One big mistake Americans make when picking a mortgage — Dave Ramsey warns it could end up costing you thousands

Ramsey has made his own money mistakes in the past, and he’s focused on coaching Americans through their financial woes so that they don’t end up bankrupt.

One of his big no-nos is taking on a 30-year mortgage. He once warned against taking a longer mortgage just to make monthly payments smaller.

“Sure, the 30-year plan gives you a smaller monthly payment. But this longer, drawn-out repayment plan has more of your money going toward the interest each month — which also makes the principal balance go down much slower,” Ramsey wrote.

The financial guru often recommends homebuyers take on a 15-year plan instead to reduce interest fees.

This week, the average 30-year fixed-rate mortgage rose to 7.4%, according to Freddie Mac. With current rates and the cost of homes rising, many Americans feel as though home ownership is out of reach.

“Now that we’re at 7%, that is a very far distance to push to improve affordability,” Kara Ng, a senior economist at Zillow, told The New York Times.

How amortization works

A mortgage is an amortized loan, or one where you make a scheduled payment (typically each month) and this payment is applied to both the principal of the loan and the interest that accrues. The payment goes to the interest first, and anything remaining goes towards the principal. This can mean that a smaller monthly payment will see you paying mostly interest, rather than paying down your principal.

To demonstrate the difference between a 15-year mortgage and a 30-year, let’s take this example.

Say you want to buy a $700,000 home and you’ve put 20% down, or $140,000, leaving you with a $560,000 mortgage. At a 7% mortgage rate, if you choose a 15-year term, your monthly principal and interest payment will be $5,033.44. You’ll pay $346,018.90 in total interest.

By contrast, on a 30-year mortgage, your monthly payments will be $3,725.69 and you will pay $781,249.83 in total interest. In other words, the extra 15 years will cost you an additional $435,230.93 in interest alone. That’s a serious amount of cash that could be put towards your retirement savings, your child’s education or making improvements to your home.

Ramsey advises his readers to create their own amortization schedule to ensure they have a clear view of how a long mortgage could see them throwing money away.

Ramsey’s tips for mortgages

Of course, affordability is a top issue for Americans, and 30-year mortgages are common precisely because it can be difficult to find the extra funds for a large mortgage payment each month.

In addition to recommending a shorter loan term, Ramsey offered a few more tips for getting the best mortgage for you. Here are his words of advice — plus a few more of our own.

Shop around

Doing your homework by comparing several different lenders could lead you to a better mortgage rate or amortization schedule for your loan. Don’t feel like you have to go with your existing bank or one that’s recommended to you. If you have time to explore your options, do so as much as you can.

Start early

If you’re shopping for a new home, preapproval for a mortgage can help you to move faster. While preapproval typically takes 1-3 days, the process to close the deal can take over 30 days.

Be prepared (and prepared to wait)

Your lender will review your credit history, income and current debts in the process of evaluating you for a mortgage. You may also be expected to foot the bill for appraisals, property inspections, survey fees, title searches and lender reviews.