Real Estate the Ramsey Way - The True Cost of Buying a Home (It’s More Than You Think)

Episode Date: October 2, 2023

Your dream home can quickly become a nightmare if buying it makes you house poor. In this episode, you’ll learn how to know what you can actually afford, plus how to budget for the additional costs of buying a home. Helpful Resources: Find out what your monthly payment should be with our free Mortgage Calculator. Find the only real estate agents in your area endorsed by Dave Ramsey.

Dave Ramsey here, and welcome to real estate, the Ramsey Way. In this episode, we're talking about the true cost of buying a home, because if you want to make that new home you're dreaming of an actual reality, you need accurate expectations of the whole home buying situation and what it'll cost you. So, stick around to figure out how much house you can really afford. Nathan's with us in Pensacola. Hi, Nathan, welcome to the Ramsey Show. Hi, Dave, a long-time listener.

I appreciate your show. and definitely live by almost all the advice you have. Well, thank you. How can I want me help? So my wife and I are looking at possibly buying a property. It's a little bit more expensive than what I'm used to buying. So right now we own a home, and we're just trying to figure out if it makes sense to take our current investments and just basically liquidate our current investments,

and then now go into debt with a mortgage that would be probably about a – $300,000 mortgage after we're done with liquidating all of our expenses for all of our debt. I'm sorry, all of our assets. Okay. How old are you? We're 47, 47 and 46. All of your assets? You mean you're pulling retirement out?

No, no, no. The retirement I can't touch until later, but we've got listening to you guys, smart investor kind of stuff, and we went with a smart investor pro here in Pennsylvania. That's cool. So you have how much money in investments that are non-retirement? Probably about 600K total. Okay. And your current residence has how much equity in it?

About 400. Okay. So you're buying a million three house? It's going to be a little bit less than a million three, but it'll be a little over a million. Okay. I missed how you get $300,000 in debt because I got a million dollars here, $600 and $400. I guess the mortgage might not be quite $300. It'll be probably closer to $200 when you have all the closing costs and everything into it.

Okay. So you're talking about you're not going to net $400 out of your house. We should. We should net $400 out of the house. And you have $600 in investments. And savings and everything, yes. That's a million. And the house is a million.

There's not $200,000 in closing costs. There's not a 20% closing cost. There's no such thing. So I guess it's just kind of an uneasy feeling going with a higher home value. And I guess the big thing I have is does it make sense to liquidate the investments that we have right now? I wouldn't buy the house if I didn't. Because you're going to go into debt. It's the same question of if I had a paid $4 million house, would I go borrow $600,000 on it to put money into investments?

No, I wouldn't. not taking the money out of the investments and putting them on the house is the same thing as borrowing on your house to do that. So you should not buy the house unless you're willing to use the investments to do it. What's your household income? Right now it's probably about 110. And how old are you guys? 48 and 46. Will you be able to afford the taxes on a million dollar property with $100,000 a year just to maintain the property, keep the lights on this thing,

Keep the yard mode? Yes, we will. Florida's got some generous disabled veterans' tax benefits. Okay. So why do you want to buy a million-dollar property? It's something my wife and I have always dreamed about living on water, and this is an opportunity to do so right now. Okay.

I don't think you're going to need a mortgage or if you do, it's a very, very small one, and you're going to turn around and get that paid off as fast as you can. If you're sitting in this property, debt-free within a couple of years, then I'm fine with this idea if you want to do it. The thing that's out of balance that you're feeling is that the vast majority of your net worth is now tied up in your single-family home that does not generate an income. It does grow in value, but it does not generate an income.

And so, you know, you're going to have to really pour on the coals and build some investments by the fact that you don't have any house payment in the near future to make this work. But no, you don't need a $300,000 mortgage. The numbers you keep giving me that you act like they add up and they don't add up. I mean, $600 and $400 and $1 million, and you buy a million dollar house for a million dollars and you use a million dollars, you shouldn't have a mortgage. And so... Something about this makes me uncomfortable.

