How much you spend on rent or your mortgage depends on a variety of factors unique to your situation, but financial experts advise spending specific percentages of your income, based on your debt, for housing. The costs of living of different areas of the country ultimately determine your optimal spending ratios, but balancing common sense with expert advice will help get you into your dream house and keep you out of a financial dog house.
Rent vs. Mortgage
Deciding on whether to rent or buy a home requires a number of lifestyle and investment considerations. The sooner you purchase a home, the sooner you start building equity in an investment you can use for retirement, tax planning or other investment strategies. Renting can reduce your cost of living because you don’t have property taxes and repair costs, giving you a more carefree living situation. When renting is cheaper than buying, you can use the savings to reduce debt and increase savings. Spending years in a rented apartment or house, however, leaves you with nothing to show for your spending when you move out.
While there is no universally accepted formula for determining how much to spend on rent, a common percentage range cited by financial advisers is approximately 25 to 30 percent of your gross income. This should allow you to pay the rest of your bills and save some money for emergencies or investing.
When lenders decide whether to offer you a mortgage, they look at a variety of factors, including your debt-to-income ratio. The standard industry measurement that mortgage lenders use is that no more than 36 percent of your income should go to debt, with no more than 28 percent of that going to your mortgage. When a mortgage lender first runs your numbers, it might determine you are carrying too much debt. To more easily qualify for a mortgage, you can use strategies such as paying down debt, increasing your down payment amount, buying a less-expensive house or increasing your income.
Using a recommended percentage to determine your housing spending probably isn’t a good idea if you don’t have a personal budget calculated first. Without a budget, you won’t know how much you’ll need to spend on groceries, utilities, car expenses and other living costs. If you have savings goals, such as an emergency or retirement fund, these will affect your housing cost decisions. Create a personal budget that shows what you have left for a possible housing payment after you pay your basic expenses and meet other savings goals before you decide on your rent or mortgage number. You might be surprised at how much those movie outings, CDs and cups of latte are eating into your dream of owning your own nest.
When you rent or own, consider all of the costs associated with each. As a renter, you might have fees for parking and gym use, have to pay a deposit, pay for renting a washer and dryer and absorb some maintenance costs. As a homeowner, you’ll be responsible for repairs, which you might be able to reduce by purchasing a homeowners insurance policy. In addition to mortgage costs, you’ll have one-time and ongoing costs such as an appraisal fee, different types of insurance, property taxes and closing costs. Depending on the type of mortgage you take, your interest might stay the same, or adjust after a specified time period, resulting in higher monthly payments.
Sam Ashe-Edmunds has been writing and lecturing for decades. He has worked in the corporate and nonprofit arenas as a C-Suite executive, serving on several nonprofit boards. He is an internationally traveled sport science writer and lecturer. He has been published in print publications such as Entrepreneur, Tennis, SI for Kids, Chicago Tribune, Sacramento Bee, and on websites such Smart-Healthy-Living.net, SmartyCents and Youthletic. Edmunds has a bachelor's degree in journalism.