My Friend Just Made This Huge Mortgage Mistake. Don't Repeat It

When my friend and her husband set out to buy a home early this year, I wished them luck. And I hoped they'd manage to find a place they could afford given today's home prices, mortgage rates, and limited inventory.

On the plus side, my friend found a home pretty quickly. And it's a home she really loves. It's roomy, updated, and it has a nice amount of storage, which I know is important to her. 

Here's the problem, though. I know for a fact that my friend stretched her budget to buy this home. And now, she has an expensive mortgage payment to tackle every month.

When she asked whether I thought she was taking on too high a mortgage given her and her husband's income, I was honest and said that yes, I thought it was a bit of a stretch. But ultimately, they had fallen in love with the house and decided to move forward. 

My friend's plan is to wait for mortgage rates to come down and then refinance her home loan once that happens. Doing so could lower her monthly payments. 

The problem, though, is that mortgage rates may not drop for years. And until that happens, my friend has left herself with very little financial wiggle room.

A precarious financial situation

Given what my friend and her husband are now spending on their house, there's little to no money left over for them at the end of each month. In fact, my friend just stopped funding her IRA account to manage her housing expenses, and her husband has reduced his 401(k) plan contributions. 

What's also alarming to me is that my friend and her husband have a very small emergency fund. It's advisable to have at least three months' worth of bills in your savings account. My friend and her husband have maybe a month's worth, tops. And a big reason is that they raided their savings to come up with the down payment for their home.

All told, my friend's finances are shaky right now due to her home purchase. And while she's hoping to find ways to boost her income via some side hustles, all told, I think she got in over her head by buying too much house.

Don't make the same mortgage mistake

These days, home prices are high, as are mortgage rates. The median home price sold in March was $375,700, according to the National Association of Realtors. And the average interest rate on a 30-year mortgage today is 6.39%, according to Freddie Mac. 

The home my friend bought cost considerably more than $375,700. (To be fair, we live in an area where a starter home might cost $500,000, and her home, though comfortable, is fairly modest for the area.) The mortgage rate she locked in is somewhere in the mid-6% range, too. 

But based on her household income, she took on too much house. And I hope she doesn't end up getting herself into serious debt while she waits for mortgage rates to come down so she can lower her monthly home loan payments. 

A lot of people these days are no doubt signing mortgages and hoping borrowing rates come down in time. But you should absolutely make sure you can afford your housing costs based on today's rates before moving forward with a home purchase. 

My friend can barely do that. And if she's forced to cover her current mortgage payments for several years without a drop in costs or a boost in pay, then her finances might take a serious long-term hit.