How Much Should You Spend on Your Mortgage?
If you’re worried about the size of mortgage payments, you’re not alone.
With the median home price over $400,000, your mortgage is likely to be your biggest monthly expense. Let’s take a look at a real-life example.
With a home price of $400,000 and a down payment of $20,000, you’d need to finance $380,000.
The monthly mortgage payment for a $380,000 mortgage (30-year fixed-rate) at an interest rate of 6.2% is $2,313. And that doesn’t include any money you need for private mortgage insurance, property taxes and homeowners insurance.
It’s natural to worry that a monthly payment of this size might be too high for your household budget.
But how do you make sure that you can afford your new mortgage payment? Using the 28% rule is a good guideline.
The 28% rule
The 28% rule states that you should spend no more than 28% of your gross monthly income on your monthly mortgage payment. Your gross monthly income is your income before taxes are taken out.
For this rule, your mortgage payment includes the total amount of money you send to your lender each month — the dollars you spend on your loan’s principal balance and interest as well as any money you send to an escrow account to cover PMI, property taxes and homeowners insurance.
Say you’re considering buying a home that comes with a total monthly mortgage payment, including taxes and insurance, of $2,313. To determine the gross monthly income you need to afford this payment, divide your mortgage payment by 0.28.
In this case, you’d divide $2,313 by 0.28 to get $8,260.71, the gross monthly income you’d need to comfortably afford this mortgage payment. This means your gross monthly income should be $99,129 a year.
But the 28% rule isn’t the only one you can use to determine if a mortgage payment is affordable. You can also turn to the 36% rule.
The 36% rule
The 36% rule states that your total monthly debt payments should equal no more than 36% of your gross monthly income.
For this formula, include the following monthly debts — your estimated new mortgage payment; any student, auto or personal loan payments; and your minimum monthly credit card payments. You should include any alimony or child-support payments you make each month, too.
Say your gross monthly income is still $8,261. Multiply that figure by 0.36 to determine the total monthly debt you can have while still meeting the 36% rule. In this case, 0.36 times $8,261 equals $2,974, which means that your total monthly recurring debts can equal no more than this amount if you want to follow the 36% rule.
Now say that your monthly mortgage payment is still $2,313. Subtract that $2,313 from $2,974 to get $661. This is the maximum amount that your other recurring monthly payments can be if you want to meet the 36% rule.
To calculate the most comfortable mortgage payment for your income and debts, it’s best to lay out a household budget and get preapproved for a home loan with a mortgage lender.
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