Mortgage Payment Affordability

How much home can you afford? That’s actually the wrong question to be asking—instead, you should be calculating what kind of mortgage you can afford. This is because the size of your down payment will significantly affect the short and long term costs of owning your home. For example, if you put a $50,000 down on a home valued at $200,000, your mortgage will be the same as if you put $25,000 down on a home valued at $175,000. In both cases, you owe the bank $150,000, regardless of how much your home is worth.

With that established, let’s figure out how big of a mortgage your income can handle. Lenders and mortgage brokers will often give you an overly optimistic figure. That’s because the bigger the loan they give you, the more money they’ll make. Of course, they don’t want to see you default, but they also don’t mind pushing you just to the edge of the breaking point in terms of how much you can scramble together for a mortgage payment each month. Instead of basing your decision on what the lenders say, it’s best to use your own mortgage affordability formula that allows you to comfortably buy a home on your income.

A good starting point is to multiply your gross annual income by 2 (for a conservative estimate) or 3 (for a more aggressive estimate). You could also multiple your gross annual income by 2.5 for a middle of the road estimate. So, let’s say you and your spouse make about $100,000 a year combined. This puts you in the range of $200,000 to $400,000. Remember, this represent the size of the home mortgage you can likely afford. If you have $50,000 saved up for a down payment, this means you can afford a home selling at $250,000 to $450,000.

But this is only part of the equation. There are some state-by-state variables that may skew this estimate up or down. Namely, you’ll want to factor in real estate taxes, home insurance costs and utilities. These fluctuate from region to region (for example, colder states will pay more in heating fuel and homeowners in states where hurricanes occur will pay more in insurance) so be sure to do your research. Typically, you can get a rough estimate of your total cost of living (mortgage payments plus taxes, utilities and insurance) by doubling your monthly mortgage payment. So, if you have a $200,000 30-year mortgage at 7 percent, you’re looking at a monthly mortgage payment of about $1,330. Go ahead and double that to get your estimated total cost of living: $2,660. Keep that figure in mind when budgeting how much you can afford on your paycheck.