Buying a house is a big step. As you get ready to make this purchase, though, it’s important to carefully consider the size of your monthly mortgage payment.
Once you make that commitment, you’re kind of stuck with it. So, it’s important to make sure you can afford your payment. Here’s how to figure out what mortgage payment you can afford:
Start with the 30% Rule
The quick and dirty way to figure out what monthly mortgage payment you can afford is to use the 30% rule. This is a rule that states that your mortgage payment (which usually also includes your home insurance, interest, and taxes) shouldn’t take up more than 30% of your monthly income.
So, if you make $3,500 a month, your mortgage payment should be no more than $1,050.
Remember, though, that this is a rule of thumb. Some people base it on gross income, not take home pay. If your take-home pay ends up being $2,900 a month, you can adjust your affordable mortgage payment to reflect that, bringing it down to $870.
Others insist that the 30% rule should also encompass other housing expenses, including utilities, and plan for maintenance and repairs. If you consider these other costs, your affordable mortgage payment might be lower, perhaps around $700 or so.
Don’t assume that this rule has to be hard, though. It can be a good place to start, but it’s probably not where you want to finish.
How Much Debt Do You Have?
Part of what’s affordable in a mortgage payment depends on how much debt you already have, and what kind of debt it is. If you have other obligations, that’s going to change what constitutes an affordable mortgage payment.
For example, if you’re already paying $300 a month in other debt payments, it might not make sense to get a mortgage that amounts to $1,000 a month.
One way to figure out how your mortgage debt could impact your overall financial picture with other debt is to use the 28/36 qualifying ratio. This is used by some lenders to determine whether or not you should receive the best terms.
With this ratio, your mortgage shouldn’t account for more than 28% of your monthly income, and your total debt (including your potential mortgage) shouldn’t exceed 36% of your monthly income.
So, if you base it on your gross income of $3,500, your total mortgage plus debt payment shouldn’t be more than $1,260 a month, and your mortgage payment shouldn’t be more than $980. If you have debt that pushes you above that threshold, it might be a good idea to pay down some of your other debt before taking on a mortgage obligation.
What are You Comfortable With?
In the end, though, it’s mostly about comfort level. I like to keep all of my housing expenses to 25% of my net (after-tax) income. One of the biggest challenges many people face is being “house poor.” They can make their mortgage payments, but there isn’t much left over to enjoy different activities or save for the future.
I like to make sure I have enough money available to me so that I can go on trips with my son, as well as keep my emergency fund active. What happens if something unexpected pops up? I don’t want to have to borrow to handle it. Plus, I would also rather have a smaller, less expensive place to live if it means I can afford to go to the movies and take a fun spring break trip with my son each year.
Think about your priorities. Even if you can get a bigger mortgage, will it help you enjoy your life? Could you be happier with a smaller mortgage payment and better monthly cash flow? Carefully think about what matters most to you, as well as what you’re comfortable paying.
Be honest about your money situation, and get real about what you want from your home and your life. Then, settle on a mortgage payment that allows you to live comfortably and reach your financial goals.