3 Signs your Mortgage is too Big

A big mortgage can be used to get a much pricier home without a larger down payment. There is some merit to taking a big mortgage. You can keep cash in your pocket longer, allowing it to grow through investment. You can also grow into the home over time instead of moving out in a few years. While there are financial merits to a big mortgage, a mortgage that is too large can put you at risk for foreclosure.

#1 You Meet Jumbo Loan Standards

Mortgage limits are set at the national level on a yearly basis. These limits are based on the median home prices in a given area. From that starting point, financial authorities limit the potential size of a mortgage. While you will not be able to get a government guaranty on a loan exceeding the standards, private lenders will still extend "jumbo loans."

Jumbo loans exceed federal mortgage limits but not all jumbo loans are problematic. Some high income families will have no problems making loan payments. In other cases, the mortgage limits are not in line with the cost to live in a given market. For example, the limits in California as a whole may not be high enough if you are looking to purchase a home in Malibu. Even though jumbo loans are occasionally necessary, though, they should be avoided if possible with a large down payment.

#2 Your Monthly Payments are too high

The overall size of your mortgage does not have as much an impact on your personal finances as your monthly mortgage payment. These payments are what truly determine how comfortably you can afford your loan and how near you are to foreclosure at any given moment. Your mortgage payment should be no larger than half of your monthly income less other fixed expenses. You should also have at least three months payments saved in an emergency fund in case of job loss. Any higher, and you are just one unexpected expense away from missing a mortgage payment.

#3 Your Debt to Income Ratio is Unbalanced

Your mortgage is not an island all to itself. The size of your mortgage relates directly to your income. A mortgage that is the right size for a family earning $150,000 is much too large for a family earning $75,000 each year. As such, you need to consider your mortgage as it fits into this bigger picture.

  • What portion of your income is allocated toward a mortgage?

It should be well under half.

  • What portion of your equity is offset by debt?

This should be well under half. The only exception here is for a family very young into the mortgage process.

Your first home loan may represent a value larger than half of your asset base. Once you are nearing the half way point of your mortgage, however, your ratio should achieve a better balance and stay that way, even if you sell the home and go into another mortgage that may be more expensive.

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