The Billionaire Investor Understands One Key Factor About Mortgage Loans That Dave Ramsey Doesn’t Understand.
the main points
- Dave Ramsey believes that you should avoid borrowing to get a home if at all possible and you should get a mortgage with a short repayment period.
- Buffett believes a 30-year mortgage is “the best tool in the world,” and has used it himself.
- Buffett’s mortgage philosophy makes more sense than Ramsay’s.
The decisions you make regarding a mortgage loan can have a profound impact on your finances. If you borrow to buy a home, your mortgage will likely be the largest monthly payment and the largest debt you will incur in your lifetime. You will also be committed to making payments for an extended period.
That’s why it can be frustrating to see so much conflicting mortgage advice.
Warren Buffett and Dave Ramsey disagree about mortgages
Some financial experts, like Dave Ramsey, urge people to take out the smallest loan possible for the shortest amount of time possible — or even to avoid borrowing altogether and paying cash to buy a home.
Others, however, are taking the opposite approach. In fact, billionaire investor Warren Buffett described the 30-year mortgage as “the best tool in the world.” He personally took out a 30-year mortgage when he bought his home even though he could have easily avoided it, and most homebuyers are advised to do the same. Here’s why he’s right.
Buffett’s approach to mortgages is better than Ramsay’s
Buffett’s advice on mortgage loans makes a lot more sense than Ramsay’s. That’s because Buffett fully understands that there is an opportunity cost associated with paying cash to buy a home — or even getting a short-term mortgage with higher monthly payments. Ramsay seems to ignore this fact when he warns buyers to stay away from a 30-year mortgage, instead opting for a shorter repayment period with higher monthly payments or no loan at all.
When Buffett bought his home for $150,000 in 1971, he noted that he put about $30,000 on the property and borrowed the rest. The reason: “I thought I’d probably do better with the money than it was to buy the whole house.”
Buffett ended up buying Berkshire Hathaway stock with the money he had can They are accustomed to buying the house. As a result, he ended up turning the $110,000 or $120,000 he had paid in cash for the house into $750 million because the value of Berkshire’s stock went up so much.
You don’t have to be a Buffett to get good returns
Now, most people aren’t likely to see the kind of ROI that Buffett made by buying Berkshire stock. But it is reasonable to assume that most people can Get a better return on investment instead of paying cash to buy a house even if they are not expert investors. Investing in an S&P 500 Index Fund can produce average annual returns of around 10% over time, which is much higher even than an expensive mortgage at 4% or 5%.
By limiting your money at home, Ramsay suggests, you miss out on the opportunity to do other things that could have a greater impact on your net worth. This is true whether you are making a large down payment, paying cash for a home, or opting for a 15-year loan with much higher monthly installments.
And as Buffett points out, you also have the ability to make your mortgage cheaper through refinancing if rates drop. “It’s a one-way renegotiation. It’s an incredibly attractive tool for the homeowner and you have a one-way bet.”
For all of these reasons, you should listen to Buffett instead of Ramsay. If you are buying a home, a 30-year mortgage is the best way to do it.
Historic opportunity to save thousands from your mortgage
Chances are that interest rates will not remain at multi-decade lows for much longer. That’s why taking action today is so important, whether you want to refinance and lower your mortgage payments or you’re ready to start the process of buying a new home.
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