Demystifying the Affordable Mortgage

Buying a home can be a daunting undertaking. You might even become paralyzed looking at home prices, but when you understand how much home you can afford it demystifies the experience. Sure, there are many good online calculators out there to play with, but if you do the math yourself, it might just make a lot more sense.

So first, some rules to help you determine how much you can afford in monthly payments. We’ll look at a hypothetical example of a couple making $75,000 combined annual gross income to illustrate each step.

#1 The Rule of 28: Your Maximum Mortgage Payment

This rule says that your monthly mortgage payment should not exceed 28% of your gross monthly income (remember gross means before taxes are taken out, as in it’s gross how much money you could be making if it weren’t for taxes).

our example:
$75,000 income/12 months =  $6,250 gross monthly income
$6,250 x 28% = $1,750 maximum monthly mortgage payment

#2 The Rule of 32: Your Maximum Total Housing Payment

This next rule says that your total housing payments (including the mortgage, homeowner’s insurance and private mortgage insurance, association fees and property taxes) should not exceed 32% of your gross monthly income.

our example:
$75,000 income/12 months =  $6,250 gross monthly income
$6,250 x 32% = $2,000 maximum total housing payment

#3 The Rule of 40: Your Maximum Monthly Debt Payments

This formula calculates your total monthly debt payments and includes other loans, credit card payments, car loans, etc.

our example:
$75,000 income/12 months =  $6,250 gross monthly income
$6,250 x 40% = $2,500 maximum monthly debt payments
$2,500 – $2,000 (max. housing payments)  leaves $500 for other debt.

Use the above calculations to help you analyze your monthly household budget.  To make your mortgage affordable, you’ll want to shoot for something lower than the maximum. Once you decide on an affordable monthly payment, you can determine how much you house you can afford.

Your Maximum Mortgage
At this point you won’t know your actual mortgage rate, but you can estimate an average 6% on a 30-year fixed-rate mortgage, which would put your payments at about $65 for each $10,000 borrowed. Again, it’s not exact, but is a good estimate.

our example:
$1,750 maximum monthly mortgage payment /$65 = 26.92
26.92 x $10,000 = $269,230 maximum mortgage amount

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