As you begin to find what you can
afford for a mortgage payment, remember that there is a lot of conflict on the
best percentage of your monthly income. Some people say 45% of your monthly
income, others say 25%. Best practice as illustrated by the Wall Street Journal
is the 28/36 rule. Landmark goes into that more on this article.
Finding 28% of your income and
looking for houses that you can afford in that budget can be a quick and easy
way to calculate how much you should spend on a home, however, it’s arbitrary.
Perhaps you’re comfortable with having more debt and a longer loan. Or maybe
you would rather have a shorter time-span on a loan. Here is a more specific
way to find what you should be paying for housing costs each month.
First, take your monthly income – the amount of money that is put into your bank account each month, with taxes taken out. If you have dual income from your partner, include that as well.
Take your monthly income and
subtract your set debts. This will be different for everyone – some people will
have car payments, others will have phone bills. Add up each of these bills,
but exclude anything to do with your housing costs at your current location.
You should write these down, but don’t include them in your equation. You can
look at your housing costs currently to get a good idea of what you can afford
as far as a mortgage payment goes.
Next, subtract food-related
costs. If you don’t have a current budget for what you spend on food
(groceries, eating out), you can look back through your past two to four months
of bank statements and average the amount of money you spent those months on
Subtract how much money you
transfer to savings each month.
After, subtract entertainment
costs. Again, if you don’t know how much you use on entertainment each month,
you can look back through your bank statements and average your costs.
This final number will be how
much money you can spend per month on housing-related costs.
Multiply it by 12, then by however long you want a loan for (15 or 30 years for example) to see the price range you should be looking for when looking at homes. Remember, when you're thinking about housing costs maintenance is an important part of that cost! A home warranty can save you money on home maintenance, cutting it from thousands a year to mere hundreds. Learn more about the best home warranty at www.LandmarkHW.com. You can see home warranty coverage, what a home warranty costs and why it's important to protect your home with home warranty insurance.
Remember what housing costs entail! It’s not just a mortgage payment – housings costs also include property taxes, insurance and maintenance. We’ll go into that a bit more in the next article in this series.
Or you can go to our article on why there is conflict on how much to pay per month here: