3 Dangers of Taking On Too Big of a Mortgage

by Maurie Backman | Updated July 19, 2021 - First published on Feb. 11, 2021

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Here's why you shouldn't stretch your budget too much when buying a home.

Mortgage rates have been sitting at or near historic lows since summertime, so it's a great time to buy a home from an interest-related perspective. The lower your loan's interest rate, the lower your monthly home loan payments will be.

On the other hand, home prices are extremely inflated these days due to a surge in buyer demand. As such, you may end up spending -- and borrowing -- more than you'd like to if you're buying a home in today's market.

Of course, there's a difference between buying a home at the top end of your price range and buying one that's financially out of reach for you. A home at the top of your price range might strain your budget but not bust it completely. But if you take on too large of a mortgage by buying a home that's out of your price range, here are some consequences that may follow.

1. It could wreck your credit

If your mortgage is too big, keeping up with those payments could mean falling behind on other bills. And if that happens, your credit score could take a serious beating. You'll generally see your score fall substantially with just a single late or missed bill payment. Of course, you could easily end up having to skip a mortgage payment too if you're on the hook for a monthly payment that's outside your comfort zone. Either way, being delinquent on any bills just isn't good.

2. You may miss out on other goals

Maybe you're trying to save for retirement or set money aside for your children's education. If you take on too much of a mortgage, your home loan payments could end up monopolizing so much of your income that you're unable to save for other important objectives.

3. You could lose your home

You won't lose your home if you're late on a single mortgage payment. But if you fall behind on multiple payments for multiple months, your mortgage lender may eventually have no choice but to start the foreclosure process. To put it another way, taking on too much mortgage could increase your risk of losing your home -- and that's just not worth it.

Know how much you can afford

It's difficult to determine how much of a home loan you can afford without running some numbers. After all, you might think you can push yourself to swing a $300,000 mortgage, but once you see what that means in terms of monthly payments, you may find that you think very differently.

To help guide your decision, use a mortgage calculator to figure out how much money your home will actually cost you each month. You'll need some basic information to get accurate numbers -- your loan amount, down payment, mortgage interest rate, and length of repayment period. But you can play around with different numbers and see what they mean in terms of a monthly payment.

Of course, your monthly principal and interest payment only represent a portion of what your home will cost you. You'll also need to account for other expenses like property taxes, insurance, and maintenance. Plus, you may need to pay private mortgage insurance or homeowners association fees. Run those numbers so you don't get in over your head and suffer the above repercussions.

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