Let's talk about how much a house can you afford according to Dave Ramsey? So Dave Ramsey is a financial guru, super big into a debt-free lifestyle. Actually is okay with having a mortgage he's really big on having no debt except for a mortgage. If you have to take it on and then pay down that mortgage as quickly as possible.
So he has a couple of rules that he has when it comes to purchasing a house and how much you can afford. So obviously Dave Ramsey wants you to be debt-free first before you purchase a home, this isn't always a good option for people. Sometimes it's really difficult to get to that point, but he's going to suggest before you look at what you can afford, make sure that you're debt-free. So make sure that you eliminate credit card debt, student loans, car loans, debt, personal loans, or anything like that that needs to be eliminated before you purchase a home.
Then, he's going to suggest you take out a 15-year mortgage instead of a 30-year mortgage. And it's really good advice if you can afford a 15-year mortgage, it really is going to save you thousands, tens of thousands of dollars. In some instances, maybe a hundred thousand dollars by going with a 15 year over a 30 year, because you have a shorter amount of debt and a lower interest rate.
So that takes us to how much what's his rule of thumb for how much you can afford. He says one-fourth of your take-home pay, so 25% of your take-home pay. So if let's say you make $2,000 a month and your spouse makes $2,000 a month, your combined household income is $4,000 per month. So in this case, we're assuming that is after taxes. So in that instance, you probably both make somewhere around 3000 to $3,500 each per month before taxes, and your take-home pay is probably close to $2,000 per month take-home.
So you would combine those, you have $4,000 per month and take it home. And then 25% of your take-home pay would be $1,000 per month. So in that model, according to Dave Ramsey, the maximum mortgage payment you could have on a 15-year mortgage would be $1,000 per month. So if you're in our area where taxes are, you would probably be looking at maybe a $115,000 house.
Obviously, that's going to depend a lot on what area you're in and what taxes look like, and how much you're looking at putting down. But you probably will be somewhere around that range.
Some other thing that Dave Ramsey wants you to do is look at what the down payment is. So he's a big proponent of putting 20% down. That's going to cut out mortgage insurance and mortgage insurance is what you pay the lender when you have less than 20% down, and mortgage insurance doesn't help you at all. You're never going to get it back. It's basically an opportunity cost to be able to put less money down.
So, if you put 20% down, obviously you're going to get rid of that mortgage insurance. He will even be more lenient to people if they're putting 10% down or somewhere in between 10 to 20%, but he usually suggests the lowest that you could put down would be 10%.
So look at the homes in your area. You're going to have to figure out what some of these monthly payments are going to look like along with some down payments as well. And just here in a second, I'm going to jump over to his website and show you the calculator that they have on there. So you can type in what your take-home pay is. It's going to calculate your 25% of that take home. So what's your max monthly mortgage amount. And then they have some different options to show you what those down payments look like.
So on Dave Ramsey's blog page, it shows how much house we can afford. So from there, he's going to walk through some similar things. So you're adding up your total monthly income, multiply it by 25%. So if you put in there your monthly take-home pay and one way that you could do this is by looking at your pay stubs over the past month and see what's your average take-home pay because it's probably variable, it's might not be the same, but let's run that scenario.
Let's say you make $4,000 per month tame home. And we could calculate, we can see the maximum mortgage amount is $1,000 per month. So based on a 4% interest rate on a 15-year fixed mortgage, you could do a $150,000 house with 10% down, a 168, 990 with 20%. And you can see it goes up as you put more money down.
So now that begs the question, is this good advice? Yes. The short answer is yes. The long answer is it's complicated because it's difficult advice. It's really solid financial advice and solid financial sense because with Dave Ramsey is trying to teach here is a lifestyle that is completely counterintuitive to what we're usually familiar with. Especially in America where we're very used to carrying debt and making payments. And it's very easy to have the mindset that we always have to make payments on something.
What Dave Ramsey is suggesting here is eliminating debt first, so that a house becomes a blessing. He talks about a lot of the idea of if you're getting a home, you want that home to be a blessing.
And if you're renting is not wasting money like everybody wants to say. That's an unbiased opinion for me because I make money when people buy a house, and I don't make money when people rent. But it takes a lot for somebody in the real estate industry to say renting really is not wasting money. What Dave Ramsey calls it is buying patience.
So if you're renting great, you're buying patience until you have the ability to get there. But you want that house to be something that is fruitful. That's a blessing to you that makes your life better and that you enjoy it. Otherwise, it really is going to be a burden. If you take on so much of a housing payment that you can't afford it later.
Also, keep in mind that this is a really conservative opinion. What Dave Ramsey does through all of his financial advice is really conservative. It's a really smart wealth-building strategy that works really well over time, but they're conservative plans. There are other plans that might fit you.
If you like Dave Ramsey, I'm a huge fan of Dave Ramsey. This is a great strategy for you to get into, and it's going to set you up for success long term because what might happen is you might feel like this is too strict for you to buy the home that you want. And if so, it's really there to protect you to set guardrails on your future.
So you can buy the house now that you might have to make some sacrifices, but over time, that's going to benefit you by helping you just to have more security and not as much debt or risk or obligation that you have to take on the future.
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