Calculate The Mortgage Payment You Can Afford

When you begin to look for your dream home it can be intoxicating walking through house after house, envisioning the future in each one, but it pays to keep your head out of the clouds when you’re contemplating taking on debt for thirty years.  One important thing to realize is that you want enough money to live comfortably and a house payment within your means is vital to this decision making process.  A simple rule of thumb is to remember that you want to spend only one week’s worth of income on housing.   Most of the time, your mortgage is going to include a portion that goes to your escrow, and you want to include that amount in your calculation.  Escrow usually consists of homeowner’s insurance and yearly taxes, and sometimes private mortgage insurance (PMI).

I’ve always used gross wages to calculate how much house payment I can afford.  Others prefer to calculate your net wages.  I think typically the bank or real estate agent want to put you into a bigger house and mortgage so guard yourself against this tendency, I know we went through this process when we were looking for our home that we’re in now.   Had I been less financially savvy our mortgage would be much larger than it is now.  Another rule I had was that we could afford $10,000 worth of house for every $100.  If 1/4 of my income was $500 then I could look for home as high as $50,000.  If $700 was one-quarter, then I could go as high as $70,000.

Here is a real life example:

My gross income from my “day” job is $3000 per month.  $3000 divided by four is $750.  My mortgage is $534.02.  My mortgage breaks down as follows:

Principal & Interest $366.06
Homeowner’s Insurance(s) $55.67
Mortgage Insurance $42.40
City/School Tax $61.42
Shortage $8.47

My net or take home pay is $2400, if I used the net then I would need to stay under $600.

 

The House That Grandpa Built

My Mom as a little girl in front of the house that Grandpa built

Every since I was a young girl I dreamed of owning my own home and a piece of land.  I think it was  important to me from such a young age because we moved frequently when I was growing up, and I hated how everything changed.  Neighborhood friends, teachers, school, would I have my own bedroom or have to bunk up with my sisters?  I also knew that meant I had to have good credit and I set out to establish that as soon as I moved out into my own place.

I’ve bought two homes by mortgage, but one time I borrowed money from my grandparents to buy a mobile home and paid them back with interest.  Something similar to this is the option to rent or lease to own home ownership.

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9 comments to Calculate The Mortgage Payment You Can Afford

  • Regardless of what you use for your own rules, I think it’s very important to actively make a decision regarding how much you can afford. There are a lot of people who walk into a bank and ask how big of a mortgage the bank will give them … and then tend to spend somewhere near that amount on a house.

    That sounds like a recipe for disaster for me.

    Sometimes it can be cheaper to get a piggyback mortgage than pay PMI. You pay a bit more interested on the second mortgage, but the differential is sometimes less than what PMI would be (plus it’s deductible, and it decreases as the loan amount decreases).

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    Mrs. Accountability Reply:

    @Kosmo @ The Soap Boxers, oh I definitely agree with you that you need to figure out what you can afford. You’re right, some people just get the biggest loan they can which is not very wise. The stupid thing about our PMI is we shouldn’t be paying it, but it’s going to cost a bundle to get an appraisal done, plus I need to get my husband on the mortgage. It would be cheaper to just get a new mortgage!

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  • Another rule of thumb is to look at the amount the lender says they will loan you, and then buy a house that will cost no more than half of that amount.

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    Sandy Reply:

    @Emily, I had not heard of this rule of thumb. I think it is very practical. Banks/lenders really do try to oversell you on the house.

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    Mrs. Accountability Reply:

    @Emily, I have not heard of this one either. I guess nowadays people are told they can have a home worth $500,000 so that would be practical to halve that. But if you’re only approved for say $60,000, I think you would be hard pressed to find a home for $30,000. I suppose at that point you have no business buying a home? I still think owning a home is better than renting, hands down. For me it’s a matter of stress. I know the landlord isn’t going to come knocking at the door anytime of the day or night, or decide to evict me by taking off the front door (happened when I was six years old), or isn’t making the mortgage payment. Too risky. Also, I’ve always found the payment to be cheaper for my mortgages than renting. Maybe I’ve just been lucky.

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  • My own rule is that total housing costs should be 33% of net income or less. This will help to keep people out of trouble and is a rule we personally follow as well.

    BTW I haven’t seen you around the Yakezie much. You should come by and visit more often; we miss you.

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  • This all sounds like very good advice. I am hoping to buy my home in about a year, but unfortunately I live in a rather expensive city. To get a mortgage that is half of what they approve or 33% of my net income I may need to move further from the city. Still it is probably the practical decision. It is just tough to leave an area you have been living in for a long time.

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    Mrs. Accountability Reply:

    @Modest Money, hi there. Sounds like a good idea to move if your commute doesn’t kill you gas-wise! We live in a rural area and our mortgage is $534. I spend about $90/week in gasoline. My mortgage and gasoline costs are still less than what I’d pay for a house in the city. Good luck with buying your home. Best, Mrs. A

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    Modest Money Reply:

    @Mrs. Accountability, Well I do have the benefit of working from home right now. I just don’t know for sure if that will keep up. The price of gasoline wouldn’t be my concern if I did get a new job. I’d be more concerned about the time wasted and the extra stress of a long commute.

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