QUESTION: Lindsey in Dallas and her husband have a mortgage on their home, and the payment is more than 25% of their take-home pay. They’re trying to decide if they should be placing the full 15% of their income toward retirement or pay down the mortgage. They have a $350,000 mortgage and make $7,000 a month.
ANSWER: Your take-home pay includes bonuses, so you’re fine on that. I would be putting 15% of your income into retirement. Above that, I’d be throwing money at college and then money to pay off the house as soon as possible. The good news is that you’re really starting to get some wiggle room now, because you’ve gotten all this other stuff cleaned up.
The 25% of your take-home pay includes all of your income. That’s our general rule of thumb. If your house is 27% of your take-home pay, that doesn’t mean you have to sell your house. I’m just trying to keep people who are buying a house from buying too much. I don’t want you to be house poor or be so tied up with a mortgage that you can’t breathe.
You have to stop and think about what your steps are to buy a home that stays within that general range, so you aren’t house poor and the house thus owns you. Then when you buy, you have a payment that is no more than a fourth of your take-home pay on a 15-year, fixed-rate mortgage.