June 29th, 2015
Owning a home can be one of the most rewarding experiences of your life. Ironically enough, it can also be the most costly. Your home’s mortgage is something that you have to deal with on a regular basis, and to get that mortgage, a bank had to evaluate your income and make a decision concerning lending. You also had to make a decision about what you were able to afford. For many of you, a rule was used, the 30% rule. While this may have been reinforced by others, and while even your bank might have considered it, it is not the end-all of lending, and in fact does not take some prime factors into consideration. To that end, this article discusses why you shouldn’t use the 30% rule when buying a home.
What is the 30% Rule?
The 30% rule states that when figuring out how much home you can afford, you should look at your take home income (not your gross) and set aside 30% for your mortgage. While this may sound like a good idea on paper, the truth of the matter is that allowing for up to 30% of your take home income to be eaten by your mortgage doesn’t take into account some key factors. Also, while it may seem like a good idea up front, it can quickly become a burden as you get into home owning.
Why it May Not Work
The problem with the 30% rule is that it ignores home maintenance, living expenses, bills, and other debts. The 30% rule works great if that’s your only expense, but your home is going to require maintenance, and without the proper income, your house will fall into disrepair. Then there is the problem of what happens if you start to fall behind. What if you lose your job, or have a medical emergency? If you’re not careful, you could find yourself underwater on your house payment very quickly. The 30% rule, combined with other debts and expenses, doesn’t leave a lot of room for savings.
What To Do Instead
First off, forget about 30% for the cost of your mortgage. Instead, consider 30% to be the total cost of living. If your mortgage, insurance, maintenance, and other debts can account for 30% total, then you are doing well. This gives you more than enough for day to day expenses, and it gives you an opportunity to start setting something back for the future, or for an emergency.
Another rule you may want to consider is the 28/36 rule. Make your total home owning costs come out to 28% of your income, and let your other debts combined bring your total owed each month to 36%. This still leaves you plenty of money for your day to day, and for anything else you might enjoy.
A third option to consider is to have a good amount in your home already. A lot of your money paid out each month goes towards things like insurance, taxes, and home owners insurance. If you can put forth 20% of your home’s mortgage up front, you can avoid paying mortgage insurance. Also, you may want to call your bank and ask for a reevaluation of your loan. You might have had a shift in what your taxes are worth, which means you can lower your payment even more.
30% is a good starting point, but in truth, you want enough of your income so that instead of just staying alive, you can really get to living. Look at your situation, look at what you need versus what you’d like, and go from there.