I’m a part of a budgeting community on Facebook. One of the posters mentioned how much their income was, in conjunction with how much they thought was the ideal amount to pay for mortgage or rent and that got my wheels turning. Just how much should you pay for your mortgage/rent in a month? Whether your renting or you own your home, there’s one thing that I’ve noticed when scrolling through Realtor.com: Rent is crazy expensive and so are mortgages no matter where you live.
I began to think. Is what I’m paying a reasonable amount to pay for housing? So I did a little research and found there are two primary rules. There are more than that but we’ll cover the top 2. I love numbers and that will be very prevalent in this post for the next 2 paragraphs. Please, don’t let that deter you from reading on.
The first rule says, 25% of your net pay should go towards housing costs. I’d like to unpack that. The mortgage that I assumed in 2020, costs $941.66 and this amount includes my HOA fees and escrow (taxes and insurance) for my home. I get paid 26 times a year and I get $1,803.35 net pay. First, I averaged out my net income because it’s based on a monthly amount. The “monthly” net amount I averaged is $3,907.26. I did this by following this formula: net pay x # of weeks I get paid, divided by 12. Then I figured out how much 25% was of that number, I got $976.82. Lucky me…I made the cut. (Insert eye-roll)
The second rule, states housing should cost 28% of your gross pay or your pay excluding deductions. For me, that figure comes to $4,986.80. The calculation for this is: hourly pay rate x 40 x 52, divided by 12. If you are a salaried employee, that’s: your annual salary divided by 12. 28% of this amount for me is $1,246.70. Yay me right?! Wrong. Even with this being a higher amount taxes, home insurance, and an HOA can easily sink this amount. Particularly in today’s market. If you have to add PMI (private mortgage insurance) to that, yikes.
For those who hate math…the math part is over.
I’ve had a desire to buy a second home to begin exploring property management as an additional income source for the past two years. When you look at the mortgage rates in comparison to the cost of homes, I’d have to make a very large down payment on any house to get to this figure if I want a really nice home. I’m talking $50k plus, for a down payment unless I purchased another home out of state. If I decided to buy a second house, I’d need a second job and possibly a sugar daddy.
So what are we to do that doesn’t involve us compromising and becoming a sugar baby? Well…if you’re renting, try your best to find a place that fits in your budget meaning it allows for payment of your regular bills, variable spending, savings, and extra debt payments. Sometimes that may require you to down-size temporarily, to get things back on track. I don’t recommend going to a sketchy part of town but if you don’t mind…go for it! I know this is easier said than done if you have a family. In that case, speak with your spouse/partner because those who run the household, should make that decision together.
If you are hoping to buy a home one day like most of us are. Find a mortgage lender to come up with a good plan for home ownership preparation now. They will talk to you about what you can do to reduce your liabilities and paint a solid picture of where you really are and where you need to be. This may require a credit pull but I promise it’s worth it. I have a few contacts if you live in NC. If all else fails, they may recommend you speak to a financial counselor to begin your path to home ownership.
Things may seem impossible but they’re not. Sticking to the 25% net or the 28% gross rule isn’t what’s going to deter you in either situation. Be sure to consider all avenues. It’ll just take a little bit of time and savings to make it to your desired result. I’m an optimist and I’ll tell you, it’s not over unless you say so.
I’ll catch you on the other side!
Photo Credit: https://www.meritagehomes.com/
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