Homeownership is an exciting step.
It’s also a lot of responsibility.
Whether you’ve just bought a house, are considering home renovations, or are house shopping, it’s important to assess how much you’re spending on your house and how much house-related debt you have.
A 2019 study conducted by Freedom Debt Relief found that more than half of Millennials (54 percent) and just less than half of Gen X (43 percent) do not know how much they spend on their house every year.
Houses cost more than a monthly mortgage payment. Homeowners must pay additional taxes, pay for services and utilities, buy insurance, and more.
If you’re already a homeowner, you should spend time reviewing your home-related expenses, including your mortgage.
“Have a solid understanding of your actual budget, not what you think your budget is. Most people are off anywhere from 25–50 percent of what they think they are spending compared to what they actually are.
After that, make sure you understand ALL the expenses that go into purchasing and owning a home. This includes closing costs, PMI, maintenance costs, etc. Many renters don't realize how much their landlords do for them until after they own a home, and this can unpleasantly alarming,” says Jeff Rose, CFP and CEO for Good Financial Cents.
Calculate how much home-related debt you have. Keep in mind that this may be more than what you owe on your mortgage, especially if you’ve been using loans or carrying a balance on your credit card for other home-related expenses.
If you’re planning a renovation, you also need to set a budget for that and stick to it.
Once you’ve reviewed how much your spending and what your total home-related debt is, you’ll be in a better position to manage your expenses and your debt.
The same study by Freedom Debt Relief found that the most common ways homeowners dealt with debt was through home refinancing (38 percent), home equity loans (34 percent), and debt relief or debt settlement (24 percent).
Here are eight tips from experts on the best ways to manage home-related debt — when it’s manageable and when it’s become overwhelming.
If you’re dealing with manageable home-related debt, including your mortgage:
- Get a smaller loan than approved by bank
- Use cash for all other home expenses
- Practice strict budgeting
If you’re dealing with an overwhelming mortgage:
- Downsize your home
- Meet with a housing counselor
- Renegotiate loan terms
If you’re dealing with overwhelming home-related debt separate from your mortgage:
- Receive credit counseling
- Consider debt consolidation or debt settlement
If you’re dealing with manageable home-related debt, including your mortgage
Get a smaller loan than approved by bank
“The smartest thing to do is to take out less of a mortgage than what a bank approves you for. Having it so that payments can be covered on only one income reduces stress in case one person loses their job.”
— Steffa Mantilla, debt payoff and wealth building strategist for Plantsonify
“The first and best way, of course, is to plan appropriately. You’ll need to have accumulated plenty of savings — and then some. Ideally, a downpayment will be 20 percent of the purchase price. But savings must go much further than that.”
— Tanya Peterson, vice president of brand at Freedom Debt Relief
Use cash for all other home expenses
“My best advice is to avoid going into home-related debt. Besides your mortgage, your goal should be to pay all of your home expenses with cash. This planning starts well before the purchase of your home. When you identify what the home needs in order to be move-in ready for you, or if you decide you want to renovate along the way, budgeting for these costs is essential along the way! If not, it can be incredibly overwhelming to assume a new mortgage and establish more debt related to your home, in addition to that.”
— Lauren Mochizuki, Casa Mochi founder
Practice strict budgeting
“Decide if you can pay down the debt on your own with serious budgeting and belt-tightening. Determine an amount you can allocate to paying off debt each month — an amount that is more than the total of all minimum payments. Then select either the avalanche or snowball method.”
If you’re dealing with an overwhelming mortgage
Downsize your home
“If home debt is overwhelming, it’s smart to think about downsizing. No home is worth the intense financial stress caused when you’re house poor. Owning a home is more expensive than renting so going back to renting is always an option temporarily while you get your finances back in order to be in a stronger position to buy again.”
Meet with a housing counselor
“One of the best practices for overwhelming home-related debt is to get help from housing counselor. There are some that are free and some that cost. They can sit down with you and go over your situation. They will come up with a plan to walk you there your situation. The free ones are just as good as the paid services. They will also help you fill some paperwork if relief is offered. Here is the link to the housing counselor site and you just put in your zip code to find the closest one to you.”
— Harold Trinh-Moore, JH Moore, Inc
Renegotiate loan terms
“If your home debt has become overwhelming, your options will depend on the type of debt. For example, if you are struggling to make your mortgage payments, you could attempt to renegotiate your loan terms with the goal of achieving a lower monthly payment or lower interest rates. However, mortgage lenders are rarely willing to do this. In extreme circumstances, bankruptcy could be a last-resort option.”
— Omar Chouche, CEO of Liberty Debt Relief
If you’re dealing with overwhelming home-related debt separate from your mortgage
Receive credit counseling
“Consider credit counseling if you would benefit from a slightly lower interest rate on a credit card. This lowers the monthly payment, but it can take about five years to completely get out of debt. For a consumer with a significant amount of debt, this may not be the best alternative; they may need more help than just a reduced interest rate.”
Consider debt consolidation or debt settlement
“See if you can consolidate debt with a personal loan. Many people end up accumulating debt on credit cards — for home expenses, or for other expenses when the home-related ones become overwhelming. For someone maintaining accounts with high interest rates, a personal loan from an independent lender may be helpful. Personal loans can offer rates much lower than credit cards offer. Their rigorous payment schedule can be helpful to keep one on a strict schedule to eliminate the debt.”
“Evaluate debt settlement. This option may be helpful for someone with $7,500 or more of credit card debt, who is having avery hard time making minimum payments, and who has suffered a financial hardship (such as job loss, medical expense, divorce). Debt settlement companies are regulated by the Federal Trade Commission. They work on a consumer’s behalf to lower principal balances owed. The American Fair Credit Council is a resource for reputable providers.”