Becoming a homeowner is a big part of the American dream, and people will go to great lengths to purchase their first property. Thankfully, the incredibly low interest rates we’ve enjoyed in the past few years has made this much easier. But, is getting a large mortgage actually wise?
Financial experts caution that many people are blinded by affordable rates or bargain house prices, and get a huge mortgage to purchase their dream home. This debt is usually beyond what they can reasonably manage. They end up struggling with it years later.
In the worst of cases, homeowners end up having to sell their home or get foreclosed on. Fortunately, avoiding this is simply a matter of financial diligence.
Finding the Perfect House
The key is to stick within your budget, and only take on as much debt as your earnings can handle. The question is, “What can you actually afford?” A general rule is that your total housing costs shouldn’t go beyond 28% of your monthly gross income.
This means that if you earn $75,000 a year, your mortgage payment shouldn’t exceed $1,750. There are exceptions, of course. A household that is financially disciplined and has no consumer debt or student loans to worry about can afford something higher.
The size of your down payment has a huge impact, as well. Paying at least 20% will significantly decrease your interest rate, and also lets you avoid paying mortgage insurance. If you can, save up before taking out a loan.
Location is also vital, as Keystone Construction notes. A lot of the homes for sale in Stansbury are exceptionally good for their price, so you can get far more for your money. Conversely, places like Southern California are notorious for their sky high property prices. This will severely limit your options.
At the end of the day, you don’t want to be one of the countless Americans who are “house poor”. Make sure that you purchase a property that will bring you happiness, rather than be a burden.