Like, it makes me uneasy. That's a lot of... The reason is that all, everything you own is going into this house, except your... retirement. And it is, it's out of balance. It's too much, really. But if you're paying cash for it, I think you can tolerate it as long as you turn around and start dumping money into retirement really, really quick. Would I do this if I were in your shoes? No, I wouldn't. No, I wouldn't. Maybe that's I wouldn't either. Because I don't want that much of my net worth making $110,000 tied up in a single family house that does not create income. And I'm thinking of it, if the air conditioner goes out of

on this million dollar house, it's going to be an expensive repair, or if the driveway needs to be, or if I got to do some plumbing work on a million dollars, it's all so expensive. Everything, let me just 100% of the houses break. Yeah, yeah, yeah. A hundred percent of them need crap done to them. And brand new, no matter who built them, no matter where they are, I mean, I'm a lot of real estate. And there's just, they eat money. Yeah.

So to your point, that's good. Yeah, I think, you know, the more I sit here and talk this through, listening to John, too. I'm risk averse though, so let me say that out. But I mean, there's just no margin here. There's no wiggle room. There's no wiggle room. There's no wiggle room. When if you get sick or when if you get something.

If life goes sideways. Right now you've got a lot of wiggle room with $600,000 in the bank. So probably what I would do is take your $600 and pay off your current residence, which you should have done anyway if you're listening to me. But that's that part where you said you just did part of what I teach. I remember that part. I didn't drive by it. I heard it.

and then I would save like a crazy person, and I might do this deal in five years where I've got $500,000 left over after I buy it. Now, that started, if you had $500,000 left over, non-retirement after you move in there, you do a million-dollar house, $110,000 incomes is low for a million-dollar house, but if you're paying cash for it for whatever reason, it's okay, but you do need some liquidity,

and it doesn't need to be freaking 90% of, your net worth. That's just, that's out of balance. Or can you save up some money and go multiple weeks and stay at a lakehouse a year? And, I mean, I don't even mind if you buy, you know, if your dreams live on the water, I agree, I like living on the water. I've got, I've got properties on the water. I like it. But water, water's amazing. Yeah. But the, but, but, but it's not amazing if it steals your piece instead of gives you. There's so, and there's no margin here. No margin. It's dangerous. That's a dangerous deal. No, I wouldn't do it. I'm not. I'm not. I wouldn't do it. I'm,

I'm going to retract. I wouldn't do it because I don't like the fact there's no wiggle room. What I would do is I pay off my house today. And I start saving like a crazy person and make this a three to a five-year dream. And just keep piling up cash and keep investing with a paid-for house. But you're going to do what you're going to do because you already don't do some of the stuff we teach. So that's up to you. You get to decide. But that's what I would do if I woke up in your shoes. I find people don't have margin with their time. They don't have it with their relationships. They don't have it with work.

They don't have it with money. We just have a margin-free society now, man. Well, there's friction at grates. They get frayed ends. Yeah. And you get frayed at the ends, and it's just because everything's pushed to the edge. And it takes what would have normally been a blessing.

And, you know, you add two doses of stress to it, and all of a sudden, you don't. the thing you were supposed to be in love with you hate. And when you think of it psychologically, our brains were designed to run at that level when a lion was chasing us not to live like that. It just rattles everything to our cord. It's a big old house with a lion chasing you around. You just parked a lion in the front yard.

Yeah, that's right. Andrea starts off this hour in Dallas, Texas. Hey, Andrea, welcome to the Ramsey Show. Oh, Dave, it's good to talk to you again. You too. Thank you for having me on your show. Well, thank you. I don't know.

You probably, I don't know if you remember. I actually met you back in 2019 at your studio. My husband and I stopped by, and I, I'm a balloon artist. I made a bunch of balloons for your grandkids. Oh, thank you. Thank you. I'm sorry. I bet so many people I can't remember my name.

But I'm glad you're here. How can we help? Okay. Well, I was hoping you could help me with a little disagreement I'm having with my husband. We've been married 10 years. and I have listened to you longer and got him on to the total money makeover and we followed you and we're able to get debt free. Good.

