Dave Ramsey Mortgage suggestion...

**disneysteve** · 01-09-2009, 05:56 AM

This is one place where many disagree with DR. It might work in the boonies but it certainly won't work in urban areas.

I'd go with 28% of income toward housing, a 20% downpayment and a 30-year fixed-rate loan.

**ScrimpAndSave** · 01-09-2009, 05:59 AM

28% of gross or take home?

**jIM_Ohio** · 01-09-2009, 06:29 AM

My mortgage (with taxes and insurance) is about 24% of gross and about 36% of take home. 30 yr fixed at 5.75% and I put 5% down (I have a second mortgage which is included in above totals).

Many here suggest I am pushing the limits far beyond reasonable boundaries. There are tax implications with a mortgage which I have never seen a DR poster or DR himself mention.

For example you are single, making 55k (right). 15% tax bracket caps at $33950.

55k
std deduction is 5700
personal exemption is $3650

55k-(5700+3650)=45650.
This is in 25% tax bracket. Get about $11700 of deductions and you will see your tax picture change considerably.

$11700+5700=$17400 (add the std deduction back in if you itemize so you can see what you need).

If you put 7% into a 401k or similar, reduce above by $3800. If you have a 30 yr fixed mortgage of $250k at 5.25% you will pay $13,000 in interest first year- add that in. If property taxes are $3000 per year add that in. If you have a state tax bill add that in (otherwise there is a table for sales tax where you can add that in- about $1000-1700 probably). You would get 25% of most of above back (15% of the rest).

Then you can contribute to Roth in 15% bracket and take it out at 25%- giving you significant savings. You will also notice your tax refunds skyrocket (talking $3000-$5000) until you adjust withholdings.

Go here for the numbers (like std deduction, bracket limits etc...)
Reference Room

My wife and I earn close to $120k- if you look that is middle of 25% bracket. Yet by time we itemize we are just under 15% bracket cap every time.

As we pay off the mortgage we adjust 401k upwards a percent or two (to keep the AGI low enough for deductions to push us to 15% bracket). I know this can only last so long (401ks have a cap), so I know the Roth is a good deal for us (pay taxes now at 15%, I won't be there long).

**GREENBACK** · 01-09-2009, 06:33 AM

That's kind of funny. When I bought my current home I didn't even have a vague idea of who Dave Ramsey was. I put 20% down with a 15 year note and my payments are about 18% of take home.

I live in a somewhat rural area and am amazed at some of the housing prices I see mentioned on this site.

**poundwise** · 01-09-2009, 07:29 AM

It is true that situations and locations vary and I'm not going to be an apologist for Dave Ramsey on this issue, however, I do think it strange that everyone just accepts 30 years as the absolute norm for a mortgage.

Have you ever put an amount and a rate in a calculator and seen the difference in what you ultimately pay if you have a 30 year mortgage as opposed to a shorter term?

I used the mortgage loan calculator at Dinkytown.net to come up with the following:

$200,000 - 5.5% - 30 years - $1,136 payment - $208,807 interest
$200,000 - 5.5% - 20 years - $1,376 payment - $130,187 interest
$200,000 - 5.5%- 15 years - $1,634 payment - $94,150 interest

So, for a payment of $500 more per month, you save well over $100k over the life of the loan and own your house 15 years sooner.

If $500 makes the payment out of reach, then consider that a payment of $240 more per month still saves you nearly $80k and 10 years.

When interest rates are higher, the differences grow even larger.

I'm not trying to tell anyone what they should do and I don't have a comment on what percentage of your income you should base your plans on - there are a lot of variables - however, I do think considering the term and the overall cost certainly provides food for thought.

**jIM_Ohio** · 01-09-2009, 07:50 AM

Originally posted by poundwise View Post

It is true that situations and locations vary and I'm not going to be an apologist for Dave Ramsey on this issue, however, I do think it strange that everyone just accepts 30 years as the absolute norm for a mortgage.

Have you ever put an amount and a rate in a calculator and seen the difference in what you ultimately pay if you have a 30 year mortgage as opposed to a shorter term?

