Wondering where you should set the cap on your housing expenses? Money expert Clark Howard has new advice that’s been shaped by recent changes to our nation’s tax code.
Here is Clark Howard’s mortgage/rent budgeting advice
With so many formulas out there for how your housing budget should look — spending between 25% to 30% of your monthly gross income on housing is the traditional advice — Clark approaches the question from a different angle.
“I’ve dealt with this question over the years and my advice has changed over the years. There are so many formulas out there that you hear, but my thing has always been that when it comes to a mortgage, you should step back 10% from what your lender says you qualify for,” the consumer champ says.
The 90% mortgage rule
Clark has a simple rule of thumb to follow when shopping for a mortgage: See what you qualify for when it comes to a traditional 30-year fixed rate loan. Then back off and go house shopping at only 90% of that dollar amount.
“So if you qualify for a $200,000 mortgage, for example, don’t look at houses above $180,000. By doing that, you will help create extra financial breathing room in your life,” Clark says.
“The expense of housing is like a rubber-band — stretch it too far and it will break. Stay at 90% or lower and your wallet will smile.”
Special advice for renters ready to buy
For renters who are looking to make the jump to home ownership, Clark says you should aim for a monthly mortgage payment that mimics what you’re already paying in rent each month.
His reasoning is informed in part by the new tax law.
Consider this: First off, the doubling of the standard deduction to $12,000 for most single filers and $24,000 for most married couples means it may no longer make sense to break out mortgage interest on a Schedule A.
“Your mortgage becomes a real hard cost, dollar-for-dollar,” Clark says.
Editor’s note: For new home purchases, your mortgage interest deduction on your primary or second home will be capped at $750,000 if married filing jointly ($375,000 all other filers) under the new tax law.
Second, when you’re a homeowner, there’s nobody to call if something goes wrong around the house and needs to be fixed. You are the landlord.
“So you’ve got to account for that, and that’s why I’ve become more conservative about purchase price over the years,” he says.
One question Clark often gets is whether what you plan to pay each month — which, remember, should mirror your monthly rent as closely as possible — should be inclusive of property taxes and insurance or not.
“My answer is that that’s really determined by where you live. It’s not necessary to account for taxes if you live in a state where property taxes are very low,” the penny-pincher notes.
The bottom-line is that rather than fixating on set formula, Clark takes a more holistic approach to the question of how much to budget for mortgage or rent.
“If you can comfortably pay for housing and put away something for savings at the same time, you’re on the right track.”