by Maurie Backman | Sept. 12, 2020
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People who spend more than 30% of their income on housing are more likely to struggle.
Many people are struggling during the COVID-19 pandemic, but renters seem to be hurting more than homeowners. The reason? Renters don't have an opportunity to build equity in their homes and then tap that equity as needed. Homeowners, on the other hand, can often borrow against their properties when a financial crunch ensues.
Renters, in general, are financially vulnerable right now, but some are harder hit than others. Those who already spend at least 30% of their income on housing are especially vulnerable, according to research by The Ascent on how renters are faring during the pandemic.
If your rent -- or your mortgage, for that matter -- constitutes more than 30% of your take-home pay, you may be setting yourself up for financial struggles. Not just during the pandemic, but after it as well. And that's reason enough to rethink your living situation.
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If you spend too much of your income on housing, you may not have enough left over to cover your remaining bills. It's that simple. And if you fall behind on your other bills, you'll risk racking up costly debt that could haunt you for years.
Even worse, if you spend too much on housing, you could eventually wind up homeless. If you take on too high a rent payment and can't keep up, you'll risk eviction. And if you take on too high a mortgage payment and fall behind, you'll risk foreclosure. In addition to losing your home, an eviction or foreclosure could also damage your credit, causing you untold financial problems.
A better bet, therefore, is to aim to keep your housing costs to 30% of your take-home pay or less. If you're a renter, that 30% should include your rent and renters insurance. As a homeowner, it should include your mortgage payment, property taxes, insurance, and private mortgage insurance, if you're subject to it.
If you're renting a home and realize you're in over your head, your best bet may be to move someplace more affordable. Of course, that's easier said than done. In some cities, there's a glaring lack of affordable housing, and you may not find a place that's much cheaper than where you're living today. The expense of moving may also be an issue in itself. If you can load up your apartment contents into a friend's pickup truck and essentially move for free, it may be worth it. Otherwise, you'll need to save up to hire movers.
If you can't move for a while but can't afford your home, look into rental assistance programs. It also wouldn't hurt to talk to your landlord about your hardships, especially if the COVID-19 pandemic has made your financial situation exponentially worse.
If you own a home and your housing costs exceed 30% of your income, now may actually be a good time to downsize. Right now, it's a seller's market due to extremely low inventory, so a buyer may be willing to pay top dollar for your home. And if you get enough money from the sale of your home to pay off your mortgage, you can then apply for a new one that's more manageable. You could also rent for a while until you're in a better position to buy.
If selling your home isn't an option, you can try refinancing your mortgage. Lowering the interest rate on your home loan will also lower your monthly payment, which could be enough to get your housing costs under that 30% threshold.
Spending too much on housing is a dangerous move for renters and homeowners alike. If you're in a home you can't afford, it pays to take steps to change your living situation. Otherwise, you could wind up struggling financially for a very long time.
Chances are, interest rates won't stay put at multi-decade lows for much longer. That's why taking action today is crucial, whether you're wanting to refinance and cut your mortgage payment or you're ready to pull the trigger on a new home purchase.
The Ascent's in-house mortgages expert recommends this company to find a low rate - and in fact he used them himself to refi (twice!). Click here to learn more and see your rate. While it doesn't influence our opinions of products, we do receive compensation from partners whose offers appear here. We're on your side, always. See The Ascent's full advertiser disclosure here.
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