What Is the 28/36 Rule?
The 28/36 rule is a helpful budgeting strategy. It states that you should spend no more than 28% of your gross monthly household income — your income before taxes are taken out — on your mortgage payment. You should spend no more than 36% of your gross monthly household income on all your recurring debts.
For this 36%, your recurring monthly debts include your mortgage, student, auto and personal loan payments. It also includes your minimum monthly credit card payment and any alimony or child-support payments you must make each month.
By following the 28/36 rule, you can avoid overspending on big-ticket items such as a home or new car. It’s a way to make sure you have enough money in savings to handle unexpected financial emergencies such as car repairs or the cost of a new furnace.
How can you use this rule to calculate how much of a mortgage payment or car loan you can afford?
The 28 part of the rule
Say your gross household income, the money that all the members of the household bring in together, is $120,000 a year. According to the 28/36 rule, you should spend no more than 28% of that amount on mortgage payments each year.
Multiplying your household income of $120,000 by 0.28, or 28%, gives you $33,600. This means that you should spend no more than $33,600 a year in mortgage payments.
To calculate how much you can spend each month on mortgage payments, divide that $33,600 by 12. That gives you $2,800. This means that you should spend no more than $2,800 a month on your mortgage payment. Make sure you include the cost of property taxes and homeowners insurance in your calculations. Most lenders require that you pay extra with each mortgage payment to cover these costs.
The 36 part of the rule
But how much should you be spending on all your monthly recurring debts? This is where the 36% part of the 28/36 rule comes in.
Again, if your annual gross household income is $120,000, you should spend no more than 36% of that on your monthly mortgage payment; student, auto and personal loan payments; monthly minimum credit card payments; and monthly alimony or child-support payments. By multiplying $120,000 by .36, or 36%, you get $43,200, the most you should be spending each year on these payments.
To determine how much you should be spending each month on these recurring debts, divide that $43,200 by 12, which comes to $3,600. Your goal, then, should be to not take out any car, student or personal loans — or run up credit card debt — that causes your monthly spending on these debts to rise past that $3,600 limit.
If your maximum monthly rent/mortgage payment (the 28% part) was $2,800 per month, and the 36% part is $3,600 per month, subtract $2,800 from $3,600 to discover that $800 is the maximum you should be spending on your car, student or personal loans, and credit cards.
Remember, though, that the 28/36 rule, while a useful guideline, is just that: a guideline. You might have to tweak your budget to make sure that you can comfortably afford any new debt you are considering taking on.
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