Suze Orman and Dave Ramsey both gave this bad mortgage advice


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You might not want to listen to those finance gurus on this question.

Key points

  • Suze Orman and Dave Ramsey both advise taking out a 15-year mortgage.
  • A 15-year mortgage significantly reduces the payment term compared to a 30-year mortgage.
  • There is a huge opportunity cost to consider with a 15 year loan.

Taking out a mortgage is a big decision and it’s only natural to turn to financial experts for advice on how to do it right. Suze Orman and Dave Ramsey are two of the most popular financial gurus, and both have given a lot of advice on mortgages.

Unfortunately, some of the advice these two famous personalities gave isn’t actually very good advice for most people. Specifically, Suze Orman and Dave Ramsey recommended a particular type of mortgage that may not be suitable for the majority of homebuyers.

Here’s the Bad Mortgage Advice Orman and Ramsey Both Gave

Dave Ramsey and Suze Orman both made the same recommendation when it came to the type of mortgage most consumers should take out. They both advised using a 15-year mortgage instead of a loan with a longer repayment term, such as the 30-year loan that most consumers consider standard.

“I wish more people took out a 15-year mortgage instead. [of a 30-year mortgage]”, Orman said on his blog. Orman pointed to some of the advantages of a 15-year loan, including a lower interest rate than longer-term loans, as well as lower total costs over time.

Ramsey also made a similar suggestion. “If you decide to take out a mortgage, we advise you to take out a conventional mortgage at a fixed rate over 15 years with at least 10% down payment”, Ramsey Solutions blog reads. Like Orman, Ramsey praised some key features of the 15-year loan, including lower total loan costs and the fact that you get out of debt faster.

Here’s Why That’s Bad Advice

While Ramsey and Orman are both right about the benefits of the 15-year loan, there is one major downside that both financial experts seem to gloss over and underestimate the impact.

The big problem with a 15-year mortgage is that it forces you to commit to much larger monthly payments than loans that have a longer repayment term. Orman addresses this issue by saying “Paying off a loan in 15 years rather than 30 years means the monthly payment will be higher.”

While Orman points out that the monthly payment on a 15-year loan could be about $500 more than on a 30-year loan for a $250,000 loan (depending on the interest rate), she goes on to explaining this big drawback. She simply claims that most people could easily find 10 items in their budget that could be cut by $50 per month.

The problem with this line of thinking, however, is that it ignores opportunity costs and neglects to consider what else you could do with that money. The return on investment (ROI) of prepaying a mortgage loan is the interest saved. It’s usually only around 4% or less. By comparison, if you invest your money in a reasonably safe investment like an S&P 500 index fund, you could earn an average annual return of between 7% and 10%.

Most people have choices to make when it comes to what they do with their money since they don’t have an endless supply of it. Choosing to commit a ton of extra money to pay off a low-interest loan at the start of 15 years instead of 30 years could end up leaving you with less wealth than if you invested – especially when you take into account the fact that mortgage interest is tax deductible if you itemize.

Rather than taking out a huge monthly loan payment, most borrowers will end up much better off if they take the 30-year loan and invest the money they save on payments each month compared to a mortgage of 15 years old. So before you listen to Orman and Ramsey, do the math yourself to see which decision is best for you financially.

A Historic Opportunity to Save Potentially Thousands of Dollars on Your Mortgage

Chances are interest rates won’t stay at multi-decade lows much longer. That’s why it’s crucial to act today, whether you want to refinance and lower your mortgage payments or are ready to pull the trigger on buying a new home.

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