Owning a home is, perhaps, the ultimate American Dream. But there's a difference between owning a home, and owning a home you can reasonably afford.
There's a danger to taking on too-much house, and if you're not careful, you could wind up losing the home you worked so hard to call your own. Here are three signs that you've gotten in way over your head.
Housing takes up more than 30% of your income
In 2015, an estimated 11.8 million households spent more than half of their income on housing, which is just way, way too much. As a general rule of thumb, your housing costs should never be more than 30% of your income. And by "housing costs," we're talking your mortgage payment, real estate taxes, and homeowners' insurance.
The reason it's important to keep your basic housing costs low is to ensure that you have enough money left over for things like food, transportation, healthcare, and retirement savings. If you're spending more than 30% of what you take home on your basic housing costs, it's a clear indication that you're spending too much.
Your maintenance costs keep climbing
It stands to reason that larger properties take more work and money to maintain than smaller ones. If your maintenance costs keep climbing year after year, and your salary increases can't keep up proportionately, you may be headed for trouble. Most homeowners spend between 1% and 4% of their home's value on yearly maintenance and repairs. If your budget only allows for $200 a month in upkeep, but your actual costs keep getting higher, you may need to rethink your housing situation.
You've gone into credit-card debt to stay in your home
According to research from the MacArthur Foundation, between 2011 and 2014, an estimated 52% of Americans have had to make at least one major sacrifice to afford their homes, including getting a second job, cutting back on healthcare, or taking on credit-card debt. If high housing costs are causing you to rack up a sizable credit-card balance, it's time to take a long, hard look at your financially unstable reality.
The more credit-card debt you accumulate, the greater the chances of it negatively impacting your credit score. And when you carry a balance, you always end up paying more for what you charge by way of interest fees. Even if you're not using your credit card to pay for housing expenses directly, if your mortgage and maintenance costs aren't leaving room in your budget to cover your other expenses, it's a clear sign that you need to make some changes.
The dangers of overbuying
Not only can taking on too-much house impact the day-to-day quality of life, but it can also prevent you from saving for important milestones like retirement. To retire in a reasonably comfortable fashion, you should be saving 10% of your income, at a minimum. If your housing costs don't allow for this, you're sacrificing your long-term financial health just to stay put. So if you haven't yet bought a home, but are thinking of really stretching your budget to do so, consider what you'll be giving up just to call that expensive piece of property your own.
If you're already in a situation where your housing costs are more than you can handle, you'll need to think about unloading that property, and moving to a home that better suits your budget. Of course, selling a house takes time, and there are expenses involved, as well.
As an immediate plan of action, start cutting non-essential expenses to free up room in your budget. Eliminating restaurant meals, clothing purchases, and cable can help you avoid the trap of getting into credit-card debt. Next, consider taking a side job to generate extra cash while you try to sell your home.
Finally, if selling your home in the near future means taking a loss that will be difficult to recover from, look into your options for renting it out, and rent a place yourself until you're able to sell at a more-favorable price. Let's say your monthly mortgage, property tax, insurance, and maintenance costs total $3,000 a month. If you can manage to rent your home for $2,000 a month and find a $1,000 rental yourself, you can potentially wait out a poor housing market and minimize your ultimate loss.
No matter what you do, the key is to take action rather than continue to live in a house you can't afford. Giving up an expensive home doesn't make you a failure; it makes you a financially responsible adult. With any luck, you'll learn from the experience, and go on to find a new home that's right for your budget.