I used the mortgage loan calculator at Dinkytown.net to come up with the following:

$200,000 - 5.5% - 30 years - $1,136 payment - $208,807 interest
$200,000 - 5.5% - 20 years - $1,376 payment - $130,187 interest
$200,000 - 5.5%- 15 years - $1,634 payment - $94,150 interest

So, for a payment of $500 more per month, you save well over $100k over the life of the loan and own your house 15 years sooner.

If $500 makes the payment out of reach, then consider that a payment of $240 more per month still saves you nearly $80k and 10 years.

When interest rates are higher, the differences grow even larger.

I'm not trying to tell anyone what they should do and I don't have a comment on what percentage of your income you should base your plans on - there are a lot of variables - however, I do think considering the term and the overall cost certainly provides food for thought.

Consider cash flow on the 30 year. That $500/month difference is a Roth deposit. Invest the $500/month difference for 30 years and see it grow at 7%, you have $600k+ in the investment account.

If you did the 15 year and could not invest until year 16 (and invested the full $1634), you have $527k at end of same 30 year period.

If the return is 9% the 30 year plan has just short of 900k and the 15 year plan has 627k (30 year plan almost 50% more).

two issues here- the 15 year plan would lose more to taxes in two ways:
1) less tax deduction
2) the $1634/mo could not all be invested in a Roth (too high for two spouses limits), so a portion of the return would be lost to taxes too.

**My suggestion would be do 30 year, get the Roth maxed, then look to come back once retirement accounts are on track and pay off the mortgage in 15-20 years**. Retirement planning should come before a 15 year payoff is locked in.

**LivingAlmostLarge** · 01-09-2009, 07:53 AM

He's on crack. Seriously, it would never fly in anywhere that is a middle to high COLA. Live in CA, NY, DC, Boston and surrounding areas like NJ, Conn, MD, VA and you couldn't buy a condo for less than $200k. By his numbers the only people affording a 1 bedroom condo for $200k would be making something close to $100k.

Anyway though, there are other factors besides what Jim mentioned, which by the way Jim, I ran as well.

Where are you in your career and family life? Are you a dual income family likely to go to 1 income when you have kids? Then don't buy a home based on two incomes.

Are you beginning your career like my DH and I so buying a house at 28% PITI isn't a huge deal because our incomes have huge upside potential. If I got a job right now, I know our PITI would be around 15%. Buying a home at 40 without much chance of promotions or raises, be more conservative.

But someone just finishing an MD, Phd or other professional degree and buying their first home? If they stretch and buy at 30-35%? It might be a very different story.

As for poundwise, when you are in the upper income brackets, mortgage money is cheap. It's a hedge against inflation and in 30 years when you are still paying your mortgage the rental next door might be 2x the price for rent.

It never makes sense to prepay your mortgage if you aren't taking advanatage of a 401k and IRA maximum contributions for both. Above and beyond, you can make the argument that it's worth paying down the mortgage.

But that's $16.5k for a 401k, around $20k for Roth 401k, $5k for a Roth or non-deductible IRA. That's $20k/year per person.

If you are saving that much per person then pay off the mortgage. If not the tax benefits of the 401k makes it attractive or even a Roth 401k makes it attractive to save instead of paying off a 6%, 30 year fixed mortgage which migh only have an EFFECTIVE tax rate of 4.5%.

People who say get a 15 year versus 30 year and only look at the interest paid out, are NOT running the numbers. They aren't looking at what happens if they put every penny they paid into a 401k/IRA. They are not looking at the tax break for the 401k.

Basically it's short sighted. But it makes people feel good. So it's fine. But at the end of the day they are poorer than people who hang onto mortgages and invest the difference. They are richer than those who don't prepay the mortgage. But which category do you want to be in?

Rich, comfortable or broke? I'm aiming to be rich.

**disneysteve** · 01-09-2009, 08:54 AM

Originally posted by poundwise View Post

I do think it strange that everyone just accepts 30 years as the absolute norm for a mortgage.

Have you ever put an amount and a rate in a calculator and seen the difference in what you ultimately pay if you have a 30 year mortgage as opposed to a shorter term?

