Next up is a question from Robert: “What should I do if I am just over 25% of the 25% guideline on an existing mortgage? Downsizing seems a bit expensive. How do you think about this?” Okay, so it depends on what “just over 25%” means. Does “just over 25%” mean you’re hanging at 27% or does “just over 25%” mean you’re at 42%? Because those are different levels. The gravity around what’s happening now in housing is a big decision, and it’s something that is significant for most folks. Your home or the real estate purchase you make is going to be the most expensive thing you ever buy; it’s the largest purchase that we make. And what we recognize is that this big purchase can have big impacts on the rest of our life.
So, if you find that you’re just over 25%, the way that I would think through the decision-making process is, “Okay, are there other areas where I can trim back my expenses to make sure I’m still saving appropriately? To make sure I’m saving in the areas I want to be saving, so that I’m not just house-rich and life-poor?” If the answer to that question is no, and I don’t have a positive income trajectory, and I think that I’m always going to be likely overpaying for this mortgage, so much so that it’s going to prohibit or inhibit me from being able to save for the future, then you might have to make a really tough decision. You might have to say, “Man, I’ve just gotten myself into too much house. I’ve got to find a way to get out of this.”
If, however, you can trim your expenses down and you can still save the way that you should be saving, and you can still do the things that you ought to be doing with your money, even if that 25% trickles to 27%, 28%, 30%, I think that’s okay. But you have to exercise more discipline than someone else in the exact same financial situation.
In my mind, I wrote down three quick things. First, I want to know what their path looks like. Is this just a moment in time and over the next five years, you’re going to get tremendous pay raises? Because we did mention the potential for pay raises recently, and there were differing opinions on that. Some people took issue with the five percent figure, while others thought it was reasonable.
So, Robert, I would ask yourself, are you on track to get big pay increases over time? Maybe this is a moment in time that you need to figure out how to maximize the current opportunity and get yourself back on track as fast as possible. Or are you stuck? Because that’s a big question. Now, if you’re stuck and this is going to start unwinding your opportunities to do anything good in the long term for yourself, and start building your wealth that can compound and work harder for you than you can with your own effort, then that’s a completely different thing.
So first, take an analysis: Is this a moment in time or am I stuck? And once you have that answer, you can figure out if it’s okay. If you’re stuck, you need to start looking at what’s the cost of the transaction to be done. Real estate transactions have a lot of friction costs – attorneys, real estate agents, local government fees – everyone seems to have their hand out. So, you need to figure out what the cost of the unwinding process would be, and then think about that, building that into the time to recover. Because how does this all fit? And then maybe there’s something here with looking at… you know, taking the idea of short-term versus long-term. Remember, houses are supposed to be five to seven, if not even a 10-year decision. With interest rates being as high as they are right now, did you skip some of those steps so you can quickly triage and figure out what your next step forward is?
The gravity of the decision may not necessarily mean selling the house. It might mean bringing in a roommate, or figuring out another way to create income inside your house to make it make sense. In a lot of life situations, that may not be possible. But if you live in an area where the rental market would support that and help you offset the cost of your mortgage at least for a season, it’s not the craziest idea. Why are you laughing at me? I saw it on social media; somebody posted it and I thought it was very… They were almost calling it a “boomer” comment when people said the whole roommate thing.
But then this person did something interesting. I love it when people have contrary takes. And I almost hate to even say this, because in her video she was sharing something that she went back and looked at the percentage of people who lived alone historically versus now. It was a moment that showed we are in a period where, and it probably does go against the housing market, that so many people are living alone that it messes up the… But it still sounds like a “boomer” comment just to say, “Go get a roommate.” I don’t know, it’s just…
But there is some historical context. That’s why we’re a good balance because I’m trying to give the olive branch of how… Because I think if I’m a young person right now, I’m pretty ticked off at the older generation that has left me with this inflation-adjusted real estate with high interest rates, and then they’re telling me how to figure this out. It’s tough. But I do know this. You don’t make you feel better about that with a roommate. And it feels the same way that you can limit with. Yeah, the good news is this is not sustainable forever. There will be a reversion back to the mean if something changes. You’ll be prepared. I know that sounds like a very broad thing, but I’m trying to give you the least “boomer”-sounding answer out there.
Ray, what do you think about the roommate? Is that correct? No, I was just saying, like, on TikTok it’s like, you know, hashtag househacking. I feel like it’s kind of trendy now. Well, I mean, househacking is like, you buy a duplex and you live in one half of it, or rent out the other half. That’s kind of what Bo’s talking about. “Hey, put an ad in the paper and say, ‘Hey, you want to come?'” When I bought, that’s literally what I did. I had a buddy who was down on his luck during the Great Recession, a reduction in force. I said, “Hey, you know what, man? I’ve got a room. Why don’t you come live with me? I’ll charge you cheap rent.” Yeah, you remember that? And he came, and he left me for a while. It worked great, it was awesome.
That’s actually what I did when I first moved here. I was young, and a co-worker had a house. She was single, and it was really fun, actually. She’s way, so this might get edited out, because then nobody’s going to click on this clip if we keep going like this. But it is interesting, you realize Bo, was Bo and his wife lived with us. Yes, and meanwhile, there’s somebody – the big spoon story because somebody ate a lot of cereal in the house at the time and he used all the big spoons. But by the way, uh, we just got a comment. And since this question’s thrown away anyways, Jake was like, “Put an ad in the paper, tell me that you’re old without telling me you’re old,” because that’s not how you find the remix anymore. So true. You were like, “I’m trying really hard to beat a boomer.” If you know how to put an ad in a paper, let me know. I don’t even know if I would know where to start myself. For more information, check out our Home Buying Checklist!