How Much Mortgage Can I Afford?

You have made the decision to purchase a home but you are unable to decide how much you can afford.  You want to know what percentage of your income should go towards it and what sort of financial obligation you will be faced with.

Many financial institutions such as banks, credit unions, mortgage brokers etc., follow the 28/36 rule.  This simple rule will give you an idea of what you can afford.  Basically the rule states that the monthly payment of your mortgage should be under 28% of your monthly gross income (that is pre tax income) and that your total household monthly bill payments are less that 36% of your monthly gross income.

Now some financial advisors suggest you should change this formula to 25/30 of your actual household income (that is after tax) to enable you to achieve other financial goals such as debt reduction, retirement plans etc.  Therefore you do not bite off more than you can chew though you end up with less house.

What if you want the larger house?  Well you can live with the 28/36 rule and the larger monthly payment.  Another option is a larger down payment reducing the amount you finance.

Remember that a larger home will increase your monthly utility payments – heating, cooling, etc., as well as increased taxes and greater maintenance costs.

The other factor to bear in mind is that your household income may increase over the years meaning that you will be paying a smaller percentage of your monthly income towards you mortgage payment.  The opposite of this is true of course, and you may find yourself in a position where you monthly income is reduced and you end up paying a higher percentage towards your mortgage payment.

Its worthwhile putting in time and effort when determining how much mortgage can I afford.  Its better to be prepared and in control of your destiny.