And we like it. He likes it a lot. But now we are having our second baby doing November and he's having to work from home. And I'm nesting and we feel like it's time to move up in house and we have a little bit of a disagreement. I feel like I found like the ideal dream house and he feels like it's too much. And it would cause us to have a mortgage again for a little while. And he just doesn't want to do that. And I'm just like don't feel like I want to settle when we're going to be in the house,

hopefully a long time. So that's... Okay, so what is your current home worth? We are hoping after realtor fees that we can get about $300,000, out of it. And what would the other house cost? The other house that we're looking at, our realtor thinks we could get it if we made an offer for $4.95.

So a move of $200,000. Do you have any money saved above the $300? We do. We've got our emergency fund of $16,000, which we're not going to touch. Correct. And then in other various accounts, we've managed to save up about a little over $100,000. Okay.

So you're only $100,000. $500 in disagreement? Basically. Yeah, if you had another $100K, would he be okay with the $500,000 house? He would be thrilled with it. His thing is, like, some of these things are... It's not too much house. It's no debt that he wants.

Right. It's not too much house. It's no debt. He says, this house is fancy. It's a want. It's not a need. We shouldn't go into debt for a want. Okay.

Okay. I got it. I got it. And so what's your household income? So, 2021, we did combined 101,000. How quickly can you save 100 grand? I don't know. I mean, if we...

Less than three years, probably? Two to three years. Two and a half years, maybe? Two to three years. Maybe. No, definitely. No, definitely. If you had to do it to save your life, you could save 100 grand in two years,

but three you could definitely do it. Okay. Because you'd be living on beans and rice again in order to hit this goal, to do two years. Three years you can definitely do it. Okay. Or you can pick up, do you have anything else you can sell? Nothing that's like worth much. I mean, you got expensive cars?

No, they're used cars and they are paid off and they're, you know, kind of old. Okay. They're not expensive. Okay. What about going to a $400,000 house and you pay cash for it? Have you looked into what that would look like? We're still looking and keeping our eyes open. We haven't ruled it out.

Okay, so here's the deal. What we're really arguing about is not whether you have too much house. If I'm understanding your outline, what you're really arguing about is whether we go in debt or not. Right. And your husband's going, I finally got $4. free, I can't walk willingly into another bear trap. I can't do it. I can't swallow the bill.

As much as I love you, as much as I want you to have what you want, I just can't go back there. It makes me throw up into my mouth. Right. And then part of me is also like inflation is going up and what if I buy too much house and then like the country has gone crazy and then I can't like... No, you don't worry about that. You don't have to worry about that.

What you've got to worry about is what you can control. Your bottom line is you guys are arguing about 100. grand and two to three years. That's what you're arguing about. I'm not really arguing about whether to move, if moving is valid, whether the $500,000 house is too big a house, whether we're really not arguing about any of those things. We're just $100 grand short of doing what you want to do, and you're willing to go in dead and he's not.

That's what it comes down to. And so once you quantify it that way, it gives you some real good points for discussion. I don't think either one of you are in the stupid zone with this. If you took out a little mortgage and paid it off real fast, it doesn't violate our guidelines. But I've got to personally agree with your husband. Once I got out of debt, you weren't going to drag me back in kicking, screaming under any circumstances. There wasn't anything Sharon wanted bad enough for me to do that, or I wanted bad enough for me to do that, ever. And I was actually more likely to want something than she was.

But you couldn't get me to do it again. So I kind of understand where your husband's coming from. I don't think George and I have an answer for you. There's no one right or wrong here. You just have to get on the same page of whatever you do going forward. And I don't think you're buying this house unless you both come into agreement. That's for sure. Here's a dose of reality for you.

Drowning and a house payment every month is what's called being house poor. And it means you won't have enough money for your other financial goals. But here's some good news. You don't need a degree in economics to figure out what your house payment should cost. Just check out our free mortgage. calculator to get a clear idea of what your monthly payment should look like. Go to ramsysolutions.com slash mortgage calculator or click the link in the show notes to start crunching the numbers.

