Over the past several years, housing prices and mortgage rates have risen considerably, raising the barrier to entry for many homebuyers. Between the down payment, closing costs, home insurance, and taxes, purchasing a home comes with more upfront costs than many buyers realize.
Though it may be tempting to score your dream home, it can be a dangerous financial move to sign a third-year mortgage on a house you can’t afford.
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Most financial experts recommend that mortgage payments not exceed 25% to 30% of monthly income to ensure homeowners can make consistent and timely mortgage payments. However, as housing costs outpace wage growth, this may be more challenging for Americans to achieve.
Shark Tank alum and investor Kevin O’Leary shares his take on how homebuyers should approach mortgage payments and the rising cost of homeownership.
Rising home prices and mortgage rates have made homeownership more expensive — and risky. Kevin O’Leary shares how to balance these rising costs while spending within your means.
Image source: Shutterstock
Housing costs are outpacing wage growth, making budgets more crucial than ever
Prices have steadily increased over the past few years, prompted by surging inflation in 2022. Necessities like food, housing, and healthcare were particularly impacted, making the financial milestone of homeownership further out of reach for younger homebuyers.
The Harvard Joint Center for Housing Studies found that the median home sale price was 5.6 times the household income in 2022, up from 4.1 times household income in 2019. This is the highest disparity on record, an indication of declining housing affordability in the U.S.
As home prices rise, it has become increasingly important for homebuyers to stay vigilant about purchasing a home with a manageable monthly mortgage payment.
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O’Leary outlined how buyers can avoid the homeownership pitfall of buying a house they can’t afford.
“Make sure that you do not pay more than a third of your after-tax income towards a mortgage, or you’re gonna get yourself in trouble,” he wrote in a post on X, formerly known as Twitter. “You may have to downsize your house a little bit to abide by that rule.”
Homeownership comes with recurring costs from maintenance, insurance, and taxes
Although most Americans view the down payment as the biggest upfront cost of buying a home, recurring costs from property taxes, insurance, and miscellaneous repairs add up quickly over time.
The average cost of maintaining a home in 2024 was $18,000, up 26% from four years ago.
Related: Barbara Corcoran has blunt words on mortgage rates, 2025 housing market
An affordable mortgage payment allows homeowners wiggle room for emergencies. Falling behind on mortgage payments can lead to loan delinquency, default, and eventual foreclosure.
O’Leary explains why buyers should abide by the 30% housing rule, should any unexpected costs materialize.
“If you’re paying more than a third of your after-tax-free income to service your mortgage, you’re putting yourself in a very risky position,” he continued. “You have to live in addition to maintain the home — there are taxes, monthly maintenance, and then the risk of variability of the actual mortgage rate. That really starts to put a squeeze on them [homeowners].”
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