44% of home buyers worry about mortgage debt: How to know when you're taking on too much
Buying a home is a huge undertaking, and for some people, the idea of having to cover a mortgage payment every month is quite stressful. In a recent survey by Ally Financial, 44% of home buyers said they feel anxious about taking on mortgage debt. But if you borrow strategically, you can alleviate that concern.
How to land on the right mortgage amount
Let's get one thing out of the way. Mortgage lenders use their own formulas to figure out how much of a home loan you qualify for. But just because you're approved for a given loan amount, that doesn't mean that's the amount you should borrow.
There are other factors to take into account when deciding how much to borrow, like your non-mortgage housing costs. These include things like:
- Property taxes
- Homeowners insurance
- Homeowners association (HOA) fees – for those buying in an HOA
As a general rule, your housing costs – including your mortgage and the items just mentioned – should not exceed 30% of your take-home pay. But even with that rule in mind, you may feel more comfortable sticking to an even lower threshold. This especially holds true if you have a lot of outstanding debt, or if you pay a lot of money for childcare and can't afford as high a mortgage. So it's important to understand how much of a home loan you feel comfortable taking on before embarking on a home search.
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Crunch those numbers
That said, it's easy to look at a giant number on your mortgage document and get overwhelmed. If you're borrowing $300,000 to finance a home, for example, well, that's a lot of money. But it's important to know how that breaks down as far as your monthly payments go.
Generally, your mortgage lender will give you that information up front, and you can also use a mortgage calculator to run your own numbers. But one thing your mortgage lender can't tell you is what your homeowners insurance will cost. That will depend on the policy you buy and the amount of coverage you secure, so you'll need to get some quotes to see what costs you're in for.
As far as property taxes and HOA fees go, those should be disclosed to you when you buy your home. Granted, both numbers can change over time. You may, for example, start out with an annual property tax bill of $4,000 that increases to $4,400 the next year. And your monthly HOA dues could go from $250 to $270, depending on how your HOA board votes.
But generally speaking, you can get a good sense of what your home will cost you to own before you buy it. And from there, you can make sure you're comfortable with the mortgage you're taking out before moving forward.
► 'It's just draining': Homebuyers frustrated by a cutthroat housing market are putting their searches on hold
Pay attention to interest rates, too
One final thing to keep in mind about your mortgage is that the lower its interest rate is, the less it'll cost you. That's why it's a good idea to shop around for a mortgage in the course of buying a home. It may be that one lender comes in with a much lower interest rate on a home loan than another, so comparing your choices could result in ongoing payments that are less of a strain on your budget.
► Yes, you can appeal your property tax bill: Here's how to do it
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