EntreLeadership 💸 The Ramsey Show Highlights   Learn more about your ad choices.  https://www.megaphone.fm/adchoices Ramsey Solutions Privacy Policy

Dave Ramsey here and welcome to another episode of Real Estate, the Ramsey Way, where you'll learn how to make smart home decisions, avoid costly mistakes, and navigate homeownership with confidence. Well, Rachel, we took a call about paying off the mortgage early, and it's a fun conversation to see what that money can turn into. Oh, yeah. Invested versus just sending in a regular old mortgage payment to the bank. Yeah, and there's so many mortgage types out there, and most of them are truly just crap, and they're meant to give more money to the banks and lenders and less money in your pocket. And so I want to take a look at an example of the 15-year mortgage, which is the one we recommend, versus the 30-year mortgage, to show people exactly what the numbers look like. And we're not going to get super nerdy. I'm not going to talk amortization schedules, Rachel, but I did want to look at this graph from our blog article on the 15-verse 30. So we're going to look at a $300,000 house, which I understand you're all like, where can you find those? This is back in the day, kids.

Let's say you did 20% down on this $300,000 house. That's $60,000. Tracking? That means you'd get a mortgage for $240,000. So let's look at that same mortgage on a 15-year and a 30-year. And the blue, if you're watching on YouTube, is the mortgage loan. The orange is the amount of interest you pay. So here's the shocking part.

on a 15-year fixed rate loan with an interest rate of 3.5%, the monthly payment is $1,700, and the total interest you'd pay is $69,000 if you just paid every single payment perfectly for 15 years. Right, right. On the 30-year, you're going to have a higher interest rate at 4%. Now, the payment is lower, which is why most people do it. It's 1146 instead of 1716. But the total interest you pay on that 30-year, over 30 years of payments, is 172,000. that you just gave away to the lender.

Yep. That is shocking. I mean, almost $100,000 more. And that's, again, I get the interest rate. People are probably like, it's at 6%. Sure.

Well, the numbers change now, but it's even worse with a 30 year at 8%. Right, right. So the math is just magnified. You're paying $350,000 on that 8% loan. That's why we want your mortgage paid off ASAP. Yes. It's interest, you guys.

I mean, it does. It just, it racks up and you see it. So you're paying over $100,000 more in interest to have the 30 year over the 15. I know people have great intentions. They say, well, George, I'll pay it off like a 15. Yeah. And I'm like, the people that really want to build wealth and they don't want to wait until

they're 65, what they're doing is they pay off their 15-year mortgage in seven or 10 years. Right, right. That's the average we found with people who follow the baby steps, our millionaire study. 10 years is what it takes for them to pay it off. Yes. Baby stepers, seven years on average to pay off their mortgage. And so that's very encouraging to see how much money you can. and save. And I actually shared this in my book, Rachel. I wanted to see the numbers for myself and my

wife when we paid off our home. So you ready for this? We paid off our mortgage back in 2021, and I did the math on it. We would have shelled out. We paid ours off aggressively in like 26 months because we're weird. But it was on a 15-year fixed rate. If we just made payments from 15 years, we would have paid almost 50 grand in interest. Had we opted for the 30-year loan, we would have paid over $100,000 in interest. So instead, because we paid it off even earlier, we pay just nine grand in interest by being crazy. And you chose well in your home. And that's our big point, you guys.

I mean, some people are like, oh, my gosh. You guys are. Yes. And we know the housing. We're not completely oblivious to what is going on in the world. Like we understand rates are up. Housing prices are up. And depending on your area, yes, a starter home could be $800,000 in some areas.

Right. So like this is a reality. But the hard thing is, George, is money doesn't have emotion. It doesn't care. Matt doesn't care. It is what it is. And so you can't justify, okay, I'm going to go and buy a house that's my payment is half of my income just so I can say I have a house because you're going to feel screwed every month. It's going to feel like, oh my gosh, we have no money because you have too much house. And so expectations on when you buy a home, what kind of home you buy have shifted in the last three years. And people even some drastic things, they're moving, states even, because they're like we just can't afford. long-term what we want our life to look like because of this. Because again, you guys, it's the math. And that's what we have to always go back to, regardless of how much it sucks.

