How Much Should You Spend on Your Monthly Housing Payment?

By: FreeValues Staff, August 4, 2016

As a home buyer, one of your first questions will probably be “how much house can I afford?” This is an important question whenever you’re buying a home, because you want to make sure that not only can you afford the monthly payments but that you can also afford the rest of your expenses. There are many different things to consider when thinking about how much home you can actually afford to purchase.

Experts will generally agree that you should aim to stay within 28% of your monthly income on your mortgage payment. Your total monthly payment will include more than just principal & interest, so make sure to factor all of the associated costs into your budget. First, consider closing costs. If you don’t pay these or you are unable to get the owner to cover closing costs, they will be tacked onto your mortgage payment (usually in the form of a slightly higher rate). Your property taxes and homeowner’s insurance will also be added onto your monthly payment. 

Your down payment also impacts how much house you can afford. The more you can put down on a house, the lower your monthly payments will be. If you can afford a 20% down payment, you can avoid PMI. If you don’t have an adequate down payment (usually 20%), you’ll have Private Mortgage Insurance (PMI) added into your mortgage.

You also need to determine how much you are able to borrow. To do this, calculate all of your debts. This includes credit cards, car payments and student loans. These monthly debt payments should not be more than 38% of your monthly income.

Remember that being approved for more than you thought you were qualified for, doesn’t necessarily mean that you should use all of the money available to you. Talk to your lender (or better yet, a trusted financial planner), and consider what your total monthly expense will be after all costs are added up. Will a higher monthly payment hinder your ability to contribute to an emergency fund? Can you reasonably afford an emergency and your mortgage? Will you be able to put away money for college savings or vacations?

It’s easy to become overwhelmed by all the “what-ifs.” While it’s wise to keep all of these things in mind, remember that buying a house should be a fun and exciting experience, and that home ownership is a very satisfying, rewarding experience.

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