The traditional way to see how much of a mortgage payment you can afford is to take your monthly income and multiply it by 0.28. So if your monthly income was $5,000 this formula would say you can afford a $1,400 a month house payment. So someone with a $60,000 annual income could afford a $1,400 mortgage by their self. A couple with a $120,000 annual income and $10,000 monthly income could afford a $2,800 monthly house payment according to this formula.
A debt to income ratio of 36% or less helps you get approved for the loan. This is all your monthly debt payments including your new mortgage payment divided by your monthly income. Remember that your mortgage payment is not just your loan but includes your home insurance, property taxes and Home Owners Association fees.
Now let’s look at the3-30-10 rulefor buying a house.[1]
3-30-10 Rule For Buying A House
How Much House Can I Afford?
If you really want to keep your personal finances easy to manage don’t buy a house for more than three times(3X) your income. If your household income is $120,000 then you shouldn’t be buying a house for more than a $360,000 list price. This is the price cap, not the starting point. This can seem impossible to do in many major cities and it likely is which shows that it may not be the best financial decision to live in those cities if you don’t want house payment stress.
There are the same types of jobs all over the country and you don’t have to live in high cost cities that put a strain on your personal finances. This rule makes for a low stress house payment. This is a smart and frugal rule and makes sense even more in this current high interest rate environment.
How Much Should A Down Payment On A House Be?
The30in the rule stands for saving up 30% of the purchase price of the home before buying it. So if you bought a $300,000 house you would put 20% or $60,000 down at closing on the cost so you would remove the PMI expense. This is the cost of buying private mortgage insurance for your bank so if you are foreclosed on, they are protected, a complete waste of your own money. The other 10% or $30,000 in this example goes into savings as an emergency fund for you. This ensures your ability to pay the mortgage for over a year or longer depending on your interest rate.
What Percentage Of Income Should Go To Mortgage?
The final part of the formula, the10means to spend no more than 10% of your gross income on your mortgage payment. This is very difficult in a high interest rate environment and requires a 30 year mortgage, a high income, and living in an inexpensive area in a modest home. Another way to do this is to have a roommate that pays you rent, have a separate Airbnb area, or own a duplex and live in one side and rent out the other.
This is what some people do that are willing to do whatever it takes to achieve their financial goals. It will seem extreme to the majority of people. So if your household gross income is $10,000 a month your mortgage should be $1,000 a month according to the 3/30/10 rule. Large down payments can also help make a payment lower.
In contrast, the normal percentage of income ordinary people spend on their mortgage is 28%.[2]
Mortgage 15 Year Vs 30 Year
The pros and cons of the two different time durations of mortgage loans has become more nuanced in the current interest rate environment. Traditionally the 15-year mortgage is preferred when possible as it’s paid off in half the time and saves the interest off 15 years of additional payments. Some money managers have argued to always get a 30-year mortgage when interest rates were low because you could make more money investing the difference of the lower payment in the stock market during the perpetual bull market. This is currently a different world with high interest rates near 7% for a 30-year mortgage and a bear market plunge over the past 12-months.
Home owners are almost always tempted to go with the lower 30-year mortgage and be able to buy a bigger house. A 15-year mortgage is more difficult to make payments on but will pay off and have no payment after 15 years if the home is kept. With a 15-year mortgage you accrue home equity much faster and it’s half way paid off after 7 and a half years.
However for the 3/30/10 rule you need a 30-year mortgage to keep the payments as low as possible to try to get the 10% income expense ratio. People that have previously locked in low interest rate mortgages before 2022 have created a great hedge against inflation over a long period of time.
Can Mortgages Be Paid Off Early?
Yes, most mortgages can be paid off early without a penalty. Everyone needs to make sure when they call their mortgage lender to payoff the remaining principle on the loan to ask if there will be any penalties. If the loan is paid off early through extra payments being made then you must ensure to mark the check or payment as going on the “principle only”and make sure they know it isn’t just an early payment that goes toward the total loan. The benefit of paying off a mortgage early depends on the interest rate and stock market returns.
Can Mortgages Increase?
An adjustable rate mortgage (ARM) can increase or decrease correlated with interest rates due to the way the loan is structured in time phases. A fixed-rate mortgage payment can also fluctuate during the time frame of the loan due to factors like the cost of insurance on the home and city or county property taxes. The bank loan part of the fixed rate mortgage stays the same but the other factors and also the money kept in the escrow account can cause the mortgage payment to change once a year.
Habeeb Mahmood
FAQs
Three key rules that should guide your house spending are: The house price should not exceed three times your annual income. Your mortgage payments should not exceed 30% of your gross monthly income. Ensure you have a substantial down payment, ideally 10% or more, to reduce the loan amount and potential interest costs.