That's the reality. And so we want you to build wealth, get there the fastest right way. And what we found is when you do a 15-year, it forces you into a formula that makes you pay it off faster, even though you're probably going to pay it off even faster if you're doing the baby steps, which is great. But, you know, it's a hard conversation, George, and what's even difficult about, and I'd be curious, just your prediction on this with just the housing market because in my head when rates go down you guys the demand is suddenly going to open up everyone's going to freaking rush to buy a house

because rates have gone down and then that's going to drive the prices up again so if you are in a position where you can put you know 5% down 10% down 20% down and it's again we we use the 15 year here at ramsie because we want you in a formula that's getting you out of debt we don't like any kind of debt we just won't yell at you if you do a 15 year fixed rate and yeah and it's know, 25% of your take-home pay. That's the formula we use. And you're ready to do it. Do it. Because we, people thought the bottom of the market was going to crash. What, last year? That's what everyone kept saying? And it's like, it's going to crash. And it was, we were, we kept saying it's not. It's supply and demand when it comes to this stuff, you guys. And so if you are in a position

to buy, having a home is a great investment. We want you to do it the right way, though. Absolutely. And I understand for those that want to buy home, it's, it's painful right now. It sucks. Yeah, it does. It's harder than it was for your parents. Yes, and the harder thing is it's not going to get, it's not going to get easier. So make a plan, get out of debt, get the emergency fund, start saving up that down payment, adjust your expectations. This doesn't have to be your dream home. Just get in the game. And that might be a condo or a townhome and it might be in an area further out from the city. And it may not have all of the accoutrements and the fancy kitchen island that you dreamed of. But at least you're a homeowner. And that's a great thing. Be proud of that.

And it's an amazing accomplishment, George, especially houses, cars, these, like, big parts of our lifestyle. When you look back, you know, in the 70s and 80s, on average, a square foot of a house was 1,400. Now it's up to like 2,600 on average, right? The average single-family home. And so our expectations on life, in general, in general, have changed. If we don't have the quartz countertop, we're throwing a tizzy fit. What we've just, yeah, categorized as this normal way of living, when you look back, I mean, I look back, I mean, I look back, on childhood pictures of like my our home growing up and I'm like it's brown carpet I mean it's just

not aesthetically pleasing but it's okay and now it's like you can't even imagine having X, Y, and Z you know what I mean like because social media reality TV I mean all this stuff we've been painted and this picture of what life should look like has been in front of us for so long for so long that it's normal and God forbid you know kids share the bathroom like I mean like all of that So, again, it doesn't make it easier, but I think we do have to have some level of grounding to say, gosh, what we expect in life. Like it or not, the lifestyle creep thing. It is real from a generational standpoint, too. You used to have to wheel down windows, George in our cars. That was my first car, Rachel.

You would wheel down a window. And everyone was okay with that. But like, oh my gosh, could you imagine today? You know, it's really embarrassing, though. I'll say this is the worst part about having manual windows. whenever someone I knew pulled up next to me and I couldn't reach over far enough to get to the passenger side window to talk to them. Yes, because you really go. So I would just like wave at them awkwardly. I know.

Because I wasn't trying to pull a, you know, pull a hamstring trying to get over there. And think about our cell phones. No Kia. Cricket. Oh, yeah. That was the, that was it. Simple times. It was. No internet. You didn't have email. Play snake on the Nokia brick. So we're so used to having all the information,

everything we want right there in our hands, right? So I'm like, it's to the little. things of our expectations. And I'm part of it too. I'm guilty of this. So you're part of the problem. I may be part of the problem. Not pointing fingers, but no, that's good. That's a good. To kind of level us out. Level us out of fear or like disfomo or I'll never get a house. So I just need to jump in now. Right. Because you'll be the next caller calling the Ramsey show saying, Rachel, I think I need to sell the house because we're so broke and so stressed. And we go, the home should be a blessing, not a burden. And what happens when you do it before you're ready is it becomes a

burden. So Rachel, you talked about forecasting the 24 housing market. That's literally the YouTube video I uploaded to my channel today. Stop it. George, we are like twin. You know how twins? They have the twin thing they say. You could like feel like that's us, George. E.T. Energy happening on the show today. George. It's like brother sister energy. We I like. So if you want that in eight minutes, you can go to my YouTube channel and watch the forecast of the 2024 housing market. I even did the weatherman thing. We got a green screen. I got to be weatherman on the channel. How happy were you. Talking about like northeasterly winds and cumulus clouds, it brought me so much joy. It's always been a dream of mine, Rachel. If this whole, whole thing falls apart, I'm going to go

