Buying a Home? Dave Ramsey Says to Pay for These 2 Expenses in Cash
- There are certain upfront costs you'll encounter when buying a home.
- Financial guru Dave Ramsey says the more items you pay for outright, the better.
- He recommends paying for moving expenses and closing costs in cash.
When you're getting a mortgage, you don't need to add to your debt.
Buying a home doesn't just mean having to put down a decent chunk of money on a mortgage. There are other costs you're apt to encounter when you purchase a home.
First, there are moving costs. You need to transport your belongings from your former home to your new one, and even if you don't have a ton of stuff, that's still something you'll have to spend money on.
Then there are closing costs, which are the various fees lenders impose to finalize a mortgage. Closing costs commonly range from 2% to 5% of your home loan amount. Even if yours come in at the lower end of that range, they can still be substantial.
Some home buyers end up paying off moving expenses over time by charging them on a credit card and carrying a balance. And it's very common to roll closing costs into a mortgage and pay them off over time, too.
But if you ask Dave Ramsey, both moving and closing costs should be paid for upfront, in cash. Here's why.
It's all about minimizing your debt
Dave Ramsey makes it very clear that he's not a fan of consumer debt in any form. In fact, Ramsey even says that if you can buy a home in cash, you should do so to avoid having to borrow via a mortgage.
That said, Ramsey recognizes that many people can't simply purchase a home outright in cash, and that taking out a mortgage is often necessary. But if you're going to do that, he thinks you shouldn't add to your debt pile. And that's why he thinks those who buy a home should budget for moving and closing costs and plan to pay for them outright.
Should you take Ramsey's advice?
Paying off moving costs over time by charging that expense on a credit card and carrying a balance could result in you racking up scores of interest. Plus, too high a credit card balance could actually cause damage to your credit score. As such, Ramsey is spot-on with his recommendation to just pay your movers on the spot and not carry a balance for moving expenses forward.
Closing costs, however, are another story. If you're borrowing at a competitive rate, then adding a little more money to your mortgage in the form of closing costs may not be such a terrible thing.
Let's say your closing costs amount to $6,000. Will it really make a big difference if you're borrowing $300,000 versus $306,000?
A $300,000, 30-year mortgage at 5% interest will cost you $1,611 a month in principal and interest. A $306,000 mortgage with those same terms will cost you $1,643. All told, that extra $32 a month might fit into your budget seamlessly. And that way, you don't have to write a $6,000 check at a time when you're grappling with other expenses related to moving and settling into your home.
In fact, rolling your closing costs into your mortgage could be your ticket to avoiding credit card debt from the cost of your move itself. And so if you have to choose, you're better off covering your move in cash and paying your closing costs off over time.
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