Time to pay the mortgage!
If that sentence made you queasy, it might not be what you ate for lunch. It could be that your house payment is taking too big of a bite out of your budget.
We know it’s easy to catch house fever. You turn on the television and instantly fall victim to a six-hour “House Hunters” marathon on HGTV. And as soon as someone hears you’re renting, they ask why you aren’t buying instead. “It’s the American dream!” And it is—if you can afford it. But if you go out and buy a house that’s too big for your budget, you’ll end up living in a nightmare.
A lot of people find themselves with too much house and too little wiggle room in their finances. But how do you know if you have too much house?
Financial expert Dave Ramsey recommends your housing budget not exceed more than 25% of your take-home pay. And that number isn’t just your mortgage payment—it also includes things like property taxes and homeowners insurance.
If your housing budget is more than 25% of your paycheck, here are two options for downsizing your home and adding some cushion to your monthly budget.
“But . . . the American dream!” Give yourself permission to quit keeping up with the Joneses. It’s only going to make you feel broke and stressed. Renting for a period of time can be a blessing. It teaches patience and allows you to save up for a bigger down payment in the future.
2. Buy smaller
Whatever you do, don’t make the same mistake twice. If you sell your house and decide to purchase something a little smaller—whether that means your square footage or your mortgage payment—stick to these three rules of thumb:
1. Abide by the 25% rule. Don’t forget, this includes more than your mortgage. Take into consideration the cost of property taxes and homeowners insurance. And remember—we’re talking about your take-home pay, not your gross income.
2. Put down as big of a down payment as possible. Of course, we recommend the 100% down plan—and with patience, it can be done! But if you decide to take on a mortgage, plan on putting down at least 10%.
3. Stick to a 15-year fixed-rate mortgage. Get a 15-year fixed-rate mortgage to avoid paying more interest over a really long time. Don’t let your mortgage drag on for longer than 15 years—no house is worth that much stress!
If you’re still not quite sure what to do or you just want to talk through your options, contact one of our real estate Endorsed Local Providers (ELPs). We designed the ELP program specifically to help you find trustworthy local professionals who have the heart of a teacher. They can offer insight and advice as well as talk you through the process of selling (or buying) a home.
At the end of the day, if your mortgage payment devours 35%, 40% or 50% of your budget, you’re inviting Murphy to move into your spare bedroom. You remember Murphy—he’s the one who guarantees that whatever can go wrong, will go wrong. But imagine the financial freedom you’ll experience when you have your margin back.
Farewell Murphy. Hello financial peace!