Buying a home is a major life decision, and most people spend years planning for the process. The hardest parts are typically saving for a down payment and choosing the right size and location to fit your budget.
Personal finance expert Dave Ramsey shares some key tips and blunt words on preparing for success in the housing market and avoiding major financial mistakes.
Ensuring you have enough savings for a hefty down payment is the foundation for securing a home with manageable monthly payments. However, finding the right mortgage rate and term for your situation is equally important.
Below, Ramsey explains his no-nonsense take on the best way to plan for buying a home.
Dave Ramsey says making a considerable down payment is crucial
Though the traditional 20% down payment recommendation is ideal, it’s not necessary. Younger buyers looking to close on their dream home can put down between 5 and 10%, but they’ll be subject to private mortgage insurance — an extra fee added to mortgages until homeowners have paid off 20% of the home’s value.
Making a 20% down payment will not only spare you from added fees but it will also mean lower monthly payments since your overall balance will be lower. Lower monthly mortgage payments will help ensure you can make payments regardless of other financial strains and unforeseen life events.
Ramsey notes that choosing a 15-year mortgage over a 30-year mortgage has a significant payoff, saving buyers tens of thousands of dollars overall.
“If you sign the dotted line on a new home when you aren’t prepared financially and emotionally, the house will wind up being a curse instead of a blessing,” Ramsey wrote. “It will wind up owning you instead of the other way around.”
Saving up enough to put at least 20% down on a home and opting for a shorter loan term are two key ways buyers can position themselves for financial stability and success.
Ramsey discusses additional hidden costs to consider when buying a home
While the initial down payment and recurring monthly mortgage installments are the biggest financial considerations, there are other recurring costs homeowners must factor into the overall cost of owning a home before committing.
Property taxes can cost tens of thousands of dollars per year, depending on where you buy a home. This makes choosing a location within your budget even more important, as it could change your annual taxes considerably.
Protecting your home from the elements through homeowners insurance is an important safeguard, and Ramsey highlights that your mortgage lender will require it to protect their assets.
Many areas in the southeast U.S. are facing extreme climate conditions and significant weather damage, which is significantly raising homeowners insurance bills in those areas. Buyers hoping to save on insurance will need to consider risk factors in the location to which they moving and how much homeowners insurance will rise over time.
Homeowners Association (HOA) fees can cost up to $300 per month or more, depending on the location, amenities, and neighborhood maintenance required. While this may only add up to a few thousand dollars per year, it is an added expense that buyers must budget for or risk falling behind in mortgage payments.
