Ramit Sethi says that even if you’re not a millionaire, buying a house you can’t afford will end up costing you millions

24/7 Wall St. Key Points:

• It may be tempting to stretch your budget to buy a “better” home, but buying a property you can’t afford can ultimately cost you millions.
• Instead of standard lending limits, financial expert Ramit Sethi advocates for the strict 28/36 rule based on gross income and mentally adding 50% to a home’s listing price to simulate long-term expenses.
• Also: Take this quiz to see if you’re on track to retire ^(Sponsored)

I recently came across a very interesting YouTube video by Ramit Sethi that claimed purchasing a house you can’t afford could literally cost you millions of dollars – even if the house you bought isn’t worth a million!

How could this be? Let’s take a look:

The Hidden and “Phantom” Costs of Overbuying a Home

When it comes to buying a house, it’s easy to get caught up in the emotions of finding the perfect place. But when you purchase a home that’s beyond your financial means, the consequences can quickly escalate.

The cost of buying a home isn’t just the purchase price. Yes, it means a higher monthly payment, which could strain your budget. But, this could lead to your cutting back on other financial goals, like retirement and investing.

Sethi heavily emphasizes what he calls “phantom costs”—the unrecoverable cash drains that buyers routinely omit when calculating home equity. These include high mortgage interest rates (sitting around 6–7%), hefty closing costs that consume roughly 10% combined to buy and sell, property taxes, HOA fees, and ongoing maintenance. While rent is the maximum you will pay for housing, a mortgage is merely the absolute minimum.

Opportunity Cost: What You Could Be Losing

You also have to consider the opportunity cost of that home. You’ll have more money tied up in a home and less money available to invest, which could potentially cost you a lot in the long run. Whether it’s the extra interest paid on a higher mortgage or the missed opportunity to invest in stocks, bonds, or a retirement account, the long-term cost adds up.

Over 30 years, the total cost of owning that home can also become inflated by property taxes while your ability to invest in making money diminishes. This lost investment chance can cost you hundreds of thousands of dollars, if not millions.

Know Your Numbers Before You Buy (The 28/36 and 50% Rules)

So, how do you avoid this? The key is to know your numbers before purchasing a home. You must have a clear understanding of your income, monthly expenses, debt obligations, and financial goals. If you don’t have a budget established, now is a great time to get one ready.

Look at all this information realistically. Don’t stretch it, either. It’s easy to say, “Just $100 more won’t be a big deal,” but that is a slippery slope.

While generic advice often suggests keeping housing under 25-30% of take-home pay, Sethi explicitly uses the 28/36 rule based on gross income. Your front-end ratio (Principal, Interest, Taxes, and Insurance) should not exceed 28% of your gross monthly income, and your total debt-to-income ratio should not cross 36%. Even though lenders routinely approve borrowers for up to 49% DTI, doing so is the fastest path to becoming house poor.

To accurately simulate this reality, Sethi recommends utilizing the “50% rule” when window shopping: mentally add 50% to a home’s listing price. If you cannot comfortably afford the math on a adjusted $750,000 budget for a $500,000 sticker price home, you should continue renting and invest the difference.

Sethi’s 5-Question Homebuying Checklist

Before moving forward with a purchase, run your situation through Sethi’s mandatory structural checklist. If you answer no to any of these metrics, he advises waiting to buy:

1. Will I live here for at least 10 years? (Transaction fees will wipe out short-term equity that could have otherwise grown in S&P 500 index funds).

2. Is my total housing cost strictly under 28% of my gross income?

3. Have I saved a full 20% down payment to fully avoid Private Mortgage Insurance (PMI)?

4. Will I be completely fine if the market value of this house decreases?

5. Am I personally excited about this choice, or am I just giving in to real estate peer pressure?

Long-Term Benefits of Buying Within Your Means

Buying a home within your means provides tons of benefits beyond just stress reduction. This gives you the opportunity to grow your wealth and plan for the future. You free up your money to contribute towards your financial goals, like saving for retirement of investing in the stock market.

This contrarian strategy highlights why Sethi, a multi-millionaire, openly chooses to remain a lifelong renter himself; he views a primary residence as a lifestyle purchase rather than an optimized investment vehicle. Plus, your lower housing cost helps you build your financial resilience. If the market shifts or your income changes unexpectedly, you’ll have a cushion ready to help you adjust.

Editor’s Note: This article was updated to incorporate Ramit Sethi’s specific financial parameters, replacing general net income budgeting advice with his signature 28/36 gross income rule, the 50% sticker price rule, and an analysis of phantom homeownership costs. A five-question homebuying checklist and biographical background regarding Sethi’s personal rental philosophy were also added to the text.