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Courtesy of Ramit Sethi
- Ramit Sethi, star of Netflix's "How to Get Rich," still rents an apartment.
- Even if your potential mortgage is the same cost as your rent, Sethi recommends budgeting for "phantom expenses."
- You should also start an emergency savings fund for your new home as soon as you close the deal.
In his "I Will Teach You To Be Rich Journal," made to accompany his bestselling book, Ramit Sethi writes, "I rented an apartment in New York City for more than 10 years. Renting was an excellent financial decision for me because it gave me far more flexibility and freedom than owning. In fact, I still rent by choice."
When it comes to buying a house, Sethi, who is also the new host of the show "How To Get Rich" on Netflix, advises his readers and clients to examine what their motivation for buying a home is in the first place. If you're buying a home because you feel like it's something you need to do to keep up with the Joneses, so to speak, you might want to rethink making a 30-year financial commitment.
Here are three other things to consider if you're thinking of buying your first home.
1. Calculate the 'phantom costs' of owning a home
First, Sethi says it's important to understand what percentage of your income should go towards housing. Traditionally, experts recommend using 28% of your gross income before taxes on housing. Next, calculate your new housing budget if you buy a home.
Use a mortgage calculator to estimate your monthly payment based on your interest rates and the target price of the home that you're looking to buy.
Sethi recommends factoring in "35% to 50% of your mortgage to factor in all the phantom costs of homeownership, like maintenance, taxes, interest, and closing costs. People don't think about this, and it costs them thousands of dollars."
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2. Start saving for big-ticket home repairs
Once you buy a home, Sethi recommends immediately starting an emergency savings fund specifically for home repairs. "You need to start planning, for example, for your roof repair. Your roof might not break for another 10 years, but when it does, it might 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 might cost, plus the phantom costs and savings for future home repairs, Sethi recommends using a side-by-side comparison to see how homeownership will affect your overall budget compared to renting.
Sethi says, "If you have a $3,000 mortgage and a $3,000 rent, a lot of people would say, 'Of course, I should get the mortgage. I can build equity.'" But if you compare your $3,000 rent, which won't change throughout the year, to a potential mortgage with phantom costs, plus the savings you need to build for future repairs, it might make for an unrealistic and unsustainable budget.
Finally, Sethi says, "With a house, you never want to be surprised in a bad way. I hate the idea that in order to be a real American, you have to buy a house. You don't ever need to feel guilty if you rent. You need to make the right financial decisions for your rich life."
This article was originally published in October 2022.