When it comes to home mortgages, it all depends on your monthly income. Unless you have a little birdy coming to drop a paper bag filled with cash every month. Usually, first-time home buyers want to know what percentage of their income they can dedicate to mortgage payments without having to cut corners for other expenses. They also want to know if that percentage consists of insurance for homeowners, property taxes and private mortgage insurance (PMI). Frankly, these are all the right questions to be asking, and you’re reading just the right content to answer your question.
First and foremost, the golden rule here is to take into account your total housing payment. Do not focus the better portion of your attention on just mortgage alone. Any veteran in the business will tell you that your housing budget should include PMI, insurance for homeowners and every other housing-related insurance plus property taxes. Many homebuyers have made the mistake of not summing them all together. You don’t have to.
The percentage of your income that should go into your mortgage payment can be your personal choice if you’re financially savvy. However, it’s best to seek professional advice. Meaning what you decide in the long run depends on who you ask and what they tell you. There’s the conventional model for determining what percentage your mortgage payment takes; the 35% to 45% model. This means, 35 to 45 percent of pretax income. Some call this 35% being conformist; others call it the average. Either way, this is the conventional module when it comes to your income and mortgage payments. This standard also allows buyers to take on mortgages that span as long as 30 years. A home mortgage calculator can help you with calculating.
On the conservative side, that is if you choose to be, the percentage that goes into your housing payment should not exceed 25% of your after-tax income—your take-home income at the end of the day. The central point here is that it is not only advisable to have just 25% of your income going to mortgage, but you should also opt for a fixed-rate mortgage of less than 15 years. The idea of the conservative model is to not spend so much on a house when you could channel those funds into education, cars, vacations and furniture—the good stuff basically. Simply put, more than 25% will stress your budget and make you “house poor.”
There’s a huge difference between the two modules as you can see and both of them have their benefits. You could choose any one you feel works for you and be on your merry way, but here is what we recommend and it lies somewhere in between the conventional and conservative module. Being averse to debt is cool and so is not being averse to debt as long as you’re seriously keeping in mind other factors like a new car, boat, kids, you losing your job and so on.
Also, try to maintain a maximum of 40% of your monthly pretax income when it comes to your total debt payment. If you can, 33% is not a bad maximum at all. For your mortgage payment, keep it at 28% or below 28% of your monthly pretax income.
That’s pretty much it. The rest is easy if you follow the right guidelines. Meanwhile, be sure that you don’t get tempted by your lender or financial institution to take on more than you should when you go for pre-approval on the mortgage you applied for. There’s a high chance Lenders and financial institutions will approve an application for a home mortgage with a percentage of 30 to 35% in payments. However, it’s their job to get people to take more loans, so ensure you’re not taking more than you can afford just because it was approved.