- Ramit Sethi is a well-known financial expert and founder of I Will Teach You to be Rich.
- Sethi has weighed in on how you can tell if you're ready to buy a house.
- He believes you need a hefty down payment and a plan to live there for a decade.
Don't make an offer on a property until you read this.
Rami Sethi is an entrepreneur and finance expert who created the popular blog, I Will Teach You to be Rich. Sethi has provided ample financial advice about some of the most important choices people make when it comes to managing money. Unsurprisingly, he's weighed in on when you should buy a home.
Sethi believes it's crucial for people considering purchasing a property to ensure they are really ready to do so. As he wrote on his blog, "Buying a house has been sold as a major part of the American Dream, but for many people, it doesn’t make sense for financial or lifestyle reasons."
You don't want to make a home purchase if you're one of the people who isn't in a good position to buy. Fortunately, Sethi has provided some tips on determining if homeownership is the right choice for you.
Sethi believes you should ask yourself five key questions to determine if you're ready to buy a house
In order to determine if you're ready for homeownership, Sethi believes you should ask yourself these five questions:
- Will you remain in the property for a decade? Sethi believes it's important to make sure you'll be in your home for a long time before buying due to the high transaction costs and fees associated with a sale. If you'll be staying put only for a short time, he believes you'll "almost certainly lose money" and you're better off renting and investing in an S&P 500 index fund with the money you'd otherwise use for your home down payment and mortgage cost.
- Can you keep housing costs below 28% of gross monthly income? Sethi warns you could become "overwhelmed with expenses" if your housing costs exceed 28% of gross income. Gross income is before taxes, and housing costs include your mortgage, property taxes, and insurance.
- Do you have 20% of your home's value to put down? According to Sethi's blog, you're "not ready to buy a home" if you don't have a 20% down payment. He believes this both because you'll face added costs of private mortgage insurance and because he thinks it's important to get into the habit of saving before becoming a homeowner so you're ready for unexpected expenses.
- Will you be OK financially if the home loses some value? Real estate isn't always going to go up in value, Sethi explains, and goes on to suggest you can often make more money by investing in other assets. You shouldn't purchase a property if you're counting on the price of it going up.
- Are you excited about becoming a homeowner? Finally, Sethi makes it clear you shouldn't buy a home because you feel pressured to do so, but should make this big decision only if it's something you really want to do.
Should you listen to Sethi's advice?
Much of Sethi's advice is financially sound, and it's definitely worth asking yourself these questions when making one of the most important financial decisions of your life. You especially want to pay attention to his suggestion that you keep total housing costs below 28% of your income -- both to qualify for the most competitive mortgage rate and to make sure you aren't over-extending yourself.
You may not necessarily want to put off homeownership in all circumstances where he recommends waiting, though. For many people, it's difficult to make a 10-year plan -- and most experts suggest if you'll be in the home for at least two to five years, then it could be worth buying.
Further, while a 20% down payment is definitely ideal and is the gold standard, it can be impossible to achieve in some markets, and you may not necessarily always want to wait until you have so much to put down if doing so means it will be decades until you can get into a property.
The bottom line is, everyone should carefully consider their own financial readiness to buy a home -- and should make sure they go into this big commitment with both eyes open.
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