I Will Teach You to Be Rich: No Guilt. No Excuses. No B.S. Just a 6-Week Program That Works.

by Ramit Sethi

First and foremost, you should buy a house only if it makes financial sense. In the olden days, this meant that your house would cost no more than 2.5 times your annual income, you’d be able to put at least 20 percent of the purchase price down, and the total monthly payments (including the mortgage, maintenance, insurance, and taxes) would be about 30 percent of your gross income.

Bottom line: If you don’t have enough money to make a down payment and cover your total monthly costs, you need to set up a savings goal and defer buying until you’ve proven that you can hit your goal consistently, month after month.

real estate is also the place where Americans lose the most money.

I’m not saying buying a house is always a bad decision. (In fact, I created a sub-savings account called “Down Payment for Future House,” knowing that I will eventually buy.) It’s just that you should think of it as a purchase, rather than as an investment.

The Cost of Buying a Home Over 30 Years Purchase price (typical single-family home) $220,000 Down payment (10%) $22,000 Closing costs $11,000 Private mortgage insurance ( 76 payments of 0.5% PMI at $82.50) $6,270 Interest @ 4.5% $ 163,165.29 Taxes & insurance ($3,400/year) $102,000 Maintenance ($2,200/year) $66,000 Major repairs & improvements $200,000 Total costs $778,408.73

New York Times’s excellent online calculator “Is It Better to Rent or Buy?” It will factor in maintenance, renovations, capital gains, the costs of buying and selling, inflation, and more.

That means I urge you to stick by tried-and-true rules, like 20 percent down, a 30-year fixed-rate mortgage, and a total monthly payment that represents no more than 30 percent of your gross income. If you can’t do that, wait until you’ve saved more.

Check your credit score.

The Effect of Credit Scores on a Mortgage Payment FICO score APR* Monthly payment Total interest paid 760–850 4.18% $1,073 $166,378 700–759 4.402% $1,102 $176,696 680–699 4.579% $1,125 $185,021 660–679 4.793% $1,153 $195,200 640–659 5.223% $1,211 $216,022 620–639 5.769% $1,287 $243,146

Save as much money as possible for a down payment.

If you haven’t been able to save at least 10 percent to put down, stop thinking about buying a house.

4. Get the most conservative, boring loan possible.

5. Don’t forget to check for perks. The government wants to make it easy for first-time home buyers to purchase a house. Many state and local governments offer benefits for first-time home buyers. Check out hud.gov/topics/buying_a_home

Bite the bullet, sit down, and make a realistic plan for how much your big purchases will cost you in the next ten years.

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