Purchasing a home is a multi-decade commitment, making it one of consumers’ most important financial decisions. Timing the market to get a reasonable mortgage rate, loan term, and home price can be challenging, making it easy for buyers to lose track of the details.
However, the type of mortgage loan homeowners choose can impact the amount paid in interest, which can amount to tens of thousands of dollars in the long run.
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Since 30-year mortgage loans are considered the norm, most home buyers don’t fully explore other loan terms or shop around for mortgage rates at different lenders.
However, Personal finance expert Dave Ramsey explains why that can lead to financial missteps.
Ramsey notes how amortization, mortgage loan terms, and interest rates are key variables in the cost of homeownership and alerts home buyers to avoid a crucial mistake.
Dave Ramsey offers insight into buying a home.
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Dave Ramsey explains the importance of paying down mortgage debt quickly
Although mortgage debt is considered ‘good debt,’ choosing competitive loan terms is critical for paying off the principal balance quickly and efficiently. One of the best ways to secure the right mortgage loan is understanding how much the loan will cost on a monthly basis and how long it will take to pay it off.
To do so requires distinguishing between amortization and loan terms, and Ramsey highlights the difference.
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“An amortization period tells you how long it’ll take to pay off your mortgage, while a mortgage term tells you how long you are locked into a specific mortgage contract with your lender,” he wrote.
Ramsey highlights how mapping out when and how a mortgage will be paid off can give homeowners a tangible roadmap to successfully paying down debt. “As with any type of goal setting, an amortization table gives you a game plan and the confidence to take on the mammoth task of paying off your house,” he continued.
Dave Ramsey highlights why longer mortgage terms cost more in the long run
Although 30-year mortgages are considered the norm, other loan terms are available. Shorter options like a 15-year mortgage allow homeowners to pay off their debt faster and accrue far less interest over time.
Mortgage rates on 15-year loans tend to be more competitive than those on 30-year loans, as borrowers repay their debt faster, and lenders perceive them as less risky investments.
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“Sure, the 30-year plan gives you a smaller monthly payment. But this longer, drawn-out repayment plan has more of your money going toward the interest each month—which also makes the principal balance go down much slower,” Ramsey explained.
Home buyers locked into a 30-year mortgage get the benefit of lower monthly mortgage payments, but they pay substantially more in the long run. Though they’re less common, shorter mortgage terms are a much better deal for homeowners.
“That’s why I only ever recommend a 15-year fixed-rate mortgage—it helps you pay off your house decades faster and saves you tens of thousands of dollars in interest!”
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