Should You Follow This Dave Ramsey 'Rule of Thumb' When Buying a New House?

You may be surprised to find this rule comes at a big cost.

If you are buying a home, there's a lot you need to know to be ready for the transaction to be a success. And, one of the most important things to be aware of is just how much money you are going to need upfront.

Most people know they will need some type of down payment in order to qualify for a mortgage loan. But, beyond that, there are other expenses as well -- and Dave Ramsey has an important recommendation about getting ready for one of those costs.

Ramsey's rule of thumb for new home buyers

According to Ramsey, it's important to be able to come up with enough money to cover your own closing costs. And, there's a specific amount he recommends being ready to spend.

"Saving 3-4% for closing costs is a good rule of thumb -- just to be on the safe side," Ramsey said. He explained that while some sellers cover these, you can't necessarily count on that happening and you very likely will be asked to bring this money to the closing table before you can take ownership of your new house.

You also may not find out exactly how much money you are going to need until very close to the time when you must have the funds ready. "You'll get a better idea of what your costs will be when you receive a loan estimate form from your lender after you apply for your mortgage. Just be aware that these can change before it's time to close on your home," he said. "You should receive your final closing disclosure form at least three days before closing."

Should you follow Ramsey's advice?

Ramsey is absolutely 100% correct to stress the importance of saving money for closing costs, and he's pretty spot-on with the amount he suggests you will need.

The reality is, many people who have not purchased a home before are shocked at just how high these costs are -- and they may be unprepared to come up with several thousand dollars for this additional expense after having saved for a down payment.

Many lenders know that coming up with closing costs is hard, so they may advertise loans that don't require this upfront spending. But, the reality is, these costs have to get paid one way or another. Usually, that means either the lender charges you a higher interest rate if they don't charge upfront closing costs. Or, you end up borrowing for closing costs and that amount gets added onto your mortgage.

Neither of these options is good, as it means your loan is going to end up being more expensive over time. In order to avoid paying for the costs of your closing for decades and substantially increasing these costs due to added interest and higher payments that result, you should be ready for this expense when you buy.

That may mean you need to put off your home purchase for a little longer while you save up the extra cash. Although that may not sound fun, it's important if you want your home to be a good investment and if you want your mortgage to be affordable over the long run.