If there's one thing Americans clearly aren't afraid of, it's debt, whether it be of the credit card or mortgage variety. But while the former certainly has its share of negative connotations, mortgage debt is considered the good kind to have, especially since properties have the potential to gain value over time.
However, there's a danger to taking on too much mortgage debt, and it's a mistake countless Americans make each year. It's therefore perhaps a good thing that mortgage debt seems to be on the decline on a national level. Over the past five years, average primary mortgage debt has dropped by more than $7,000, or 4.6%, according to data from ValuePenguin. Whether that's officially a positive trend is yet to be determined.
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On the one hand, the fact that mortgage debt is declining could be a sign that borrowers learned their lesson from or during the last financial crisis, and aren't making the mistake of getting in over their heads. On the other hand, it could also be a sign that property values are dropping, and so borrowers don't need to take on as much debt. From a buyer's perspective, that's certainly a plus -- but from a seller's standpoint, that's problematic, as it puts those needing or wishing to unload their properties at a disadvantage.
But let's go with the positive scenario and assume that more folks are getting smarter about borrowing. If that's the case, then we might see the foreclosure rate trend downward in the coming years, which is always a good thing. Then again, let's not forget that just because some Americans are getting better about borrowing responsibly doesn't mean that all prospective buyers are following suit. So here's a little refresher for those seeking to become homeowners on what constitutes a smart approach to buying property.
1. Know how much mortgage debt to take on
Though you may be inclined to stretch your budget to buy the nicest home you can possibly swing, don't make the mistake of spending more than you can afford mortgage-wise. As a general rule, your housing costs, including your mortgage payment, property taxes, and insurance, should not exceed 30% of your take-home pay. If you exceed that threshold, you'll compromise your ability to stay on top of your bills on the whole.
To play things even safer, you might lob general home maintenance into that 30% threshold as well. Maintenance will typically cost you anywhere from 1% to 4% of your home's value each year, and the older your property, the more likely you are to land on the high end of that range.