Can I afford a 250k house on 50K salary? ›
You can generally afford a home for between $180,000 and $250,000 (perhaps nearly $300,000) on a $50K salary. But your specific home buying budget will depend on your credit score, debt-to-income ratio, and down payment size.
What income do you need for an $800000 mortgage? ›
To afford an $800,000 house, you typically need an annual income between $200,000 to $260,000, depending on your financial situation, down payment, credit score, and current market conditions. However, this is a general range, and your specific circ*mstances will determine the exact income required.
How much house can I afford if I make $36,000 a year? ›
On a salary of $36,000 per year, you can afford a house priced around $100,000-$110,000 with a monthly payment of just over $1,000. This assumes you have no other debts you're paying off, but also that you haven't been able to save much for a down payment.
Can I afford a 500K house on 100k salary? ›
That monthly payment comes to $36,000 annually. Applying the 28/36 rule, which states that you shouldn't spend more than around a third of your income on housing, multiply $36,000 by three and you get $108,000. So to afford a $500K house you'd have to make at least $108,000 per year.
How much income to afford a 1 million dollar house? ›
Income Necessary for a $1 Million Home (California)
| 3.5% DOWN FHA FINANCING: | $230,000 per year** |
|---|
| 15% DOWN CONVENTIONAL FINANCING: | $200,000 per year** |
| 20% DOWN CONVENTIONAL FINANCING: | $185,000 per year** |
Aug 5, 2022
An individual earning $60,000 a year may buy a home worth ranging from $180,000 to over $300,000. That's because your wage isn't the only factor that affects your house purchase budget. Your credit score, existing debts, mortgage rates, and a variety of other considerations must all be taken into account.
What credit score is needed to buy an 800k house? ›
About 70% of all mortgages are conventional loans, making it the most common type of mortgage. A FICO score of 620 or better is typically required for a conventional loan and, if your score is 760 or higher, you should qualify for the best interest rates.
What income do you need for a $750,000 mortgage? ›
That equates to a monthly income of $14,400, with 28 percent of that amounting to $4,032. So $4,032 is the maximum you should spend on monthly housing costs, including principal, interest, property taxes, insurance premiums and any HOA fees.
What income do you need for a $600,000 mortgage? ›
To comfortably afford a $600k mortgage, you'll likely need an annual income between $150,000 to $200,000, depending on your specific financial situation and the terms of your mortgage. Remember, just because you can qualify for a loan doesn't mean you should stretch your budget to the maximum.
If you want to have a minimalist lifestyle, 36k/year is more then enough. If you want a home, family, car, insurance and some "toys", it's not going to be enough, at least in a majority of places in the U.S. But again, the term "decent" is pretty objective.
Can someone who makes 40k a year afford a house? ›
On a $40,000 salary, you could potentially afford a house worth between $100,000 to $140,000, depending on your specific financial situation and local market conditions. While this may limit your options in many urban areas, there are still markets where homeownership is achievable at this income level.
What is the 28 36 rule? ›
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance.
How much do you make an hour to make $100,000 a year? ›
The good stuff: calculating your hourly wage
To get this figure, divide your annual salary ($100,000) by the total number of hours you work in a year (2,080 if you work a consistent 40-hour week). The result? You're making $48.08 per hour. So, $100k a year is roughly $48 an hour.
Can a family of four live on 100k a year? ›
On the other side of that, the states where you need the most money to earn a living wage for four people all require an income of more than $100,000. These are all coastal states known for high real estate prices, including Hawaii, Massachusetts, California, New York and Alaska.
Is 100k a year good for a single person? ›
The Takeaway. For most individuals and small families, the answer to “Is $100,000 a good salary?” is a resounding “yes.” Cost of living and family size can affect how far $100,000 will go, but generally speaking, you can live comfortably on $100,000 a year. Are you hoping to make the most of your salary?
How much income do I need for a $250,000 mortgage? ›
If a borrower has no other debt obligations, a conforming loan for a $250,000 property with 10% down in a 7% rate environment would require a gross monthly income of approximately $3,870, factoring in a 50% debt ratio. This translates to an annual salary of around $46,450.
How much would a 250k mortgage cost per month? ›
The average cost of a £250k mortgage right now is £1,320 per month which means you would pay back around £395,878 across the whole term. This is based on average interest rates at the time of writing (September 2024) being 4% and typical term lengths being 25 years.
Is 50k a year good for a single person? ›
Is $50k a good salary for a single person? Generally speaking, yes. An annual salary of $50,000 is considered a middle-class income, and can be a comfortable wage for a recent graduate or a person starting a new career.
How much down payment for a 250k house? ›
As an example, for a $250,000 home, a down payment of 3.5% is $8,750, while 20% is $50,000.
