One of the biggest mistakes I’ve seen people (who are deeply in debt) make is to buy a home that’s just too expensive. My rule of thumb is to spend no more that 35% of your net income on housing: mortgage/rent payments, property tax, utilities, insurance and maintenance. But I’ve worked with a lot of people who are up in the 40’s. Man, they are House Poor!
One reason people end up in more home than they can afford is that they leave it to their lender to decide how much mortgage to take out and, therefore how much house to buy. Really? You’re leaving it to the guy who is going to make a killing off your decision? Wow! That’s dumb.
Another reason people end up in more home than they can afford is that they’re so anxious to get into the housing market they throw all caution to the wind and buy without enough of a downpayment, triggering mortgage insurance premiums on top of their mortgage payment amount. They often don’t have money set aside for closing either, and end up tapping other sources of credit. Again…dumb!
Ultimately it all ends in a mortgage meltdown. Folks find themselves struggling to make ends meet and keep their dream roofs over their heads. Their best intentions end up with the worst consequences. And all because they failed to add up the real costs of buying their home.
While a mortgage is “good” debt – you’re building assets, after all – too much mortgage is a fast route to bad debt. Why? Well, when it takes too much of your money to keep that “good” debt in good standing, you’re more likely to turn to yoru credit cards and lines of credit just to make ends meet – never mind have some fun. The result: oodles of debt racked up, or a life given over to sitting in a home and staring at the bare walls.
Want to avoid becoming House Poor?
Start by Knowing The Numbers. All the numbers. Figure out how much mortgage you can comfortably afford to incorporate into your budget and then don’t look at properties that would take you outside your comfort zone. Know how much it’ll cost to close and move into your home, and then save the money up so you don’t end up tapping credit and paying huge amounts of interest. Know what it’ll cost to carry the home – things like maintenance, insurance, and utilities – and then build those amounts into your budget so you aren’t shocked when you finally do move in.
Practice, Practice, Practice. Why would you think you can move from renter to home owner (or from small home owner to bigger home owner) without having to adjust your budget? Yet people make the assumption that they’ll find a way to cope. Really? Why not practice living on your new home budget before you do the dirty deed to see just how it’ll feel?
This is a little like the advice I give newly preggers: Learn to live on the income you’ll have while you’re on mat leave while you’re still working and bank the rest.
Ditto home buying: figure out what your new budget will be, auto-debit that amount to your savings account (less your current housing costs), and use those savings to build your Closing Costs Account. There now, you’ve killed two birds with one stone: figure out how to live on your new budget, and saved for closing costs.
Don’t Fall In Love. This is, perhaps, the biggest mistake people make when shopping for a home. They see something, fall in love, and have to have it at whatever costs. This is the root of the bidding war phenomenon. Dumb! A house may be a great deal at $350,000. But at $500,000 you’re a sucker! Do you really think there are no other houses anywhere? Lord love a duck.
Falling in love leads people to do all sorts of stupid things. They buy the surface beauty (homes are regularly “styled” to do just this) and fail to look at the structure of the home. They wave home inspection clauses. Dumb. Suppose all that new paint is hiding mold, water damage or a cracked foundation, wouldn’t you want to know?