Dear Dave,
My husband and I were listening to your radio show the other day. In it, you were speaking to a lady about buying a home. When you talk about mortgage payments being 25 percent or less of your take-home pay, does this figure include taxes and insurance or just principal and interest?
Ann
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Dear Ann,
That figure includes taxes and insurance, too. The whole idea is to make sure your house payment is manageable. You don’t want to have so much money going toward your mortgage every month, what I call being “house poor,” that you can’t take care of your other financial responsibilities or enjoy life.
It’s simple. You have more money when you don’t have debt. If you want to build wealth, you have to get out of the payment business. When one-third to one-half of everything you bring home is going to creditors, you have less money for other stuff—other important stuff.
Trust me, I get it. A home is a huge expense that very few people, especially those just starting out, can afford to pay for in cash. That’s why I don’t beat people up for getting a 15-year, fixed-rate mortgage. But that’s the only kind of mortgage I recommend.
And yes, make sure the monthly payments are just 25 percent, or less, of your take-home pay!
—Dave