You're assuming that taking a 30-year mortgage means keeping it for 30 years. Very few people take 30 years to pay off their loans. Either they move during that time or they accelerate payments. The 30-year loan gives you much more flexibility than the 15-year loan. There is nothing stopping you from getting a 30 and paying it off in 15 or 18 or 22. Whatever works for you. With the 15, you are locked into that higher payment. If anything changes in your financial situation, you're stuck. With the 30, you have the flexibility to make higher payments but if other needs arise, you can drop back to the lower scheduled payment.

Plus, as Jim pointed out, you generally come out ahead by taking the longer loan and investing the difference.

**jIM_Ohio** · 01-09-2009, 09:29 AM

Plus, as Jim pointed out, you generally come out ahead by taking the longer loan and investing the difference.

at todays historically low mortgage rates

**ScrimpAndSave** · 01-09-2009, 09:37 AM

Yeah that is the problem, too. I don't know whether or not I will be able to take advantage of these "historically low rates" because I probably won't buy until the end of the year. I feel like moving in the summer would be a gamble because I will only have around $25,000-$30,000 saved and that would take some creative financing to get something. Waiting until the end of the year will be better because I will have (hopefully) close to $45,000...and I am also hoping that interest rates won't skyrocket or do anything crazy by then.

**disneysteve** · 01-09-2009, 09:49 AM

Originally posted by ScrimpAndSave View Post

I don't know whether or not I will be able to take advantage of these "historically low rates"

Unfortunately, you can't worry about that. Don't let the rates push you into doing something that you aren't financially (or emotionally) ready to do.

**Gruntina** · 01-09-2009, 10:00 AM

We pay 36% towards our mortgage. Granted this is coming from take home pay that does not factor in the 401k, medical, FSA and etc that are taken out pre taxed. We also do not carry credit card debts either.

While we are homebodies type and live in the SF Bay area where we do not need to travel much for vacations since there is so much to do and see within the area, I am finding that paying 36% is still not really ideal. If the house didn't need major renovation, then it�s very doable. We need to fix the foundations and driveway which will take time to save up for.

If you can find a house that will need minimal repairs, then you probably do well on 25% take home pay. But if the house you get will need major repairs or renovation, it will be tougher.

**MonkeyMama** · 01-09-2009, 10:01 AM

Good points.

1st home - crazy HCOLA - 8%+ interest rates - 30 years. But since DINKS, refied quickly to 15-year. Lower rates were a factor.

We actually went to a 30-year loan for many years, less by choice, more due to other factors (having 2 homes; dropping one income, etc). We started talking about going back to 15-year, or at least making that a goal, in 2008. Decided not interested. Still have the urge to pay off in 15 years, just not to tie myself down to the higher payment. Too much life has happened the last decade. I'd do a 15-year if you could guarantee I wouldn't get very sick or laid off or anything for 15 years.

Have come to prefer the flexibility of a 30-year. We are young enough, we are far better off to beef up our ROTHs.

Also, we just refied to below 5%. No interest in paying down right now. Investing to beat 5% is pretty guaranteed.

Age, region, job outlook, and interest rates are all important variables.

Our personal goal, assuming good health and prosperity, is to pay off 20 years from OP of current home. Kids added 5 years; lost income and increased expenses.

BTW, first mortgage at age 22 was 20% down, probably 36% debt to income. Today at age 31, mortgage is only 15% of gross (one income at that). 36% may have been high, but it was considerably cheaper than renting. THat is why we bought so young. But we grew into it quickly. (higher income, lower interest rates). I expect decent income in the future. If nothing else, dh's $0 income has considerable room for growth; we're still quite young. I am not sure I'd advise 36% debt to income ratio at 40. Nor at the height of one's career...

**Gruntina** · 01-09-2009, 10:02 AM

I forgot to add - we always pay 10% tithe base on our gross earnings. Our disposable incomes is smaller after the tithe has been paid. So in that aspect is probably why we have harder time saving large sums of money in a shorter time.

Dave Ramsey Mortgage suggestion...