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- Ramit Sethi, author of the bestselling book I Will Teach You To Be Rich, is still renting an apartment.
- Even if your potential mortgage is the same cost as your rent, Sethi recommends budgeting for “phantom” expenses.
- You should also set up an emergency savings fund for your new home as soon as you sign the contract.
In his new I Will Teach You To Be Rich Journal, which accompanies his best-selling book, Ramit Sethi writes, “Renting an apartment in New York City for more than 10 years gave me a lot more flexibility and freedom than owning one . In fact I have quiet Rent of your choice.”
When it comes to buying a home, Sethi advises his readers and clients to consider what their motivation for buying a home is in the first place. If you’re buying a home because you feel like you have to do something to keep up with the Joneses, so to speak, you might want to reconsider making a 30-year financial commitment.
Here are three more things to consider when thinking about buying your first home.
1. Calculate the “phantom cost” of owning a home
First, Sethi says it’s important to understand what percentage of your income should be devoted to housing. Traditionally, experts recommend spending 28% of your pre-tax gross income on housing. Next, calculate your new housing budget if you’re buying a house.
Use a mortgage calculator to estimate your monthly payment based on your interest rates and the target price of the home you want to buy.
Sethi recommends factoring in “35% to 50% of your mortgage to account for all of the phantom costs of home ownership like maintenance, taxes, interest and closing costs. People don’t think about it and it costs them thousands of dollars. “
2. Start saving for major home repairs
Once you’ve bought a home, Sethi recommends immediately setting up an emergency savings fund specifically for home repairs. “For example, you need to start planning your roof repair. Your roof may not fail in the next 10 years, but when it does it could cost $20,000.”
3. Compare how a mortgage vs. rent affects your overall budget
Now that you have an idea of how much your mortgage could cost, plus the phantom costs and savings on future home repairs, Sethi recommends doing a head-to-head comparison to see how homeowning versus renting affects your overall budget.
Sethi says, “If you have a $3,000 mortgage and $3,000 in rent, a lot of people would say, ‘Of course I should get the mortgage. Not moving to a potential phantom cost mortgage during the year, plus the savings you need to build up for future repairs, can result in an unrealistic and unsustainable budget.
Finally, Sethi says: “You never want to be badly surprised with a house. I hate the idea that you have to buy a house to be a true American. You never have to feel guilty about renting. You must make the right financial decisions for your rich life.”
