We’ve advised you repeatedly not to buy more house than you can afford. But how do you know what you can manage before you actually have to make that payment every month?
It’s an important (and potentially dangerous) question. Thankfully, we have tips from Consumer Reports to help you make an informed decision! (Hint: The answer is NOT “How much am I qualified to borrow?)
The problem is, many Americans qualify for mortgages that are larger than they can easily afford. Taking on that big of a burden can hurt your ability to reach your other financial goals, such as saving for kids’ college education or your retirement.
What you can get versus what you can afford
Experts recommend you keep your mortgage at or under 25 percent of your household budget.
Yet the average married couple with children spends just over 31 percent of their budget on housing, and single people spend almost 36 percent, according to the most recent data from the Bureau of Labor Statistics.
It can be tempting, however, to stretch yourself for a house payment. Many buyers rationalize that they can sacrifice a little for something as important as home ownership. It’s best to resist the temptation to do so. After all, do you really want to stretch the budget every month for fifteen or thirty years?
Neeley asks clients one important question when trying to help them determine what they’re willing and able to spend on housing: “Do you really want to change your lifestyle to have a more expensive home?”
Instead, try some of these cost-management strategies.
Put as much down as possible. Aim for at least 20 percent, but more is better. Not only will you have a reduced principal right from the start, you can avoid the added expense of mortgage insurance.
Plan five years ahead. If you move sooner, your closing costs will end up really costing you.
And finally, prepare an emergency fund. One thing about life… it sneaks up on you when you least expect it. Be ready for illness or unemployment or tragedy by having a safety net in place.
A mortgage doesn’t have to be scary, if you make sure in advance you can afford it.