Brett is with us in Provo, Utah. Hi, Brett. Welcome to the Ramsey show. Thanks, Dave. Thanks for having me on. Sure. What's up? So me and my family, we have been renting for the last year while paying off student loans.

we paid off 115,000 of student loans. Way to go. It's awesome. Yeah. Thank you. Yeah, so we're at a point now where we're looking to save up for a down payment on a house. And the house we would be looking to buy, it would take us about three years to get a down payment for that house. But we're wondering if maybe it might just be smarter to wait another three years.

so a total of six years to pay for a house in cash. How much of a down payment are you doing in three years? 50%? Yeah, it's pretty much close to that. Yeah, houses are pretty crazy. How did you determine 50% as a down payment? Just for the house we were looking at for $800,000. You said you can do 50% of the house price in three years.

Right. Yes. $400,000. Yeah, I guess 350 is what I was looking at. Yeah. Okay. And what do you make? 260.

Way to go. Good for you. How old are you guys? I'm 32 and my wife is 29. Okay. Well, this is one of the, maybe the only answer that I ever give here on the air that is not what I would do, but what is okay to do. Okay. What I do, the way I live my life for the last 30 plus years now since I went broke is I don't borrow money, period, for anything ever. And so I have to figure out a way to cash flow it because there is nothing that I want badly enough or that I'm scared enough of to go in debt for it. I have been there, done that. I didn't like the T-shirt. I'm not doing it anymore, okay? I truly do believe that the Bible is telling the truth that the borrower is slave to the lender,

and I truly don't borrow money. And I do believe that that is the shortest path to wealth, by the way. Okay? Yes. The starting few years is rough. But the ending years are amazing. Yeah. So now, having said all of that, then it's the only advice we give,

here on the air that I don't personally follow, and that is if you take out a mortgage with a good strong down payment, 50% is more than a good strong. A good strong down payment would be 10 or 15 or something like that. 20 would avoid PMI. That's good. And your payment on a 15-year fix is no more than a fourth of your take-home pay. If you did that in your case, you could then pay that house off within six years. Right. Right. And if you could pay cash for it, in six years you can pay it off in six years and obviously anyone who pays their home off in six years is way weird compared to the culture so you're you're weird no matter where we are on this spectrum yeah and you're and you're heading in the you know your your face is under the column of

smart people no matter what we do on this spectrum that's right so either one of those is fine so it's just a matter of so someone call me a legalist someone someone would call me a purist. Someone would just call me not a hypocrite, but that I don't borrow. So you can do either by Ramsey guidelines anywhere in between those two things and be there. So you could put down 50%, you could put down 80%, you could put down 20%, on a 15-year fixed where the payments no more than a fourth-year take-home pay, and it wouldn't be in this case, and then turn it paid off as fast as you can. All of that is within our guidelines because we know that that's going to lead you to wealth. Brett, how old are you?

I'm 32. Way to go, man. What do you do for a living? So I'm a nurse anesthetist. Ah, good. Very good. You're killing it, man. So, yeah.

And that was where I was kind of having the question between the two, just because is there any measure on if it's harder for kids to move when they're older? That was kind of what we were going between two. I mean, I wouldn't want to wait. I wouldn't want to move in high school if that's what you're asking. I think that kids are very resilient. I think that by the time they, you know, once they put down roots, if you get into those high school years, it can be a little bit tough.

But, I mean, you can recover from anything. But, yeah, when they're, how, you have, you've got kids now? So the oldest is seven, so seven, five, and three. Seven, they're all right. He would be 13, you know, if we waited the full six years to pay. Well, that's also assuming you get absolutely no increases in income. Right. Right.

Yeah, I, yeah, true. Good point. Which is weird, because when I start saving towards something that I want really bad, what I'll do is work my butt off. And my income goes up and, you know, I'm able to just attack it. And so my guess is that it won't take you as long as the math on a straight line without any increases in pay says, okay, that you should have, because your intensity will go up and your income will probably go up both during this time. So it'll probably be four or five years. But same thing. true of paying the house off. Yeah, yeah, yeah.

If you bought it and we're living in it. So we're not going to yell at you for either one. I just love the options that you're looking at. I love that you're calling in here talking about 50% down or 100% down. That's a wonderful quandary to be in. You got options. You got your head in the right place, that's for sure. And so, again, I truly do believe these principles.

and so I truly believe that if I live them, I'm going to be the safest in the event of a pandemic. I'm sitting in a building that's worth, I don't know, what's this thing worth now, $3 or $400 million, and it's paid for. And it's paid for. And so nobody, I didn't have to worry during the pandemic that we could make the payments here.

