I’m looking at getting a mortgage. How much should I budget for my monthly payment?
For most people, a house is the biggest purchase they will make in their lives, one they will pay off for years, even decades, to come. But spending too much on a house could leave you with little money for other goals in life, such as retirement, college funds and vacation.
If you’ve decided that home ownership is right for you, the next step is deciding how much home you can afford. Try TEG’s “How Much House Can I Afford” calculator to find out how much you can afford.
• General rule of thumb: Mortgage payments should not exceed 28% of your monthly take-home pay. Housing costs vary from city to city and neighborhood to neighborhood, so using your current rent combined with the amount you’re saving for a down payment and your renter’s insurance is probably a good guide for how much you’ll be able to afford for a mortgage payment and homeowner’s insurance.
• Spending too much on your housing is a rough hole to dig out of, but it’s much easier when you’re owning rather than renting. A recent Harvard study reported that nearly half of renters are “cost burdened” because their rent exceeded 30% of their income, while one in four renters pay more than half of their income for rent. With a mortgage, you gain flexibility by developing equity, but it’s still wise to avoid spending one-third or more of your income on your housing costs.
• If you choose an affordable place now, you can save money for a down payment on a bigger place down the road.