Ramit Sethi is a popular financial advisor who’s been featured on Netflix and in the New York Times. He recently shared five questions every person should ask before purchasing a home. Here’s what they are and how asking them can help you make the right decision.
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1. Will I Live Here for 10 or More Years?
First, Sethi says to consider how long you’ll stay in the house. Your answer can impact whether buying or renting is a smarter decision.
Some experts say you have to spend at least two to three years in most places to make up for the upfront costs of buying a house. Sethi says it’s best to buy when you plan on living somewhere for 10 or more years. But your exact number may be somewhere in between.
If you aren’t sure, pull up a housing versus renting calculator online. Input your financial details, and the calculator will tell you whether renting or buying makes more sense.
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2. Will My Total Monthly Housing Costs Be Less Than 28% of My Gross Income?
The general rule of thumb is that you should spend no more than 30% of your monthly income on housing. If you spend too much more than that, you may struggle to save for other financial goals.
Sethi’s advice of 28% is very similar to this common wisdom. If you have to spend more than this to buy a house, renting will probably be the smarter financial decision — especially when you factor in expenses like property taxes and unexpected repairs.
3. Have I Saved 20% for a Down Payment?
Next, Sethi says to consider your down payment. If you haven’t saved at least 20%, he says you probably shouldn’t buy the home. There are a few reasons for this.
First, mortgage lenders typically require private mortgage insurance, or PMI, when you put less than 20% down. This increases your monthly housing bill, so you end up paying more for the same home.
Second, when you put less than 20% down, you have to borrow more money from a lender. That means paying more in interest, and, once again, having to spend more to own the same house. People sometimes buy houses with less than 20% down. But that doesn’t mean doing so is the right move for you financially.
4. How Will I Feel If the Value of the House Goes Down?
Purchasing a home is a major financial decision that can tie up your income for decades. Even though housing prices have mostly gone up over time, they have decreased quickly over certain periods — such as during the 2008 financial crisis.
Sethi asks you to consider how you would feel if something similar happened to your home’s value. If you woke up one morning and your home was worth 15% less, how would you feel? If you really love the home, a temporary dip in value may not matter. But if you think you would try to get out of your mortgage in that scenario, renting could be a smarter decision.
5. Am I Excited About Buying?
Finally, Sethi wraps up with a nonfinancial question. This is all about checking in with your feelings about buying the home.
For instance, are you dreading the financial commitment? If so, you may want to think twice about buying. Some nervousness is to be expected. But if it’s overwhelming you before you even buy the home, how will you feel once you have it?
Other Factors Influencing Renting vs. Buying
Sethi’s five questions are a great place to start as you consider whether buying a home is right for you. However, they aren’t the only factors that matter.
For instance, maybe there’s some lingering uncertainty about your career. You might want to remain open to new opportunities in other geographic areas. That could be a reason to not buy a home, even if it makes more financial sense to do so.
Renting is also more financially straightforward than owning a home. If something breaks in an apartment, your landlord will fix it on their dime. But if something like your HVAC system breaks in a home, you could suddenly be on the hook for a repair bill of thousands of dollars.
If owning a home has been your dream, you don’t have to delay realizing it just to save money. But ask yourself Sethi’s questions anyway. Doing so can still help you make more informed financial decisions — even if they aren’t always the optimal ones.
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This article originally appeared on GOBankingRates.com: 5 Questions To Ask To Determine Whether Buying a Home Is a Good Idea, According to Ramit Sethi
