3 Signs You're Taking On Too High a Mortgage

by Maurie Backman | Updated July 19, 2021 - First published on July 15, 2021

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Getting in over your head on the mortgage front is bad news. Here's how to know if you're headed in that direction.

Most of us can't afford to plunk down a pile of cash and purchase a home outright. That's why mortgage loans were invented. But if you take on too high a mortgage, you could wind up not only struggling financially on an ongoing basis, but you could put yourself at risk of losing your home. Here are a few indications that you're about to sign a home loan that's more than you can comfortably afford.

1. You'll spend more than 30% of your take-home pay on housing

As a general rule, it's a bad idea to spend more than 30% of your post-tax income on housing. If you do, you may not have enough money left over for your remaining expenses and bills.

Now when we talk about having your housing costs not exceed 30% of your take-home pay, we mean your mortgage payment plus predictable monthly housing costs like property taxes, homeowners insurance, and other recurring expenses you're on the hook for. Those could include private mortgage insurance and homeowners association fees. If you're not sure what your payments will look like, use a mortgage calculator to figure out what you'll have to pay each month based on the loan amount, the length of your repayment period, and the interest rate you think you can snag.

2. You'll leave yourself with no wiggle room for extra expenses or emergencies

You may be the type of person who follows a careful budget in an effort to keep your spending in check. But if your mortgage payments will leave you no room for unplanned bills or emergency expenses, then you're probably taking out too high a loan.

Not every unexpected bill that comes up is an emergency, but you should have enough leeway in your budget to cover a few random extras that pop up, like new band uniforms for your kids or money toward a coworker's sudden retirement. And if that's not the case, you may be getting in way over your head.

3. You'll have to cut way back to fit in your mortgage payments

There's nothing wrong with setting priorities when it comes to spending your money, so you may decide that having a more expensive home is worth dining out less or cutting back on other costs, like the monthly subscription box with beauty products you love getting. But if your new mortgage will cause you to never go out, skip your yearly vacations, and cancel everything from your gym membership to your cable plan, then it may be time to reconsider.

It's natural for housing to be your greatest monthly expense. But before you go ahead with a mortgage, make sure it really makes sense for you financially. If you're at all unsure, you may want to err on the side of buying a less expensive home and upsizing down the line, once your income increases. It's a better bet than signing up for a mortgage payment you know will be difficult to swing from the start.

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