This Is the Kind of Mortgage Warren Buffett Recommends

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Chances are good you’ve heard of Warren Buffett. He’s a billionaire, a world-famous investor, and a well-known financial expert who has provided a wealth of financial advice.

While Buffett has many investing tips that are worth paying attention to, seeing as he’s amassed a fortune through strategic investments, he has some other financial tips as well. Specifically, Buffett has recommended a particular type of home mortgage for people looking to buy a property of their own. Here’s what it is.

This is Buffett’s preferred mortgage option

Buffett believes homeownership is a solid investment for individuals and families who intend to remain in the same place for many years. And the investing expert has indicated that one big reason homeownership is such a good investment is because of the 30-year mortgage.

Buffett has called the 30-year mortgage loan the “best instrument in the world, because if you’re wrong and rates go to 2 percent, which I don’t think they will, you pay it off,” he said. “It’s a one-way renegotiation. I mean, it is an incredibly attractive instrument for the homeowner and you’ve got a one-way bet.”

Essentially, this means a 30-year mortgage works out well for homeowners because they get a low-rate loan while the bank assumes the risk of rising interest rates. And if interest rates do happen to fall further, homeowners can simply refinance into a new loan with an even lower rate and pay off their existing debt. On the other hand, if rates go up, they can keep paying at the low rate they obtained (assuming they got a fixed-rate loan) and their principal and interest payments won’t become more expensive over time.

Buffett himself obtained a 30-year mortgage when he bought his Laguna Beach vacation house in 1971, and he said he borrowed most of the $150,000 price tag and only had about $30,000 of equity in it.

Here’s why Buffett’s right about the best type of mortgage

Buffett’s advice on mortgages is spot on. As he pointed out, mortgage rates are affordable debt that’s easy for borrowers to renegotiate if they need to.

But there’s an even better reason to opt for a 30-year loan besides the fact that doing so puts all the risk of rising rates on the lender: You can do other things with your money while borrowing the bulk of the cost of your home from the bank.

As Buffett explained, he only put down a small amount of money on his home because he “thought I could probably do better with the money than have it be an all-equity purchase of the house.” He ended up buying shares of Berkshire Hathaway with it, which are now worth $750 million.

While the typical homeowner will likely not make anywhere near this much on their investments, the same rule still stands. Buyers can likely earn a better return by taking out a 30-year mortgage to cover most of their home’s cost and then investing any extra money they might have put down on the home (or they might have paid in larger monthly payments had they opted for a shorter loan term).

If you’re buying your own property, consider following Buffett’s advice, making a reasonable down payment on your house, and opting for a 30-year loan that leaves you with plenty of cash for other investments.

A historic opportunity to potentially save thousands on your mortgage

Chances are, interest rates won’t stay put at multi-decade lows for much longer. That’s why taking action today is crucial, whether you’re wanting to refinance and cut your mortgage payment or you’re ready to pull the trigger on a new home purchase.

Our expert recommends this company to find a low rate – and in fact he used them himself to refi (twice!).

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The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.Christy Bieber has no position in any of the stocks mentioned. The Motley Fool owns and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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