Ramit Sethi Says This Might Be ‘the Worst’ Financial Trouble: 5 Ways To Avoid It

Being house poor might be the worst financial trouble you can voluntarily get yourself into, according to Ramit Sethi. In a recent TikTok, he explained why it’s important to run the numbers on a home before making a purchase decision.

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This means going deeper than simply looking at the monthly payment, he said. You also need to consider other costs, such as taxes, maintenance expenses, transaction costs and buying new furniture. Failing to do this can hinder your ability to do things like travel and save or invest as much as you used, he said.

“Everyone from the outside’s like, oh, they’re a homeowner, so cool,” he said. “But inside, you know something is wrong.”

Keep reading to learn five ways to avoid becoming house poor.

Follow the 28% Rule

Before buying a home, ensure your total housing costs don’t surpass more than 28% of your monthly gross income, said Sethi on his “I Will Teach You to Be Rich” blog. This includes your mortgage payment, property taxes, insurance, utilities and maintenance costs.

This ensures you’ll still have money to live a life outside your home. You’ll also be better equipped to handle any major repairs or renovations needed.

Make a Sizable Down Payment

The more money you put down, the lower your monthly mortgage payment. A down payment of at least 20% will also allow you to avoid having to pay private mortgage insurance, according to HAR.com, operated by the Houston Association of Realtors.

If you don’t have enough saved for at least a 20% down payment, it might be worth waiting to buy until you’ve put more money aside.

Don’t Buy at the Top of Your Price Range

It can be difficult in today’s market, but avoid buying a home you can barely afford. Just because your pre-approval letter allows you to shop for properties up to a certain dollar amount doesn’t mean it’s a good idea.

Being open to the idea of a home that’s not perfectly polished or doesn’t check every box on your nice-to-have list can save you from financial stress. Remember, once the home is yours, you can put your own touches on it.

Steer Clear of an Adjustable-Rate Mortgage

It can be tempting to get an adjustable-rate mortgage, as they tend to offer lower rates during the initial period — i.e., fixed-rate period — according to Freddie Mac. However, unless you’re planning to sell the home within five years — or before the adjustment period ends — this can be tricky.

After the initial period ends, your loan will likely adjust. This can cause your interest rate to change, leading your mortgage payment to go up or down.

If the latter happens, great, but this is a risky move. Since the adjustment is based on individual loan terms and the current market, there’s a chance your mortgage payment could increase significantly.

Avoid Getting Emotionally Involved

When you fall in love with a home, it’s easy to convince yourself into spending more than you can afford. Therefore, it’s important to remain logical throughout the process, according to the North Carolina Housing Finance Agency.

Of course, it’s hard not to get emotional when choosing a home. Try to think of it as more of a business deal, instead of letting your feelings get the best of you.

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This article originally appeared on GOBankingRates.com: Ramit Sethi Says This Might Be ‘the Worst’ Financial Trouble: 5 Ways To Avoid It