A Housing Budget WarningPersonal Finance
Your home address is usually the biggest percentage of your budget. It also is the hardest of your financial costs to trim down. The only way to adjust the amount you pay is to ask your landlord or mortgage company for a reduction in monthly payment or move. When financial problems occur, an unaffordable housing arrangement which can’t be changed becomes difficult to stay with and difficult to leave. Many families discovered this in the 2008 financial crisis when adjustable rate mortgages resulted in skyrocketing monthly payments. These adjustments marched alongside job layoffs, pay reductions, and reductions in working hours. They couldn’t sell their houses either. The mortgage market dried up due to fear, and buyers dried up along with it. Rather than pay between 45% and 70% of their budget into housing thousands of people discovered it was easier to let their home go into foreclosure and destroy their credit rating. It takes seven years for a foreclosure to disappear from credit reports, and scores will rise only if defaulters live perfect debt lifestyles. So how do you avoid this situation?
You primarily need to resist urges and social pressures. Ignore anyone who tells you to buy more home than you can afford or splurge on your housing costs. This is especially true if they’re selling you a home or apartment. Their financial situation is probably poor. Alternatively, it’s making money off of your mistakes. Real Estate agents receive roughly 3% to 6% of the final sales price. That extra $30,000 on a home translates into $900 to $1,800 for them. Stay focused on your financial situation, not other people’s impressions of how you should live. When you move beyond what you can easily afford you increase your financial risk during economic downturns. Having to pay to move or switch living expenses will cost you even more.
Your best case scenario for housing costs is under 20% of your annual budget. The worst case scenario for your housing costs is 35%, and never above. At that range, you will definitely lose percentages of Investment income if you had any. After that, you will lose investment income. You need to maintain roughly three times your housing costs easily. Less gives you more financial room.
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