Question of the week:We're considering remodeling part of our house, but it will mean taking on a sizable home equity loan, which we're not entirely comfortable with. Is there a good way to know when you're taking on too much debt? --L.K., Chicago Dear L.K., You're wise to be wary of taking on new debt. Too often I see people simply borrow as much as lenders will possibly let them without ever stopping to consider if that amount of debt is actually right for them.Your question has many sides to it, and there's no single right answer for everyone. For some perspective, we recently asked members of the Armchair Millionaire community about how much debt they're willing to take on. This comment from Mattchiavo shows how he comes up with his own answers: Balance is everything. "I think one needs a balance. Most people will not be able to buy a home without borrowing, so you should borrow but stay at a reasonable level. Personally I like to keep my mortgage payments between 10 and 12 percent of my gross monthly pay. Do I have the biggest and nicest house? Nope, but I have a comfortable house with a comfortable mortgage. I also like to keep my car payments to 3 to 5 percent of my gross pay. Do I have the biggest and nicest car? Nope, but I have a comfortable car with comfortable payments." Mattchiavo is on the right track. I generally recommend that people try to spend a maximum of 20 percent of their gross pay on large-scale debts related to their home in order to remain well within a common sense financial plan. However, you still need to consider the whole picture because the kinds of expenses each of us has varies so much from person to person. When considering taking on substantial new debt, there are a few different figures that you should review to see if your personal financial profile still falls within your personal comfort zone. These are the same figures that lenders (banks, credit cards, etc.) will consider when they make a lending decision. The Armchair Millionaire Guide to Creating Your Debt-Worthiness Profile
THE BOTTOM LINE: Lenders follow basic rules of thumb. You should have your own rules of thumb that balance your financial profile with your personal level of comfort. Strike a good balance between the two and you'll generally choose the smartest path. |
If you want to be rich one day you shouldn't borrow money. If you don't have the cash, you don't need it.
If you haven't heard of Dave Ramsey you should read his website and listen to his radio show. He is a self made millionaire twice.
www.DaveRamsey.com
Just my 2 cents :)
Posted by: Debby | October 05, 2007 at 06:55 PM
I totally agree to this post ,its really important to have lenders own source of work processes in order to tackle the lending rules and rates with availing proper payments from the borrowers in specific time duration .
Posted by: Michelle Boudreau | September 10, 2009 at 02:01 AM
This is necessary to analyze how much debt is too much ad how much you would be able to pay , this can be done through examination of your revenues and expenses .
Posted by: Debt Rescue Relief | September 11, 2009 at 08:49 PM
Its very important to analyze how much debt is too much and how much you can handle , this can be done through measuring expenses and revenues .
Posted by: Debt Rescue Relief | September 11, 2009 at 09:00 PM
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