Mortgage Debt Is on the Decline -- and That Could Be a Very Encouraging Trend

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If there's one thing Americans clearly aren't afraid of, it's debt, whether it be of the credit card or mortgage variety. But while the former certainly has its share of negative connotations, mortgage debt is considered the good kind to have, especially since properties have the potential to gain value over time.

However, there's a danger to taking on too much mortgage debt, and it's a mistake countless Americans make each year. It's therefore perhaps a good thing that mortgage debt seems to be on the decline on a national level. Over the past five years, average primary mortgage debt has dropped by more than $7,000, or 4.6%, according to data from ValuePenguin. Whether that's officially a positive trend is yet to be determined.

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On the one hand, the fact that mortgage debt is declining could be a sign that borrowers learned their lesson from or during the last financial crisis, and aren't making the mistake of getting in over their heads. On the other hand, it could also be a sign that property values are dropping, and so borrowers don't need to take on as much debt. From a buyer's perspective, that's certainly a plus -- but from a seller's standpoint, that's problematic, as it puts those needing or wishing to unload their properties at a disadvantage.

But let's go with the positive scenario and assume that more folks are getting smarter about borrowing. If that's the case, then we might see the foreclosure rate trend downward in the coming years, which is always a good thing. Then again, let's not forget that just because some Americans are getting better about borrowing responsibly doesn't mean that all prospective buyers are following suit. So here's a little refresher for those seeking to become homeowners on what constitutes a smart approach to buying property.

1. Know how much mortgage debt to take on

Though you may be inclined to stretch your budget to buy the nicest home you can possibly swing, don't make the mistake of spending more than you can afford mortgage-wise. As a general rule, your housing costs, including your mortgage payment, property taxes, and insurance, should not exceed 30% of your take-home pay. If you exceed that threshold, you'll compromise your ability to stay on top of your bills on the whole.

To play things even safer, you might lob general home maintenance into that 30% threshold as well. Maintenance will typically cost you anywhere from 1% to 4% of your home's value each year, and the older your property, the more likely you are to land on the high end of that range.

It's an unfortunate fact that a good 39 million Americans currently can't afford their homes. If you don't want to become a part of that statistic, be mindful of how much house you take on.

2. Make sure to have emergency savings first

So you've done your math and determined that the mortgage you're looking at falls within the aforementioned 30% threshold. Great. There's just one more thing you'll need to do before moving forward: Make sure you have a decent chunk of cash in the bank. Buying a home means opening yourself up to a world of potential repairs, so before taking the leap, be sure to have a healthy emergency fund. At a minimum, that means having three months' worth of living expenses socked away, but to play it safe, you may want to aim higher, especially if you're buying an older home.

3. Get your priorities straight

By now, you've been told several times that your housing costs shouldn't exceed 30% of your take-home pay. But while you'd technically be acting responsibly by hitting the edge of that threshold, that doesn't necessarily mean you should be spending 30% of your income on a home. Specifically, if you're the type who enjoys experiences, having that much money tied up in a single expense might limit your ability to travel and pursue hobbies. Similarly, if you have kids and are hoping to save for college, you'll have an easier time doing so if your housing costs only eat up 20% of your income, as opposed to 30%.

The point here is that before you buy, take some time to think about what's most important to you -- a better home or more flexibility in other spending categories. You may come to find that you'd rather keep your housing costs well below the level of what's technically affordable in your case and leave your other options open.

The fact that mortgage debt is lessening could mean that Americans are finally getting wise about borrowing. So do yourself a favor and learn from that trend -- you'll be thankful for it in the long run.

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