It’s a common question among homebuyers: How much of my income should I spend on my mortgage? The answer isn’t as simple as it may seem.
There are a number of factors to consider when determining how much you can afford to spend on your mortgage each month. Your income, debts, and other financial obligations play a role in how much you can afford to borrow. 28 percent and 36 percent are two of the most common debt-to-income ratios that lenders use to determine how much you can afford to spend on your mortgage.
1. 28% Rule
In general, your mortgage payment should not exceed 28 percent of your monthly income. This is known as the 28 percent rule. But there are exceptions to this rule.
If you have a lot of other debt, you may want to keep your mortgage payments below 28 percent of your income. This will free up more money each month to pay off your other debts.
If you have a high income, you may be able to afford a larger mortgage payment. But you should still keep your payments below 28 percent of your income to avoid overextending yourself financially.
2. 36% Rule
Some financial experts recommend that your mortgage payment should not exceed 36 percent of your monthly income. This is known as the 36 percent rule.
But again, there are exceptions. If you have a lot of savings, you may be able to afford a larger mortgage payment. Or if you have a low interest rate, you may be able to afford a higher monthly payment.
3. 43% DTI Ratio
It’s important to remember that your monthly mortgage payment should not exceed 43 percent of your gross monthly income. This is known as the Debt-to-Income ratio, or DTI.
Your DTI ratio includes all of your monthly debts, not just your mortgage payment. This includes credit card payments, car loans, and other debts.
If your DTI ratio exceeds 43 percent, you may have difficulty making your monthly payments. You may want to consider a smaller mortgage loan.
4. 25% Post-tax Model
Some experts recommend using a 25 percent post-tax model when calculating how much you can afford to spend on your mortgage each month.
This takes into account taxes and other monthly expenses, such as insurance and property taxes.
Final Thought
It’s important to remember that this is just a guideline. You may be able to afford a larger or smaller mortgage payment depending on your income and other financial factors.
If you’re more concerned with keeping your monthly payments low, you may want to consider a bigger mortgage loan. This will allow you to reduce your overall housing costs.
So how much should you spend on your mortgage each month? It really depends on your individual financial situation. But in general, your mortgage payment should not exceed 28 percent or 36 percent of your monthly income. And your DTI ratio should not exceed 43 percent.
The bottom line is that you should spend no more than you can afford on your mortgage each month. By doing so, you’ll avoid financial problems down the road.
There are also other factors to consider, such as the terms of your mortgage and the current interest rates. Talk to a lender or financial advisor to get more specific advice about how much you can afford to spend on your mortgage each month.