Yeah. Okay. That allows this bald head to lay on a pillow and sleep. You know, it just is a different world. Christine is with us in Cheyenne, Wyoming. Hi, Christine. How are you? Great.

How are you doing? Better than I deserve. What's up? Thank you so much for taking my call. So my husband and I are new listeners of yours, and we're on baby steps four, five, and six. We have no debt except for our mortgage. Good. We're concerned that our mortgage is a bit high.

It doesn't quite follow your ratios, so I just wanted to talk that through with you and we just keep going on or make a change. Okay. In this case, our ratios don't matter as much, in the case of a mortgage payment as a percentage of your income, as why we have the ratios. Now, that matters a lot, okay? Okay. The why is simply, if you use up all your money on your house payment, you don't have

any money. It's called house poor, right? And that will cause you with, if you're living with a super high house payment, even though you're already out of debt in your baby step four, five, and six, it'll keep you from investing long term, keep you from your generosity goals. And in some cases, if it's super high, people feel forced to take a car payment

because they don't save up for a car because they don't have any room to save up for a car, or something like that. So that's the reason we tell people to not get a super high house payment like most of the culture tells you to do. And so once you kind of understand that, then you can kind of back into your particulars and say, you know, okay, what are we violating on the 25% of your take-home pay on a 15-year fixed? And how is that going to be okay given that we don't want to be house poor?

So, how much is your house payment? 3,900. Say again? 3,900. And your monthly take-home pay is? 11,000. Okay. So you're about 34%?

Right. Okay. And what do you guys do for a living? My husband is in supply chain. Is what? And I say, he's in supply chain and I stay home with our kids. Supply chain. Oh, God, I can't hear.

Okay. Supply chain. All right. And he's killing it. So how many raises is, because the last two years don't count? What do you guys feel like the trajectory of his income is? Is it going to go up substantially in the next three years? I think so.

Which makes this conversation not needed, moot, right? Okay, yeah. Because, I mean, if it goes from 33% to 28% to 25%, with three raises, because your house payment stays the same and your income goes up, then we're not worried about you being house poor long term, correct? Yeah, so that's one fix for this. But if he had two wild years based on supply chain backup and he crushed it and he's going to settle back into $9,000 a month, now you've got a problem.

Exactly. So what are you looking at on his income, do you think? I think it'll go up. I don't think he'll go down. If it goes down, you need to reevaluate this house. Okay. As long as it has an upward trajectory in the next 36 to 48 months, you're not going to be stuck there with all your money going to a house payment and not be able to fund your kids' college fund. Or having an air conditioner break and you've got to go to a credit union to be able to pay for it, right?

Right. Although we have an emergency fund. That's right. That's right. So just don't get yourself to where you're there. That's the whole point of the thing, you see. Yeah. So you don't need Ramsey to tell you how to make.

manage your life. But a good rule period, whether Ramsey's in your discussion or not, is don't be house poor. Don't have a house payment that takes up all your money. It makes you broke. And so, but I think you sound like you're okay. It's not ideal. If you were getting ready to buy a home, I would tell you to back off. Don't be so house, you know, but you're there. I wouldn't tell you to move over this. You're not trapped and hopelessly, mathematically disabled. you know, so I wouldn't tell you to do that. But you don't have any room. It's got to go up.

It can't go back. And you don't have any wiggle room because if it goes down much and stays down very long, you're going to be forced into a different property. But right now, I think you've got a lot of house. And in Shire in Wyoming, that's a big freaking house. That's a big dog right there. Well done. Good for you.

I bet it's fun. Listen, I know some of you are thinking that buying a home the way we teach is next to impossible with home prices where they are right now. But that's why my best advice is patience. Don't give in to the temptation to stretch your dollars and buy a home that's out of your price range. It's just not worth sacrificing your other financial goals, like your retirement, your kids' college.

Just be a grown-up about it and be patient. Thanks for listening today. Share this with your friends and family who you think will enjoy it. And be on the lookout for our next episode all about navigating this crazy real estate market.