Buying the right house can be a tough decision. Unless you’re paying with cash upfront, a mortgage will be a long-term expense. While some debt is to be expected in life, you don’t want to bite off more than you can chew. “Good debt” can easily become “bad debt” if you can’t make your payments. You also don’t want your house payments to be so large that you can’t afford to spend on other areas of your life. For average-sized families, reconsider “bigger is better.” More house means bigger bills (i.e. more space to cool or heat during the seasons) – though you’re the only one who can decide if a house is worth it to you. That said, it’s crucial to remember the other financial areas of your life too. Here are some non-intimidating tips to avoid becoming house poor.
Evaluate Your Cash Flow
Budgeting is an effective tool for managing your personal finances. Our debt counselors can’t emphasize that enough. Even if it looks like you can afford a house on paper (like when you get approved for a mortgage), don’t automatically be convinced.
A common house-buying guideline is to not spend more than 28% of your gross monthly income on housing costs and 36% on total debts. But before calculating the percentages, take a step back to look at your annual income, expenses, and budget. Once you figure out how much you’ll have left for a down payment after your daily expenses (i.e. food, gas, retirement contributions), use this calculator to see how much house you can afford. Another tip – making a larger down payment will decrease your monthly mortgage bill, if you’re able to do so. This helps you avoid becoming house-poor, because you’ll free up more money.
Understand the Cumulative Cost of Homeownership
There’s much more to the cost of a house than the down payment and monthly mortgage payment. Here’s a comprehensive list of costs involved in homeownership:
- Property taxes
- Homeowner association dues
- Maintenance costs
- Down payment and closing costs
Once you calculate the total costs, you’ll have a much more comprehensive picture of what you can afford. Being educated on all expenses prevents any surprises down the road and helps you avoid becoming house poor. The unknown costs are what tends to trip up homebuyers the most.
Don’t Forget Other Areas of Your Budget
Now that you know what you’re able to spend on a new house, think about how it affects your other expenses or financial goals. Even if you can afford a house’s mortgage payments, will it negatively affect your ability to pay other bills? Being overly anxious about how you’ll pay your other bills after paying the mortgage is a big sign of being house-poor. That’s why it’s key to calculate how much leftover you’ll have for other monthly expenses (i.e., groceries and gas, or contributing to retirement).
Plan for unexpected expenses or emergencies as well – if they happen, and you don’t have enough money to pay for it, you might go into debt paying it off. That’s why it’s better to avoid buying a house on the high end of your budget. You might risk not having enough money left over to set aside for a rainy day. Without a sufficient savings account to cover an ER bill or broken appliance, you might have to rely on credit or take out a loan.
Buying a home is a personal choice, and we hope you this post helps you prepare for buying the right one! Whether you’re getting a mortgage or paying cash, remember the general principles of spending within your means and accounting for all costs. This will help you avoid becoming house poor. Happy house-hunting!
If you struggle to pay off debt, ACCC may be able to help. Sign up for a free credit counseling session with us today.