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Financial Peace University Lesson 12 – Real Estate and Mortgages
Keeping the American Dream from Becoming a Nightmare
In our second-to-last FPU lesson, Ramsey discusses his thoughts on the best ways to buy and sell a home. As you might imagine, he’s not a big fan of 0% down, interest-only, 40 year mortgages (I know, shocking!). If the concepts espoused in this lesson were followed by everyone, we might not be having nearly as problems in our real estate market right now.
Tips for selling a home
Dave started off the class by laying out some tips for selling your home. I didn’t find anything earth shattering in his list but they are good solid tips such as:
- Think like a retailer -make your home into a model home with no evidence of cats, dogs, kids, nothing on the kitchen counters, take most of your clothes out of the closets, etc.
- Pay attention to your home’s curb appeal – “71% of buyers buy from the curb”
- Make sure your home is listed on the internet (77% search for houses on the internet) and in the Multiple Listing Service (MLS)
Buying a home
Ramsey is a big fan of home ownership for three main reasons:
- Paying for your house is a forced savings plan
- Owning a house is typically a hedge against inflation
- Your house grows virtually tax-free
Obviously the real estate market in some places in the US has not been performing well for the past few years. But that is a short-term trend resulting from a number of factors. In the long-term, owning a house is still a good idea (besides, you need a place to live).
Baby Step 6: Pay off your home early
Tips for buying a home
Again, you have most likely heard Ramsey’s list of tips for buying a house. These are suggestions such as:
- Buy at the bottom of the neighborhood’s price range
- Homes prices are based mainly on three things: location, location, and location
- Buy a home that can be attractive from the street and has a good basic floor plan
- Do NOT buy trailers or mobile homes – they go down in value faster than a car
- Do NOT buy timeshares – there is typically no secondary market to resell them (my parents actually own a timeshare…they rented the same week at a timeshare for years and the owners eventually just gave it to them. They didn’t even attempt to make my parents pay for it; in fact, they even paid the attorney fees to transfer the title!)
Mortgages
Now, we get into the crux of the lesson and I’m sure you can imagine that Ramsey’s suggestions will not mesh with all of the crazy mortgage options we’ve seen over the past decade. He starts off this portion of the lesson by reminding us to hate debt and that the best mortgage option is the 100% down plan. Seem crazy? He states that 11% of second home buyers pay cash – so someone is doing it!
Do not buy a house and take on a mortgage until you are ready to do so – that means you are out of debt and have a fully-funded emergency fund. There is nothing wrong with renting for a period of time to make sure your financial house is in order.
Ramsey recommends that you get a mortgage with a payment of no more than 25% of your take home pay on a 15-year fixed rate with at least a 10% down payment. Now, this is a very conservative plan but I’m sure it is very effective. Imagine for a moment if everyone in the US followed this advice over the past decade – I would have to think that the foreclosure rate would be drastically lower than it has been over the past few years (home prices would not have inflated so drastically, people would not have over-extended themselves, all in all, it probably would have made for a much more stable market then and now).
Why choose a 15 year mortgage? The reason is simple finances. Certainly you will pay more each month but the interest savings over the term of the loan is substantial. For instance, on a $225,000 mortgage at 6% APR, you will pay an extra $550 per month compared to a 30 year mortgage but after 10 years you will have about a $90,000 lower principal!
Ramsey recommends that you avoid these “horrible” mortgage options:
- Adjustable rate mortgages – these transfer the interest rate risk from the lender to you
- Interest-only mortgages – if I have to explain to you why Ramsey hates these, you really haven’t been listening!
- Reverse mortgages – you are putting a paid for home at risk and the fees are typically large
- Accelerated or Bi-Weekly plans – these are not bad ideas in themselves, but don’t pay a fee to set this up as you can easily do it yourself.
Yet another myth
Ramsey warns to not fall for the mortgage tax-advantage myth as a reason to not pay off your mortgage. Think about this, if you are in the 25% tax bracket and pay $10,000 in mortgage interest in a year, you will save about $2,500 in taxes. Someone might tell you that it’s a bad idea to pay off your mortgage because then you won’t save that money in taxes. Is it really a good thing to spend $10,000 to save $2,500? That math just doesn’t make sense. This math makes a lot more sense and is a “win” for everyone (except maybe your bank): pay off your mortgage, then give $10,000 to your church or another charity and you’ll still get the $2,500 tax reduction (besides, would you rather give $10,000 to a bank or a charity?).
Patience is a virtue, so is self-restraint
Take your time, find a good house and get a good deal on it. Make sure that you can afford to drop a sizable down payment and get a 15-year mortgage. This is how Ramsey recommends that you buy a house and protect yourself from being in the unfortunate situation in which so many people currently find themselves. “Real estate is a wonderful thing to buy, but move slowly. Don’t buy until you are financially ready.”
Check out my previous FPU posts:
- Introduction
- Lesson 1 – Super Saving
- Lesson 2 – Relating with Money
- Lesson 3 – Cash Flow Planning
- Lesson 4 – Dumping Debt
- Lesson 5 – Credit Sharks in Suits
- Lesson 6 – Buyer Beware
- Lesson 7 – Clause and Effect
- Lesson 8 – That’s Not Good Enough
- Lesson 9 – Of Mice and Mutual Funds
- Lesson 10 – From Fruition to Tuition
- Lesson 11 – Working in Your Strengths
- Financial Peace University Lesson 9 – Of Mice and Mutual Funds...
- Financial Peace University Lesson 4 – Dumping Debt...
- Financial Peace University Lesson 13 – The Great Misunderstanding...
- Financial Peace University Lesson 7 – Clause and Effect...
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Houses for sale in Algarve…
Does anyone know how to buy a property in Portugal?……
Great comments on how to sell a house. I find the “curb appeal” statistic especially interesting. Does Dave recommend any books or other tips on selling or marketing a house for sale? I seem to remember (maybe from his talk show) that he has strong recommendations on how to choose a realtor as well.
@VVEr – I don’t recall if he recommends a specific book for selling a house – but he definitely has a ton of suggestions in the class and workbook on both preparing your house for sale and on choosing a realtor. For instance, your realtor should be a serious, effective realtor with a lot of experience selling houses in all kinds of market conditions – not just your friend or relative who kinda dabbles a bit and sells a house every now and again. Think of your realtor as a marketing professional and definitely do interviews with whomever you are considering.
My personal theory is not how much money you make but how you spend what you have.Don’t live above your means in any income bracket and you will be just fine.
My family and i is moving at Utah and i am looking for a house for sale i have been visiting this site http://derricktornow.com/ and thinking to purchase a house there,Do you have any suggestions?