Why I Broke Dave Ramsey's Rules on Buying a Home

Rent vs. Buy - Here's how we made a decision on this:

Dave Ramsey is someone I listen to on a regular basis, and his budget thoughts are the pillars of my personal finance guidelines. In fact, when I developed my budget, it was Dave’s Excel document that I used and it has been a life changer for us.  I do think his advice does not always fit all, and I definitely broke his rules on how and when to buy a home. Dave outlines his rules for buying your home on this YouTube video. Here’s his advice:

• Get out of debt first
• Get your emergency fund in place
• Save 20% of the down payment (to avoid PMI)
• Never buy a house on more than a 15/year mortgage, and:
• Never buy a house where the payment is more than ¼ of your take home pay

As I listened to Dave’s advice, I thought back to when I bought my house. If I had followed Dave’s rules, I would still be renting today. Instead, after putting less than $20,000 down to acquire the home, we currently have almost $100,000 in equity, which makes up most of my current net worth. 

I had a dilemma in 2015. My wife was pregnant with our first child, and we were living in Somerville, MA, which is immediately north of Boston. Somerville is a very dynamic place with skyrocketing real estate prices, yet some areas of the city are not too different from the days that Whitey Bulger ruled the land. We loved Somerville, but we lived on a 2-bedroom third-floor walk-up apartment, and we just didn’t know if raising a family in the city is what we wanted. 

Once we decided to move to the suburbs, we started to weigh our options of buying vs. renting. We wanted to be west of Boston because our families lived west and we wanted to have some support with our baby when needed. We also wanted a 3-bedroom home or apartment, as we knew our first child would not be our only child. Lastly, we needed to be within 25 miles of Boston, as we both worked in the city at that time. For this reason, we also needed to be in a town that had a commuter rail station so that we could ride the train into Boston.

Our household income at the time was $96,847, with a take home of $76,813, or $6,401 per month. We decided pretty early on that buying in any area that fit those criteria would be almost impossible, so we started looking at rentals. Most 3-bedroom apartments in the towns that we were looking at were renting for $1,700 to $1,900. Already, we were above Dave’s expectations for housing expenses (¼ of our monthly take home pay was $1,600).

Since I had a degree in finance, I decided to play around with the numbers and explore the option of purchasing a home to see if it made sense for us. Here’s what I found out:

We could potentially buy a small 3-bedroom home for around $335,000 in the towns we were considering. We didn’t have 20% to put down, but we could qualify for a low-interest mortgage product through MassHousing. All we needed to do was take a first-time homebuyer course. With this product, we could buy the house with 5% down and a fixed rate of 4.25% for 30 years, and the mortgage would be $2,050 per month. This would get me in real trouble with Dave!

Let’s recap the numbers thus far:

	Dave's Advice (20% down, 15-yr mortgage)	My Buy Option (5% down, 30-yr mortgage)	My Rent Option
Down Payment	$67,000.00	$16,750.00	$-
Monthly Payment	$2,750.00	$2,050.00	$1,700.00
1/4 of Take Home Pay	$1,600.00	$1,600.00	$1,600.00

As you can see, to fulfill Dave’s recommendation for buying a house I’d need to have $67,000 saved (about 3.5x more than we had), and I’d have to increase my take-home pay from $6,400 a month to about $11,000 a month. Under those parameters, I’d still be renting today!

We eventually decided to buy that house for $335K. It is a tiny 1,000 sqf ranch with 3 bedrooms and 1 bathroom. The ultimate decider for us that at $2,050 for a mortgage vs. $1,700 for a rental, the tax benefits of writing off interest payments would easily even that equation out for us. The icing on the cake is that fact that every month we’d be paying off about $450 in equity that first year, making buying even more appealing as you can see below:

	Mortgage	Rent
Monthly Payout	$2,050.00	$1,700.00
Annual Mortgage Interest Tax Write-off Divided by 12	$(330.00)
Monthly Loan Principal Pay Off	$(450.00)
Net Monthly Cost	$1,270.00	$1,700.00

These are the reasons why we decided to buy and not rent. The math just made sense to us this way. Sure, we’ve had costs that renters would not have, such as mold remediation (about $4,000) and a clogged toilet (about $250, but I’ve learned to take care of those now!). Still, our equity position four years in is over $100,000 on our initial $16,750 down payment. That is not a bad return! 

What would you have done differently? Dave, if you’re reading this… feel free to yell at me!