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How much house can I afford?

What percentage of your monthly income should your mortgage payment be to stay financially 'safe?'

Q: I’m a 64-year-old widower. I currently rent, and I’m building a new house. I heard on your show that a mortgage payment should not be more than 25% of a monthly salary. Once my home is built, the mortgage payment will be 40% to 50% of my salary. Is that a problem?

Ric: Yes, that’s way too high for any homeowner. Your total debt, which includes your monthly mortgage payment plus your car payments, student loan payments, credit card payments, etc., should never exceed 36% of your monthly income. The mortgage payment itself should not exceed 28% of your income.

So, your plan is extraordinarily dangerous. By spending so much of your income on mortgage payments, you won’t have much left for your other expenses. Consider that you’ll lose maybe 30% of your income to taxes. If your mortgage payment is 50%, you only have 20% of your pay left for everything else: food, clothing, property insurance and taxes – and saving for retirement.

We haven’t even mentioned the costs related to that house: furniture, landscaping, home protection and so on. How much does a lawnmower cost? Do what you’re doing and you’ll be “house rich and cash poor.” Meaning: If anything goes wrong – your income is interrupted, you incur medical bills, an unexpected repair cost, there’s a natural disaster or even if your nephew announces he’s getting married and you have to buy a gift – you’re going to be thrown over the precipice. Fast. And maybe even lose your home.

I know you’re probably excited to be a homeowner, but cancel the contract if you can, even if that costs you some money. Then, start over. Figure out how much you can afford, so you can then build or buy a house that fits your income and that will help keep you financially safe.

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