With mortgage rates hitting their highest levels in over 20 years, many Americans interested in buying a home are understandably hesitant to make a purchase right now. However, personal finance guru Dave Ramsey believes that potential homebuyers who are financially prepared should move forward with their plans.
On a recent episode of “FOX & Friends”, Ramsey warned viewers about the damaging impact of “Bloody Sunday” – when federal student loan repayments resume on January 1st after being paused during the pandemic. With the holidays arriving soon, Ramsey says Americans need to get on a strict budget and have a financial plan in place.
Mortgage Rates Reach 20-Year High
The average 30-year fixed mortgage rate jumped to 7.49% last week, according to data from Freddie Mac. This is the highest level borrowing costs have reached since 2002. At the same time, home prices continue marching higher due to low inventory levels.
“[House] prices aren’t going to go anywhere but up, even with interest rates going up,” Ramsey stated. He believes that although the housing market has stalled, prices will continue to appreciate over the long run.
Ramsey’s co-host George Kamel agreed with this assessment. He cautioned millennials and Gen Z against feeling “hopeless” and “cynical” right now. Kamel acknowledged that high rental costs are pushing many younger Americans towards homeownership. However, he reiterated Ramsey’s advice that buyers need to be debt-free with emergency savings first.
How To Prepare Your Finances Before Buying a Home
Ramsey and Kamel laid out two key steps Americans should take to get their finances in order before purchasing real estate:
Pay Down All Debt
Becoming completely debt-free is a cornerstone of Ramsey’s popular 7 Baby Steps program. Kamel noted that buying a home comes with extra costs like property taxes, insurance, and sometimes HOA fees. To ensure you can truly afford homeownership, eliminating all debt is critical.
There are a few proven methods to pay off debt quickly:
- The debt snowball method prioritizes paying down your smallest debts first. Once the smallest balance is paid off, you “snowball” the extra money towards the next smallest debt. This creates momentum and encouragement as you check balances off your list.
- Analyzing interest rates and paying down high-interest debts first is also effective. Credit card, payday loan, and vehicle debt can snowball out of control if interest charges build up. Eliminating these high-cost debts saves money long-term.
- Sticking to a detailed budget that allocates money towards necessities, savings goals, and debts is vital for becoming debt-free. Tracking your spending helps optimize what you can devote to debt repayment.
Build a 3-6 Month Emergency Fund
In Ramsey’s plan, an emergency fund is the next priority after becoming debt-free. He recommends saving at least $1,000 initially, then building up 3-6 months’ worth of living expenses. For example, if your rent, utilities, groceries, and other bills total $3,000 per month – you would save $9,000 to $18,000.
An emergency fund provides protection from unexpected costs like medical bills, car repairs, or job loss. It prevents you from sliding back into debt during a crisis.
You can boost your savings by using high-yield savings accounts, money market accounts, or short-term CDs. Just beware of early withdrawal penalties on CDs.
Other Real Estate Investment Options
For those not ready to buy a home, Ramsey and Kamel suggest considering alternative real estate investments like:
- Real estate investment trusts (REITs) – Companies that own residential or commercial property and pay dividends to shareholders based on rents collected.
- Real estate crowdfunding platforms – Enable investors to pool funds together to purchase real estate, providing access to deals with high buy-in costs.
- Managed real estate funds – Professionally constructed portfolios that provide broad exposure to real estate sectors like industrial, retail, multifamily, and more.
The bottom line is that while sky-high mortgage rates are daunting, financially prepared Americans should still consider purchasing homes, according to Ramsey. With the right debt-free foundation and emergency savings, buying real estate can pay off over the long run. But it’s also smart to explore more passive real estate investments if you aren’t ready for the responsibilities of homeownership.