Is Your House Too Expensive For You?
Here’s a crazy fact: I once worked for Washington Mutual Bank as a mortgage underwriter. Washington Mutual was the country’s largest savings and loan bank, until 2008 when it completely went out of business in just one day. (Just like in the Great Depression.)
But one thing I learned about mortgages while I worked there was that most borrowers were buying too much house for their budget. They were buying impressive houses, but they really couldn’t afford them.
Back then, lenders had lax requirements on income qualification and debt-to-income ratios. In fact, most of the mortgage files I saw had buyers that shouldn’t be buying a house. As a result, when the financial crisis hit, many people lost their homes.
Now, banks are more strict, but people are still buying houses out of their price range. Financial experts agree that your total housing cost should only be about 25%-35% of your income. This includes your mortgage, property taxes, home insurance, mortgage insurance, and any association dues.
Why It Matters
If you are paying too much for housing, then the rest of your budget will suffer. You won’t have enough for the remaining categories.
Your budgeted income should be spread like this:
- Charity 10%
- Savings 10%
- Housing 25%
- Utilities 5%
- Food 10 %
- Transportation 5%
- Clothing 5%
- Medical Costs 10%
- Insurance 10%
- Recreation 5%
- Personal 5%
- Total 100% (of Take-Home Pay)
Notice that there is no room for consumer debt payments in this formula. That is because no one should have consumer debt. If you are dying to get out of debt, see this post to learn how to get out of debt quickly. Click here to set up a budget for free.
What to Do About Your Expensive Mortgage
There are a few options you can try to reduce your housing costs. If you rent, you could shop around for a new place once your lease is up. If you own your house, try one of these options:
- Refinance. If the mortgage rates are currently lower than your mortgage interest rate, you might benefit from refinancing. Lowering your interest rate can reduce your payment and make it easier to afford your house.
- Downsize. If you are open to the idea of downsizing, now might be a good time. The price of houses are rising and you might be able to make a nice profit on the sale of your home. You could use this money to put a down payment on another home that is more affordable.
- Rent Out a Portion. If you have a spare room, rent to a relative or friend. This would reduce the burden of your housing cost.
- Use Airbnb. If you are planning to take a trip, rent out your home while you are gone. You can earn quite a bit per night through online home rental sites like Airbnb and Home Away. This can help bring in more income to pay for your mortgage.
- Get a Modification. This option is very difficult. You have to contact your mortgage company and ask for an application to get a modification. They will require lots of paperwork to be submitted to apply. Then they still might decline your application. Some homeowners have been able to get approved, but it is an uphill battle. It’s worth it if it helps you reduce your costs. It doesn’t negatively affect your credit.
- Earn More Income. Getting a second job or doing things from home to help earn money will really help get your financial situation under control. Starting a side business is often very rewarding.
- Get Rid of Your PMI. Some mortgages have what is called Mortgage Insurance. This is required by the lender. Only some borrowers have to get this insurance. But usually, you can get rid of it after a certain amount of time. If you have this, contact your mortgage company to see if you can get rid of it soon. It will save you a nice chunk of cash.
If you can’t do any of the above strategies to reduce your housing cost, another option is to just reduce your other living expenses. For 87 ideas on how to reduce your expenses, click here.
If you are looking for help to set up a budget, click here. Come back soon for more money management advice from a professional accountant, entrepreneur, and college instructor. I can teach you to prepare your own taxes, start a business, budget, be frugal, make more money, save money, and so much more!
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