A question that not enough of ask is, can I afford my home? Before purchasing your house, you should consider if the mortgage payment is something that you can realistic afford. If you overpay on your mortgage or rent every month, it could leave very little room for other areas of your budget. If you are struggling to make ends meet and are locked into a home that you can hardly afford, it may be time to consider selling your home, even if it is your dream house.
Your housing cost, whether it be your mortgage or rent should cost you no more than 30% of your monthly take home pay. If your rent or mortgage is more than that, you risk the possibility of financial hardship should other expenses in your life crop up.
If you are locked into a mortgage that is eating up almost half of your take home pay you will struggle at the slightest bump in the road. Any hiccup in your income can send not only your budget spiraling out of control but cause you to have to take drastic measures to cut expenses elsewhere.
For us, the best way to think about this is how long it will take us to save enough money in our emergency fund to survive for at least three months if my hubs (the sole income earner) lost his job. If the answer is longer than a year, you could be in trouble if such an event happened. It is a scary thought but before you get yourself in a mess that is more difficult to get out of consider the math.
Here are two formulas to help you to calculate the max monthly payment that your mortgage should be:
Take Home Pay x 0.3 = Max Monthly Mortgage/Rent Payment
Or
Monthly rent/mortgage x 100 = % of your budget dedicated to your home
Monthly take-home pay
Another way to view this thought process is if only 30% of your current take home pay is being used to fund your living space, the other 70% can be used for other things like utilities, fun money, savings, vacations, etc.
The last thing you want to do is to strap yourself so thin every month that you struggle to provide even the basic essentials like groceries or even the non-essentials like “fun” money. Build a budget that works and hold yourself accountable to ensuring that you can afford your home. Do not overpay on your home.
“If you always underpay on rent or your mortgage, you’ll be in a better place to live the rest of your life more richly. On the other hand, if you overspend here, it’s like setting a domino in motion with ramifications throughout your entire budget.” Alexa von Tobel, Financially Fearless *
What are your thoughts? Like the idea of your mortgage or rent payment only being 30% or less of your take home pay?
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“Another way to view this thought process is if only 30% of your current take home pay is being used to fund your living space, the other 80% can be used for other things like utilities, fun money, savings, vacations, etc.”
This adds up to 110% ~ wish I had an extra 10% to play with 😉
Thanks for the insight though.
Hahahaha! Thank you so much for catching my error Tina! I’m just trying make sure everyone is awake. 😉
I was just reading an article by Jason Cabler where he broke down whether or not a home is even a good investment. It turns out that when people finance a home it’s not that good an investment. With all the interest, maintenance, insurance, etc., you come out with less of an appreciated asset. This sheds even more light on whether or not someone should consider buying let alone spend more than 30% of their take home pay on that bill alone! Here is the article FYI- http://www.cfinancialfreedom.com/is-buying-a-home-a-good-investment/
Thank you for sharing Aja! I totally agree that there is such a misconception that “owning” a home is the best way. You don’t really own it until you owe nothing on it. 🙂
Thanks for sharing the formula!!! We actually have $365 left over so yay! 🙂 (I was curious because our payment is $730 but it includes taxes & insurance) but we LOVE LOVE LOVE our location and i dont think we could find anywhere that would make us any happier (except farther south-but that’s neither here nor there haa!) I always feel like its a huge expense but our child care is more per month! 🙁 ek! Thank goodness we knock off around $200 for child care during the school year now but the summer months when we want to have more fun activities stinks! FREE free free’s the word for our household. haha but thanks to our first budget once august gets here we’ll have $200 on top of our $140 savings!! wahoo.
Heck yes Leanne! That is awesome! I love hearing how budgeting helps others save and I’m glad you like the formula! It made my life so much easier when figuring out costs for our home! 🙂