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How much of my income should my mortgage payment be?

Posted by  on Mar 06, 2014
 

Q: I want to start looking at houses. When it comes to figuring out how much I can afford, I've heard various "rules of thumb" about what percentage of income someone should put into a mortgage payment. What's your take on this?

A: Perhaps the first rule of thumb should be to forget about rules of thumb. There are just too many variables.

According to the US Department of Housing and Urban Development, any household spending over 30 percent of its income on housing is considered cost-burdened. Roughly 12 million households are spending over 50 percent of income on housing, and that level is clearly a hardship. So, what is the right level for you? Consider the following:

  1. Other fixed expenses. The more your budget is already taken up by non-discretionary items such as a car loan or student loan payments, the less of that budget you can allocate to mortgage payments.
  2. Job security. The employment market is pretty shaky these days, so you need to consider how confident you are in keeping your job before you decide how far to stretch your budget for a mortgage payment.
  3. Rental costs. If rental costs in your area are very high, it may be worth stretching your budget a bit to buy a house. After all, if you are already having to spend a significant chunk of your income on housing, why not build equity in a place you own rather than spend it on rent?
  4. Fixed or variable mortgage rate? At today's mortgage rates, you should be locking in a fixed rate; but should you opt for a variable mortgage rate, you will need to leave more of a cushion in case payments increase.

It is a big decision, so you need to do some detailed budgeting rather than relying on a general rule of thumb. The idea is to fit the mortgage loan to your specific budget, not to what might work for other people.



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