11/24/2021
Mortgage Payments, How much is too much?
One of the biggest factors when buying a home is the mortgage payment. It can more often than not deter potential buyers in their home ownership dreams, but much is too much?
To answer,there are several methods used to calculate one’s monthly mortgage payments in relation to one’s income.
The first being the 28% rule.
With this rule in mind it states that the borrower should spend no more than 28% of their monthly gross income (pre-tax income) on their mortgage.
Example you make $10,000 a month of gross income. 28% of $10,000 is $2800 a month for one’s mortgage payments.
Second being the 35%/45% rule
The 35% being one’s monthly debt to their gross monthly income. This 35% debt rule consists of not just one’s mortgage but all the debt that they owe and that it should never exceed beyond 35%. The 45% refers to the same debt to income ratio, but it refers to one’s net (after tax) monthly income.
Example 35% of $10,000 is $3500 set aside to cover all of one’s monthly debt including the mortgage (car loans, credit cards, etc.). 45% of $10,000-$2,000 (for taxes) would be $3600 for the mortgage and other debts combined.
The last one is the 25% rule
The 25% rule is similar to or rather a combination of the two previous rules on mortgage payments. In this rule it states that borrowers should spend no more than 25% of their net (after tax) income on their mortgage.
Example you make $10,000 a month but $2,000 goes to taxes. You would be left with a net income of $8,000. 25% of $8,000 is $2,000 a month for one’s mortgage payment.
So which one should be used?
Ultimately, there is no hard or fast rule when choosing the above methods for mortgage payments as it really comes down to the lifestyle of the individual borrower and their lending institution. As the rules are there to give insight into the financial stability of the borrower in relation to their mortgage. We can then use the numbers calculated from each rule to get a price range for the mortgage payments.
Using the above example of $10,000 a month can give us a monthly price range of anywhere between $2,000 to $3600 for a mortgage payment using the above mentioned rules.
Want to learn more? Or have any questions, comments or concerns about the real estate market. Then contact me by either phone, text or email.
