Understanding Debt: Mortgages

Homes are some of the most secure assets to purchase, though as anyone who lived through 2008 will tell you, they are not bulletproof. When purchasing a home, you already have learned briefly that your target is to get your monthly mortgage payment which includes taxes and insurance within 25% of your take home pay. Most people are not there today. However, if you are considering a new purchase, being as close to this number as possible is your target. If you purchase a home that is over 25%, it will be your job to increase your income so that your housing expense is within that target. 

If you are a first time home buyer, I recommend a 30 year mortgage with as much down as you can muster. Saving so you can put 20% down is ideal as that eliminates the need for mortgage insurance. But if you can only put 3% down, then still purchase the home if the mortgage will be close to 25% of your take home pay. 

As you begin to outgrow your first home, you will begin to look at new homes. Because you already have a house, I want you to only purchase a new home if you can do so and have the mortgage within 25% of your take home pay. There is grace if you are buying a house for the first time and need a place to live, but once you have a house, your next move should be at or below 25% of your take home pay. This may require you to save up more for a down payment or delay moving to a new home. However, if you can keep that percentage at 25%, your monthly expenses will feel easy. Your debt burden will be light and you’ll financially free!

If you currently own a home and your monthly mortgage is not at 25%, don’t worry. You’re working at increasing your income to get there. However, don’t dig a deeper hole. Now is not the time to take on a bigger mortgage and get your percentages even more out of whack. In as much as possible, maintain your current mortgage and work to increase your income. 

If your financial situation is such that you can afford a 15 year mortgage on the house you’d like while staying within the 25%, then we wholeheartedly recommend opting for a 15 year mortgage. This allows you to pay less interest and be rid of your mortgage in half of the time. However, if moving to a 15 year mortgage on a house that fits your needs causes your mortgage percentage to be above 25% of take home pay, recommend sticking to a 30 year mortgage and making extra payments if you desire after you have completed your Fuel Gauge.

For those of you who have reached the 25% target and are considering a second home, we only recommend a 15 year mortgage with 20% down for second homes. The mortgages for your primary and secondary homes should be less than or equal to 25% combined. If you can afford a second home within these parameters and feel that having that home aligns with the life you desire, then go for it! There’s freedom here and you have the margin. 

Next week, I’ll discuss auto loans which for many people have become the killer of financial dreams. I’ll give some helpful guidelines that will hopefully provide guidance when looking for that new ride! 

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Zach Santmier is the owner of Trumble Agency, Inc. and the author of the personal financial course, Increase. He focuses on helping families escape paycheck to paycheck living so they can freely pursue their ideal future.