<\/p>\n
Buying a home is considered the biggest financial decision a person will make \u2014 but return on investment isn\u2019t always guaranteed.<\/p>\n
Once a rite of passage into adulthood, today\u2019s environment of high interest rates, record housing prices, and low inventory means that many people are simply skipping the expense of owning a home: 5.5 million qualified homebuyers in 2026, to be exact, according to the National Association of Realtors.<\/p>\n
A large percentage of these \u201csidelined buyers\u201d are Millennials and Gen Zers, weighed down by student loan debts and unable to achieve the income levels required to pay a mortgage.<\/p>\n
Financial expert Ramit Sethi understands their situation \u2014 and has devoted his life to improving their financial health. The popular podcaster and star of the Netflix series How to Get Rich (based on his 2009 bestselling book I Will Teach You to Be Rich) offers common-sense advice on fixing people\u2019s finances, often with a side of behavioral psychology.<\/p>\n
"Should I buy a house?"<\/p>\n
A checklist.<\/p>\n
* Will I live here for 10+ years?
* Is my total monthly housing cost lower than 28% of gross monthly income?
* Have I saved a 20% down payment?
* Am I OK if the value of my house goes down?
* Am I excited about buying?<\/p>\n
— Ramit Sethi (@ramit) October 19, 2020<\/p>\n
What is Ramit Sethi\u2019s core philosophy?<\/p>\n
At the heart of Sethi\u2019s teaching is the concept of \u201cA Rich Life.\u201d Sethi himself came from modest means, but he\u2019s amassed a net worth of $25 million and counting from his financial coaching programs, book sales, speaking fees, and content monetization from his podcast, Money for Couples (previously called I Will Teach You to Be Rich).<\/p>\n
Sethi is wealthy by any measure, but he eschews wearing fancy watches and drives the same Honda Accord he\u2019s owned since he graduated from Stanford in 2005.<\/p>\n
Related: Suze Orman\u2019s 4 best mortgage insights for homebuyers<\/p>\n
That\u2019s because he defines the concept of living a \u201crich life\u201d as \u201cspending extravagantly\u201d on the things he loves, and \u201ccutting back mercilessly\u201d on the things he doesn\u2019t.<\/p>\n
A \u201crich life\u201d can mean different things to different people, so long as it\u2019s a life they find fulfilling. Its core tenets involve practicing disciplined investing while maximizing earnings, in order to have money left over each month to spend on the things you love.<\/p>\n
What are Ramit Sethi\u2019s 3 biggest rules for prospective homebuyers?<\/p>\n
The thing is, Sethi has frequently gone on the record saying that owning a home isn\u2019t a part of his personal \u201crich life\u201d plan. Although he\u2019s a millionaire several times over, he chooses to rent instead of buy to avoid the hassle of home maintenance, focusing instead on building his investments.<\/p>\n
But for many others, Sethi acknowledges, owning a home outweighs the convenience of renting, especially if it fits their ideal of a \u201crich life.\u201d<\/p>\n
And so, in order to ensure that someone can afford a home\u2019s \u201ctrue cost,\u201d Sethi has three rules he wants every prospective homebuyer to follow before they sign on the dotted line:<\/p>\n
1. Follow the 28\/36 rule<\/p>\n
Before committing to a mortgage, homebuyers should calculate all the costs of home ownership, including \u201cphantom costs\u201d such as property taxes, HOA fees, closing costs, insurance, and repairs (which he estimates to be between 1% and 3% of the home\u2019s price each year). Add these costs up, and they should be no more than 28% of your gross monthly income.<\/p>\n
The 36 percent comes from calculating your debt-to-income ratio, a fundamental metric lenders rely on heavily. Sethi advises maintaining a debt-to-income ratio below 36%.<\/p>\n
Related: Ramit Sethi\u2019s top 5 ways to get out of debt fast<\/p>\n
You can calculate this ratio by dividing your total monthly debt payments by your gross monthly income before taxes.<\/p>\n
Sethi uses the example of someone who owes $1,000 in monthly debt and earns $75,000 annually, or $6,250 a month. Their debt-to-income ratio adds up to be 16%, which is lower than 36% and thus meets Sethi\u2019s criteria for affordability.<\/p>\n
2. Save 20% as a down payment<\/p>\n
This is a non-negotiable for Sethi, who states that \u201cif you haven\u2019t saved a 20% down payment, you\u2019re not ready to buy a house.\u201d Why? Because he wants people to become disciplined about saving to prove they have what it takes to make consistent payments over the lifespan of their 30-year mortgage.<\/p>\n
Sethi also wants people to avoid taking out private mortgage insurance (PMI) or a FHA loan, both of which allow for lower down payments. The reason is that these mortgage products come with additional, long-term costs and expenses that wouldn\u2019t be smart to shoulder as one lives their \u201crich life.\u201d<\/p>\n
3. Plan to stay in the home for 10\u201315 years<\/p>\n
Longevity is a major factor in deciding whether to buy a home, according to Sethi. That\u2019s because it usually takes a decade to amortize, or spread out, the steep transaction costs associated with buying and selling, such as closing costs, taxes, and realtor fees.<\/p>\n
\u201cIf you move again within a short period \u2014 for example, four years \u2014 all those fees will dwarf any equity gains you may have,\u201d Sethi says, adding: \u201cImagine driving a car off the lot: We all know that it instantly loses value. The same is true of your house, and it takes time to amortize the costs.\u201d<\/p>\n
More from Ramit Sethi:<\/p>\n
Ramit Sethi\u2019s 5 most important insights for homebuyersRamit Sethi\u2019s top 5 ways to get out of debt fastRamit Sethi\u2019s 5 best financial insights for building a rich life<\/p>\n
In addition, in the housing market, the trend is not always up \u2014 consider the 2008 financial crisis, when housing prices fell 27%\u201330% nationwide, according to the S&P\/Case-Shiller Index. It took 11 years for housing prices to recover from these lows, perfectly illustrating Sethi\u2019s point.<\/p>\n
Related: Ramit Sethi\u2019s ‘How to Get Rich:’ 5 proven ways to become a millionaire<\/p>\n
#buy #home #continuing #rent #Ramit #Sethi<\/p>\n","protected":false},"excerpt":{"rendered":"
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