be a meteorologist. I'll be traffic. Guys, you can be weather. This is not, and then Ken can be politics commentary? Okay, maybe not. Yeah. This was, this has been fun. Thanks for being the dream killer, Rachel. We got Joseph in Charlotte, North Carolina. What's going on, Joseph? How are y'all doing? Doing great. How are you? I'm doing all right. Um, so me and my wife. So me and my wife. We are kind of talking exactly about what I'm about to ask about. We are looking to buy a house and like you said, the market is insane and, you know, we've taken all the steps to buy a house, but now that we're provided with the numbers and the pre-approval letter and all that, it's honestly disheartening because we don't know what to do. We have, I'm 23 and my wife's 23.

We have no debt. We've saved up some money planning for this, but when you look at the monthly in on a house that we would be looking for, it's ridiculous. I mean, it would be, it would swallow us up and there's no way we could do it. So my question is, where, what steps do we take? Do we wait? Do we rent? I mean, we kind of, we live with her parents and we're trying, we have a, we have a two-year-old. And so we're trying to get out and, you know, grow our own family, but we don't know where to go or what to do. Can I ask a quick question really quick? I'm going to get out of the way because this is jade's expertise but i but i am going to ask this question from a from a provider standpoint

and and i've been where you are um forget where you are right now let's just take a real number okay what is realistically based on what we teach what's the number that is a very smart and safe um down payment and mortgage like what's the price of a house that you can buy and it doesn't stretch you at all. What is that price point? As far as like the down payment. No, I'm sorry. I kind of led you the wrong way. I don't care about down payment. She'll talk to you about that. She's got the formula. I'm saying what is the price point that is a reasonable purchase price for you with your income where you guys are in your life right now? What's that in reasonable housing price? Honestly, it would probably be from like $280 to $300. Okay.

I'm going to get out of the way because Jade's great at this and coaching you, but I'm going to tell you what I think. If I were you, I'd be looking at places where I can get a house between 280 and 300. This is really not a grand mystery. Now, you may not like that, and I get that. But that's where the renting question, she'll walk you to the rest of it. But I thought I'd jump on the front end of that because I feel like that needs to color the rest of the conversation and go, This is what your realistic situation is.

So waiting versus renting versus maybe we can't live where I'd like to live right now. In other words, when Stacy and I started out, Jade, I could take you to the place in Franklin where, you know, never a million years would I live there now. But we thought it was the greatest thing ever. Back in the day, when we had no kids, it was our very first home. And by the way, it was $198,000. And I thought that I had lost my mind. I mean, you're right, Ken, you can only afford what you can afford. And then there's certain parts of the country where it's like, what I can afford is just not out there.

And so you got, here's what I want to say. You guys are 23. If you rent for five, six, seven years, it's not the end of the world until you can afford it. I don't think it's going to take you that long. The houses that you were looking at now that you got the pre-approval on, what was that price point? Real quick. $400,000. Okay, so you're looking $100,000 more than what you can afford.

And then you have to ask yourself, okay, what does the down payment have to be for us to get in at the bottom of this thing? 400,000. What does my down payment have to be? And what do you have saved so far? So what do you have saved so far and what do you need in order for this to balance out? And if you don't know the numbers, it's okay, you can go on Ramsey Solutions.com. We have a really great mortgage calculator there. We'll put it in the liner notes and we'll make sure you get that information.

But that's what you need to figure out. And if you can save up that down payment and in the meantime if interest rates can go down, that'd be even more, you know, that'd help everybody out a little bit. But the key point is you're a smart, smart guy. You looked at this and said, there's no way in the world I'm going to get a mortgage that's 50 or 60% of my income, right? And for that reason, you're on the right track. What we want to get you to is to where it's no more than 25% of your take home. Right. So where were you at when you were looking at these?

So we So we sat down And we've been like Ben Ben's watching all stuff So we're trying to put all the numbers together But we have like 36,000 saved And for a

I bring home about 4 to 5 grand a month Okay Based on overtime or not Yeah you guys You guys got to keep crunching those numbers Use that calculator Because when you use that

It's going to tell you Exactly what you need to have saved And then you guys can say Okay what's the timeline In order to make that happen Okay so that's what you want to look for No more than 20 5% of your take home on a 15-year fixed-rate conventional mortgage.

That's the homework.