Should You Buy a House Now? Here's What Ramit Sethi Thinks

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KEY POINTS

  • Homeownership can lead to financial stability, but it isn't for everyone.
  • Ramit Sethi has some advice for figuring out if you're in a good position to buy.
  • Asking yourself about your long-term plans and excitement to buy a home are just some of the topics you should broach.

Here's what the financial guru has to say about homeownership.

You'll often hear that buying a home is a smart financial move. And there's certainly some logic to that.

When you own a home, you get to build equity in a property that you can borrow against or profit from when the time comes to sell. You also get to lock in a mortgage payment that won't rise over time (whereas when you rent, your monthly housing payments could increase as soon as your lease expires).

But while owning a home has its benefits, it's not necessarily the right move for everyone. If you're not sure whether it's a good bet for you, you may want to take the advice of financial guru Ramit Sethi. Here are some questions Sethi recommends asking yourself to see if you're a prime candidate for homeownership.

1. Are you willing to commit to longer-term plans?

When you first buy a home, you pay a lot of money in closing costs. And when you own a home, you'll often sink money into things like maintenance and repairs.

The good news is that homes have a tendency to gain value over time. But Sethi advises that if you don't think you'll stay in your home for 10 years or more, it may not make sense to buy. If you don't hang onto your home for that long, you may not see the gains you're hoping for when you go to sell it. And in that case, Sethi thinks you may be better off renting and investing your money elsewhere, like the stock market.

2. Can you keep your housing costs to a reasonable percentage of your income?

Sethi says that your total housing costs should amount to less than 28% of your gross income (your income before taxes). Going above that threshold puts you at risk of falling behind on your housing payments or on other bills.

To be clear, when Sethi talks about housing costs, he means everything from your mortgage to your property taxes to your homeowner’s insurance premiums. So simply put, if you earn a salary of $90,000 a year, your total yearly housing costs should not exceed $25,200. If they do, you should consider holding off on buying.

3. Do you have 20% to put down at closing?

If you're not able to make a 20% down payment on a conventional mortgage, you'll be hit with private mortgage insurance (PMI). That's a costly premium that makes owning a home more expensive.

But Sethi stresses that avoiding PMI isn't the only reason to come up with that 20%. Rather, it's that by saving that 20%, you're proving that you're capable of socking money away to keep up with homeownership costs. That's an important thing, given how surprise expenses can pop up at any time.

4. Are you willing to buy a home that's not a good investment?

Many people approach the home buying process from a place of wanting to invest in an asset that will gain value. Sethi cautions against this.

He says that you should buy a home for the stability, access to a certain school district, or the ability to call your own shots and not follow a landlord's rules. But you shouldn't necessarily buy a home because you want to make money. While homes tend to gain value, they don't always gain value.

5. Are you excited to buy a home?

Some people get giddy just thinking about the idea of owning property. But if that's not you, and the idea of homeownership makes you anxious, then it may not be the right choice.

Owning a home is a huge commitment. Once you buy a home, you should expect to put a fair amount of time and money into it. And so, you need to approach that process with the right frame of mind.

Buying a home could be a decision that serves you well. But it definitely pays to take Sethi's advice and run through these questions before making that call.

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