The home ownership mistake that even high income earners make
Serious questions to ask yourself - so you don't bite off more than you can chew...
Did you buy more house than you can actually afford? This is a common errorpeople make. They assume that interest rates will stay low forever and don’t anticipate ever losing a job, or going through an unfortunate divorce. They think real estate does nothing but appreciate -so how could they possibly go wrong?
Are you biting off more than you can chew?
Even high-income families who earn in excess of $300,000 sometimes make this mistake - taking on more real estate than their bank accounts can handle.
The problem is, when “life happens” and circumstances change, it can feel like there is a big noose aroundyour neck. When you arehouse rich, but cash poor, it hurts.
Down payment rule-of-thumb
If you can’t put 25 to 30 percent down on a house, then you might be buying too much house. Scale back your purchase, or save more money before committing to buy. One must also consider their financial stability by determining a debt-to-equity ratio. This should not exceed 0.50:
- Debt ÷ equity = your debt-to-equity ratio
Could you survive a drop in income or a rise in interest rates?
Your debt-to-income ratio should not exceed 0.36.Try calculating this ratioby removing one spouse's income to see how well you couldsurvive if one of you became disabled or you were on maternity leave. Now, try it againwith a 10 percent increase on your debt payments (remember, a 1 percent rise in interest rates could increase your debt payments by approximately 10 percent). Could you still swim, or are you drowning in debt? Use the following calculation to indicate how well you can service the debt:
- Monthly debt payments ÷ monthly income = your debt-to-income ratio
Know when to sell or when to downsize
If the mortgage payments are choking you, then it might be time to sell or downsize. The longer you feel the cash crunch, the higher your stress level will increase and the more likely you are to strain your relationships, damage your healthand underperform at work. It's easy to see how quickly this can spiral downward.
So, be smart and take on debt small bites at a time.