How to Avoid Being “House Poor“
A question we hear often is, “What percentage of my monthly income should my mortgage be?”. Traditionally we’ve heard 28% of your gross income or 25% of your net income, but we don’t believe this question has a “One size fit all” answer. Current real estate climates play a huge role in what is realistic for new home buyers. High interest rates and a competitive housing market could force home buyers to take on mortgages that are closer to 30% of their income. So, what should you do? Should you try to wait out the market? With no guarantee that conditions will change in the future it can be difficult to say when is “the right time” to buy a home. While the condition of the housing market is a huge consideration, there are other factors to consider as well. Having adequate cash reserve for things like down payments and housing emergencies can be equally important.
We offer three considerations to attempt to answer some of the questions posed above and help you avoid being “House Poor”:
Your personal finances play a massive role in your ability to purchase a property. The larger the down payment is the less you will need to finance. In a high interest environment, a reduction in the size of your mortgage can be crucial to being able to afford your monthly mortgage payments.
Work to maximize your credit score in order to have a lower mortgage interest rate. According to the Federal Reserve Bank of New York the median credit score for mortgage borrowers in the second quarter of 2024 was a very high 772. During that same period the average interest rate for those borrowers was 6.78%. For borrowers with a score of 699 during the same period the average mortgage rate went up to 7.08% (McMillin). That difference, although it may seem small, could have a large impact on the affordability of your monthly payments.
Have adequate cash reserves. A good rule of thumb is to have at least 6 months’ worth of monthly living expenses in your savings. We’ve heard it said to have 20% of the home’s value in cash reserve, in the end what you need depends on your personal financial situation. Things happen, having a home comes with costs and if you aren’t prepared it could lead to financial difficulty.
Trying to buy now may seems frightening and trying to wait could have it’s own challenges too. In the end, entering homeownership prepared with strong cash reserves and great credit history can help ease the burden of navigating how and when to buy a home. It’s important to have a solid understanding of your personal finances and consult with your Financial Planner before taking that next step.
McMillin, D. (2024, September 13). Should I buy a house now or wait? is it a good time?. Bankrate. https://www.bankrate.com/real-estate/should-i-buy-a-house-now-or-wait/#buy-now
