This morning, we’ll discuss how investments in expanding housing affordability can drive economic growth.įor decades, the United States has faced a housing affordability problem. Senate Budget Committee, delivered the following opening statement at today’s hearing, titled “A Blueprint for Prosperity: Expanding Housing Affordability.”Ĭhairman Whitehouse’s remarks, as prepared for delivery: Senator Sheldon Whitehouse (D-RI), Chairman of the U.S. You should consult with a licensed professional for advice concerning your specific situation.01.31.24 WHITEHOUSE: Expanding Housing Affordability Drives Economic Growth “Over these next few months, I will be introducing bills to make housing more affordable for lower-income Americans.” The information provided here is not investment, tax or financial advice. Ultimately, the share you spend on your dream home or rental property depends on your individual risk tolerance and how much money you want leftover to fund your lifestyle. For the average American with a litany of extraneous expenses and debts, this figure should be more conservative (e.g., 25-33%). Although you may have a $50,000 down payment saved for a $500,000 property, that doesn't mean you can afford the home.īefore finalizing the transaction, investors should ensure they aren't spending more than 40% of their pretax income on a home. However, before investing in homes, they should take a holistic view of real estate costs. Investors are noticing how well real estate appreciates relative to other assets. After all, there's a shortage of affordable homes in the U.S., where housing prices have outpaced the growth in wages in recent years. For many, high spending on housing is unavoidable. Abiding by this rule generally allows for financial stability for homeowners and prevents buyers from becoming house poor.Ī recent study found the average American spends 37% of their take-home pay on housing. This rule holds that your monthly housing costs (e.g., property taxes, condo fees, insurance and mortgage) should not surpass 28% of your monthly gross income, and your monthly debts (e.g., student loans and lines of credit) should not exceed 36% of your gross income. The 28/36 rule is a simple tool for determining the affordability of a mortgage. Generally, borrowers should abide by the 28/36 rule, which has served homebuyers well during times of recession and economic market growth. Unless you're paying in cash, you shouldn't ask whether you can afford a house but, rather, whether you can afford to borrow for the house. Keep in mind that this is on the high end of the scale, as we've seen many homes close with fees as low as 1.5% or 1.75%. As a rule, you should plan for closing costs to reach as high as 5% of a home's selling price. Unfortunately, closing costs vary widely by one's location, mortgage broker and lender. Very quickly, what you think costs only $50,000 down ends up costing thousands more in associated costs and fees. In virtually all cases, these calculators ignore closing costs, the state-by-state variability of property taxes, HOA fees, moving fees, inspection fees and the costs of necessary repairs, renovations or kitchen appliances. In most cases, you merely plug your income, house price and mortgage rate into a calculator that spits out your down payment and estimated monthly payment.īuying a house encompasses much more than just a down payment and monthly mortgage payment. Why You Shouldn't Use Affordability Calculatorsīeware of online affordability calculators, which often only provide a surface-level overview of basic housing expenses. The average homebuyer, however, is probably best suited for a middle-ground approach that lands somewhere between the 25% and 40% marks - say, one-third of their pretax income. Therefore, taking the Jane Doe example above, she would spend no more than $40,000 on her mortgage, home insurance and property taxes over a one-year span. This model recommends homebuyers spend no more than 40% of their pretax income on housing expenses. Those who are slightly more accepting of risk and willing to have a lower discretionary income might be better suited for taking the so-called "traditional approach" to budgeting for a home. This approach is advisable for homebuyers and investors who are averse to risk and want to stay clear of becoming house poor, a condition characterized by homeowners whose discretionary income is low due to disproportionately high housing costs. If Jane Doe, for example, has a pretax income of $100,000, this would mean she should spend no more than $25,000 on these three expenses in a given year. If you want to free up as much cash as possible, I suggest spending no more than one-quarter of your income, before taxes, on your mortgage, home insurance and property taxes.
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