Personal finance guru Dave Ramsey is pretty outspoken when it comes to borrowing money for things. His motto is simply: Don’t Do It. Most things that the average person believes are simply understood to be a matter of credit, such as car loans, student loans, etc., Ramsey is a stalwart No on. Save the cash, then buy your car. Save cash, then work through community college.
But, when it comes to buying a home, Ramsey softens his approach a bit. If you can pay cash, that is preferable. But he also realizes that saving to buy a house outright may take many years for most people. So he alters his usual rules a bit and says to proceed, with some specific guidelines and caveats.
Before anything else, Ramsey says you must be debt-free and have an emergency fund of three to six months of expenses.
Next, Ramsey says to ask yourself three questions:
* Can I make at least a 10% (preferably 20%) down payment?
* Can I afford a 15-year fixed rate loan?
* Can I keep the house payments at or below 25% of my monthly take-home pay?
If you cannot answer “yes” to all three of these questions, he says you are probably not yet in a position to buy a home. You either need to save more for the down payment, raise your income level, or look for something cheaper than you are looking at now. Keep in mind that property taxes and homeowners’ insurance, if not made part of the mortgage payment, are extra expenses that have to be considered when buying a home.
Dave’s next step is to shop around for your mortgage, and specifically to get a pre-approved mortgage. He is adamant that your mortgage be fixed-rate, preferably a 15-year.
On Ramsey’s radio show, a common question that he has encountered over the years is: Should I buy or continue to rent? The answer usually comes down to two main factors.
1) How long do you expect to be in the home?
2) Are you in a financial position to buy, anyway (based on the above criteria)?
Sometimes, military personnel who get transferred relatively frequently end up buying a home, working from the conventional wisdom that buying always beats renting. Then they get transferred and have a tough time selling their home and buying another quickly. Dave says that it is a myth that buying always beats renting. This is especially true when you know or suspect that you will move within just a few years.
Especially since the 2008 housing crisis, folks are reconsidering the old notion of buying a home. Some are asking if renting, even long-term, is a better choice for them. One writer called it a choice of “roots vs. wings.” Is settling into a homestead and staying the most important thing for your family? Or are efficiency, the ability to move on short notice, travel, and little upkeep concern more important?
One man even shows that renting, in his case, provides the shortest path to financial independence for his family.
Buying a home is a big decision. It shouldn’t be overly-stressful. Looking ahead and asking some basic questions financially can help you be sure to keep things right for you.
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