Friday, February 6, 2009

Your Frugal Friend-Tip Three

Money saving tip #3: Don't spend more than 25% of your monthly income on your housing.

Housing=mortgage payment+taxes/12+home insurance/12+private mortgage insurance (try not to have this though) or monthly rent+renter's insurance/12

Bankers want you to think you can spend 28% or 30% or even more on monthly housing. Or at least they used to. When we went for our first home mortgage, I was shocked that they would let us have a loan that would end up costing us 36% of our monthly income. Needless to say, we looked for a cheaper house that would get us down in the 25% range. I think we were closer to 28%, but I was at least still more comfortable with that. When we moved out of the Chicago suburbs, we had a nice tidy sum from our old two-bedroom house that allowed for us to put down 40% on our new four bedroom house, making our monthly payment within the 25% of our new one-income budget.

Where did I get the 25%? Good old mom! Yup, when she was getting her degree in Home Economics, one of the things she learned was that housing should be no more than 25% of your income. Sure, that was in the late 1960s. But why should that advice not continue to work now? She gave me that piece of advice at some point. It stuck.

How can this translate for you? Well, check what your current housing payment, plus a twelfth of your insurance and taxes is at the moment. Is it around 25%? Maybe a little higher? Maybe really high? If it is really high, it might help to think about refinancing, which will work if you plan on being in your home for at least another five years. A lower interest rate can really help to bring down the costs. Also a re-evaluation of the equity you have in your home might also get you off of private mortgage insurance, which will also bring down your monthly payment. But you also should have cash for the closing costs. Rolling it into the mortgage can cost you lots more in the long run. On our first house, we did refinance and brought down our payment by $400. That was a huge help.

Hmmm...maybe we need to bring Home Economics back. It seems lots of people have ended up on the ropes, because they don't understand how to manage their own home economics. They aren't learning it on their own either. Maybe it should be in schools again. And not just the sewing and cooking, but the managing budgets. If they had forced us all to take something about managing budgets in junior high or high school, maybe the average person's economy might be doing better.


Aliceson said...

We just refinanced at 4.875% for a 15 year. We will be saving ourselves $86,000 over the course of the note, and is only costing us about $60 more per month. And if you have 20% down payment, no PMI.

Great advice, my frugal friend!

Eudea-Mamia said...

I love you.

There are so many people pointing fingers at the banks and mortgage houses. Yes, they absolutely did take advantage of some buyers.

But some buyers need to step up and take responsibility as well - if you're making $50K/year, do you REALLY think buying that $250,000 house is a wise decision?

Bring back Home Ec!! And make the boys take it too, this time around.

Welcome to SiTS - I'll be back! Em

Eudea-Mamia said...

Did I mention Welcome to SITS yet?

That was my original reason for coming, but got caught up in your thoughts :-)

Brenda Jean said...

Interesting! I'll have to figure it out. I have a head cold so I cannot figure number--it's just not happening. But, I'll figure it after I feel better:)

Welcome to SITS!