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1 in 3 millennials are taking a big risk on homebuying: Here's what they're getting wrong

U.S. homeowners spend at least 16% of their income on mortgages, but millennials spend much more.

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The housing market is still hot: Home prices rose 19.5% in September year over year, according to the S&P CoreLogic Case-Shiller National Home Price Index. Those bigger price tags are leading some buyers to take a risk with their finances by spending more on housing than experts advise.

Roughly half, 52%, of homeowners spend at least 16% of their monthly income on their mortgage, according to new data from home equity resource Hometap, which polled 1,000 U.S. homeowners.

And that's not the full extent of their housing bills. Nearly half, 46%, shell out an additional 6% to 15% of their monthly income on other homeownership costs including property taxes, utilities, and maintenance. Another 16% spend an even bigger share of their income on their homes.

Millennials were the generation most likely to put a substantial chunk of their paycheck toward housing: One in three spends more than 26% of income on their mortgage alone.

Crunch the numbers, and it adds up to a lopsided budget. Financial advisors typically recommend buyers stick with the 28/36 rule that mortgage lenders use. It stipulates that no more than 28% of your monthly gross income should be dedicated to housing and no more than 36% should go toward total debts, including a mortgage as well as other home-related costs.

"You want people not only to be able to buy something, but you want them to be able to buy something and still have a life," says Mark La Spisa, a certified financial planner and president of Vermillion Financial, recently told Grow.

Overextending on a home can lead to financial regret

Homeownership can be a tool to help build wealth, according to many experts, but overextending on a buy can lead to all sorts of trouble. The risk of spending above those ratios is that you'll be what experts call "house poor," or so overburdened with housing costs that you might struggle to pay your other bills, or fall behind on other financial goals.

"If you have to stretch each month to make your payment," R.J. Weiss, a CFP in Geneva, Illinois, recently told Grow, you might have to "forgo other goals such as saving and paying off debt."

Just 38% of homeowners in the Hometap survey felt "very prepared" to handle housing costs, and other reports point to young buyers having regrets about spending more on a home that they wanted.

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'Determine how much house you can afford'

The best way to keep home costs reasonable is knowing how much you can afford to begin with, experts say.

Guidelines for how much to spend on housing vary based on personal circumstances. Your lifestyle, location, and other financial obligations all factor in. Using Grow's housing budget calculator can give you a more unique sense of the monthly payments you can afford based on your income.

"Determine how much house you can afford in order to set boundaries around your home shopping," says Bankrate chief analyst Greg McBride. "And focus on building your savings and paying down debt so you can put your best foot forward in homeownership."

Take time to boost your credit score before buying, too, he adds. A great score can help you qualify for a lower rate, saving you money on interest. That lower monthly payment can also mean your income qualifies you for a larger mortgage. 

Current homeowners might benefit from refinancing. Roughly 3 in 4 people who have mortgages that predate the pandemic have not refinanced their home loans, according to a recent Bankrate survey. With rates near record lows, doing so could "help reduce your monthly payments," McBride explains.

Determine how much house you can afford in order to set boundaries around your home shopping.
Greg McBride
Bankrate

If buying right now seems like a financial reach, don't force it, he adds: "With home prices as high as they are and affordability so stretched, there is nothing wrong with staying where you are for another year or two in order to stabilize your finances."

As long as you stay on track with your savings goals, "you can eventually buy in a more sane market and can do your due diligence and not have to make the biggest financial decision of your life in a hurry."

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