How Much Income Should People Spend On A Mortgage?

How Much Income Should People Spend On A Mortgage?When people are looking for a home, this is an exciting process. There is always something fun about looking at potential homes and envisioning a future there. This is a big decision. At the same time, it is just as important for people to think about how much of their money they should be spending on their mortgage. There are a few rules of thumb that people should keep in mind. 

The 28 Percent Rule

One of the most common rules that financial advisors and lenders are going to talk about is going to be the 28 percent rule. This rule states that people should not be spending any more than 28 percent of their pre-tax income on their monthly housing payments. This includes not only the mortgage but also any potential homeowners association fees, real estate taxes, and home insurance payments. Once people figure out how much they can afford on their monthly mortgage payment, they can work backward to see how large of a house they can afford. 

The 36 Percent Rule

The other rule that homebuyers are going to hear is the 36 percent rule. This is a rule that pertains to all debt. Therefore, this rule includes not only the monthly mortgage payments but also any car payments, credit card payments, utilities, and student loans. In general, no more than 36 percent of someone’s pre-tax income should be going toward debt. This is very important for taking out a home loan because it is going to impact someone’s debt to income ratio. If the debt to income ratio is too high, then potential homeowners are going to have a hard time getting a great deal on a mortgage. Furthermore, they could even be denied completely. 

Find The Right House

For those who are looking for a home, this is an exciting time. At the same time, it can also be hard to find the right home when people don’t know exactly what they’re looking for. When potential homeowners understand what their budget is, this process gets much easier. Therefore, everyone needs to think about how big of a monthly mortgage payment they can afford. This will help them make the right decision.


How Diverse Streams of Work Can Help You Keep Your Cash Flowing

Here is a different approach to financial security that you might not have thought of:

Imagine a full time job is like a large flowing river of income. With this one source, you have all of the financial flow that you could possibly need, and your expenses are covered in comfort. However, what about when something happens and the river ceases to flow? Your industry could experience a drought, or you could lose your job, causing the flow of that river of income to be dammed up forever.

Since you only relied on one source of income, now that it has dried up you are completely up the creek without a paddle. To start another river of that magnitude flowing will take time, and every day that no money flows in you are digging yourself deeper into debt.Living on a one-source income is great while the money is flowing, but it can be risky business because you never know what is coming around the river bend.

Establish Diverse Streams of Income

So how can you avoid the risk of relying completely on one income source? The solution is to restructure the way you make money, and divide your earning power into several diverse streams of income rather than just one. This could mean going freelance in your industry, working on several side projects, publishing something that generates royalties, or working two part time jobs rather than just one. Just like stock experts advise you to diversify your portfolio, diversifying your career is just as advantageous.

Let’s take the example of the freelancer. Although it might seem that their income is much less stable, because they are not in a conventional job, however their diversity is what keeps them afloat. Imagine that a freelancer is simultaneously working on 10 different small projects for 10 clients. If one of those 10 clients suddenly decides to pull the plug and let the freelancer go, they don`t panic. They will not even have to suffer financially because they still have 90% of their income to rely on while they search for a new client. A loss of income is only crippling if you only have one source to cover all of your needs.

When we bring it back to the river analogy, this strategy is like having several small streams, tributaries, creeks and brooks all flowing into one river. The volume of water is the same, but if one stream suddenly dries up the river will not stop flowing. The bonus advantage to this style of working is that you will be constantly invigorated by the diversity of your work, and you will be much less likely to become bored because you are engaged in such a variety of exciting projects.

Think about it, how can the concept of diverse streams of income help you?  What have you done to create stability in your income?