When my friend Jane (not her real name) and her husband set out to buy a home five years ago, they weren't dealing with the same challenging housing market conditions buyers are grappling with now. These days, housing inventory is sorely limited, and the average mortgage rate for a 30-year loan is 7.12%, according to Freddie Mac. When Jane and her husband were looking, there were more homes to choose from and it was a lot less expensive to put a mortgage loan in place.
Jane and her husband set a budget for buying their home. But when they stumbled upon a property they fell in love with, they were quick to disregard it and spend a few hundred thousand dollars above the original number they'd landed on.
Initially, Jane made a point to call her decision a smart one. But she's since changed her tune in a very big way.
When you wind up “house poor” and miserable
Jane's logic in stretching her budget to buy her home was simple. The way she saw it, it's important to be happy with your home because you live there every day. Having a really nice kitchen instead of one that's just okay, for example, can improve your quality of life because you're using it all the time.
But the problem is this: Jane doesn't really get to enjoy her life in general because money is so tight and she's constantly worried about it. She spends so much on mortgage payments, property taxes, and maintenance that she and her husband have little money left over to travel, socialize, and do the things they enjoy.
Also, because their housing payments are so expensive, they can't outsource all of their maintenance. But since it's a larger home, it means they're constantly spending their free time doing work on it to keep it in decent condition. So not only are they missing out on the things they want, they're missing out on precious downtime.
Set a home-buying budget and stick to it
When you're looking at homes to buy and find one that wows you, it's easy enough to get emotionally attached to the idea of owning it — so much so that you might put the financial implications on the back burner. But it's really important to run some numbers ahead of your home search to figure out how much you can afford to spend on a home, and then stick to the limit you set.
As a general rule, you should aim to keep your monthly housing costs to 30% of your take-home pay or less. And you should include recurring, predictable expenses like homeowners insurance and property taxes in that calculation.
What if you can't find a suitable home based on the budget you've set? It's simple — continue to rent until you're able to afford to spend more or home prices come down. They're still pretty high these days thanks to a lack of inventory.
You might think it's worth sacrificing different things to be able to afford a nicer home. And that logic might hold to some degree. You may, for example, be willing to drive a less expensive car to allow for a monthly mortgage payment that's $200 higher. And that's fine.
But what you don't want to do is take on a home you really can't afford in the first place. You might think that home will bring you happiness, but the financial stress that ensues might easily wipe it all out.
All told, Jane clearly regrets her decision despite defending it at first. And she's stuck in her home because she doesn't want to give up her affordable mortgage rate. But once rates come down, she's planning to sell. So clearly, she's learned her lesson.
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