Dave Ramsey was my gateway drug into the world of personal finance. Mr. Steward and I were just married and happened to begin attending our awesome church just as they began a huge push to put everyone through Financial Peace University. We attended the class, and the “baby step” program that we learned there not only helped up get out of debt those three years ago, but still forms the backbone of our financial plan today.
I admire Dave for creating a foolproof financial plan that works for anyone following the steps. Creating such universal advice comes at a cost, though. Because Dave needs his advice to work for everyone, it is often more conservative than it needs to be for everyone. To that end, we have disagreed with Dave on a few things. In this series, I’ll talk about a few of the ways we have diverged from Dave Ramsey’s advice, why, and if we would recommend it to others.
We Did Not Put a 20% Down Payment On Our House
In the United States, home buyers are required to either put 20% of the home’s value down on a house or carry PMI (private mortgage insurance) to offer the bank some extra protection against taking such a risky loan. The PMI on a traditional mortgage can be removed after reaching the 20% threshold. Dave’s advice would be to never, ever buy a home until you could pay 20% or more as a down payment.
We put about 7% down on our thirty-year mortgage. Let me paint you a picture of 1.5 years ago, when we bought our house: Mr. Steward and I were living in a 750-square-foot apartment with a new baby and lots of visitors. We had committed to living in our current town indefinitely, and that town happens to be a college town. That means that rent was high relative to the surrounding market. The most recent rent hike meant we would have been paying $680 for that apartment, with only water included. The mortgage on our 1,500 square foot house, once we found it? $703 ($50 PMI included). And, since our home is well-insulated and our apartment was a third-floor unit built in the ’60s, the energy bills make it come out pretty much exactly the same for double the space. Plus, we get to own it at the end!
Would I Recommend Our Choice to Others?
I don’t regret buying a home without a full down payment because the math was the same difference for us. The key was getting the mortgage we could truly afford, even with the PMI, rather than getting a “dream house.” We did not try to maximize the amount of home we bought. Instead, we chose a comfortable payment and reverse-engineered our home buying process from that number. Since we paid our rent when I was in grad school on just Mr. Steward’s income, we felt it would take a lot to make us unable to afford payments similar to our rent. So, we stuck with that number as our goal.
Interest rates being exceptionally low when we bought (ours is at 3.75%) also helped a great deal with our being able to afford a home. Interest rates have gone up since we purchased our house. Interest rates are very difficult to predict, however, so they shouldn’t be a large contributing factor in the question of whether to buy or not.
I regret that we used about half our emergency fund as a down payment (yes, that emergency fund we recently completed saving up again). Retrospectively, that was riskier than I thought. There were several variables that made us feel more secure at the time. We had many offers from family to help with a down payment. We wanted the pride of doing it all ourselves, but we knew that we would have monetary assistance in an emergency situation. We also made sure that we got a one-year home warranty on the house, which helped us feel confident we would not face major home emergencies. Nonetheless, a series of emergencies at that moment could have been very hard on us financially.
All in all, I think Dave’s advice that you need to have the full 20% down payment to buy a house is somewhat overly conservative. I think in certain markets, families with a healthy emergency fund, moderate housing expectations, and a plan to get the PMI off the loan as soon as possible could go ahead and buy with little impact to their financial picture.
Would you ever buy a house with less than a 20% down payment?