How can you make sure your housing costs don't take up too much of your budget?
Have you heard the term "house poor"? It means that so much of your money goes to covering your monthly housing costs that you've left yourself too little cash for all of your other expenses.
Unfortunately, far too many people find themselves in exactly this situation.
Sometimes, it's hard to avoid because your income isn't very high or housing is expensive where you live -- or both. But in many circumstances, it's possible to avoid committing to unaffordable housing payments by taking three simple steps.
1. Don't borrow too much
First, if you want to keep your housing payments affordable, limit your monthly mortgage costs by keeping your loan balance reasonable.
When you apply for a home loan from a mortgage lender, it will approve you for a loan based on your debt and income. But you don't necessarily have to borrow as much as you're approved for. Your lender doesn't know your budget, your future plans, or what else you want to do with your money.
Take the time to use a mortgage calculator to see what your monthly payment might be for loans of different sizes. Then factor in how your payment will affect your other plans. You may decide that taking the maximum loan you're allowed wouldn't leave you with enough money for other goals. If so, it's OK to limit your loan to an amount you're more comfortable paying.
2. Consider all housing-related expenses
Far too many homeowners only consider whether their monthly mortgage payments are affordable and don't think about all of the other costs that come with home ownership. These expenses -- from utilities to homeowners association fees to property taxes to yard maintenance -- can really add up.
Don't assume your housing won't cost too much just because your mortgage is manageable. Instead, take a careful look at how your overall monthly spending will change once you've bought a home. And remember that larger and more expensive properties tend to come with more costs for taxes, maintenance, utilities, and furnishings.
If you find that some of the other costs of a particular property would push your total housing expenses to more than 30% or so of your income, you may want to step back.
3. Shop carefully for the right mortgage
When you borrow a large amount of money, the interest rate you pay can have a really big impact on both your monthly payment and total costs. As a result, it's imperative you shop around for the most affordable mortgage to ensure you can make the payments. In fact, you should compare rates and terms from multiple lenders before committing to a loan so you don't pay tens of thousands of dollars in extra interest.
You should also be careful about the type of mortgage you choose. An adjustable-rate mortgage, for example, could result in an interest rate and monthly payment that goes up over time, potentially becoming unaffordable in the future. An interest-only mortgage will also have rising payments that may be too hard to fit into your budget. You won't have these issues with a regular fixed-rate loan.
Finally, consider the loan term. A mortgage with a shorter repayment timeline will save you on total interest costs over the life of the loan, and you'll become debt free sooner. But the tradeoff is that your monthly payments will be much higher. This may compromise your ability to fulfill other financial goals in the short term.
By taking all these factors into account, you can ensure you don't end up with monthly housing payments that eat up too much of your budget. Hopefully, they can help keep you from becoming house poor in the future.
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