Mortgage Payments: How Much Should You Allocate from Your Income?

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Determining the amount of house you can afford depends largely on your salary.

Mortgage Payments
Mortgage Payments ( Photo: PennyMac )

Mortgage payments encompass the principal and interest on your home loan, and sometimes include property or real estate taxes as well

Whether you want to assess affordability based on your current income or determine the income needed to afford your dream home, this guide can assist you in deciding the portion of your income that should be allocated to monthly mortgage payments. Typically, these payments are divided among principal, interest, taxes, and insurance.

While most homeowners make monthly payments, other options like bi-monthly or bi-weekly payments are available. Several approaches can help you determine the appropriate portion of your salary for mortgage payments. Ultimately, affordability is influenced by factors such as income, personal circumstances, financial goals, and existing debts. Here are some rule-of-thumb concepts to calculate affordability:

The 28% mortgage rule suggests spending 28% or less of your monthly gross income on mortgage payments, including principal, interest, taxes, and insurance. To apply this rule, multiply your monthly gross income by 28%. For instance, if your monthly income is $10,000, the calculation would be $10,000 x 0.28 = $2,800. Therefore, your monthly mortgage payment should not exceed $2,800.

The 35% / 45% model considers your total monthly debt, including mortgage payments, which should not exceed 35% of your pre-tax income or 45% of your after-tax income. To determine affordability with this model, multiply your gross income before taxes by 35%, and your monthly gross income after tax by 45%.

The affordable range falls between these two figures

For example, if your income is $10,000 before taxes and $8,000 after taxes, the calculations would be $10,000 x 0.35 = $3,500 and $8,000 x 0.45 = $3,600. In this case, you can afford between $3,500 and $3,600 per month. This model allows for more excellent monthly mortgage payment options compared to other models.

Another 25% post-tax model, states that your total monthly debt should be 25% or less of your post-tax income. Suppose you earn $5,000 after taxes. By multiplying $5,000 by 0.25, you can spend up to $1,250 on your monthly mortgage payment. However, this model offers less spending capacity compared to other calculation models.

 

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