28% of income to mortgage- clarification questions

[dawnwes]

I noticed on another thread that some of you mentioned your housing costs/mortgage should be no more than 28% of your income.

Could you clarify?

I know DR says no more than 25% of your TAKE HOME income and that is on a 15 year mortgage and the 25% should include your mortgage, your taxes and your insurance. I am not sure if he includes things like utilities in there or not as I can't remember.

So, for those of you who are saying 28%, what does that mean?

15 year or 30 year?
Include escrow funds?
Include utilities?

I ask because we did buy too much house. It wasn't necessarily too much on a 30 year mortgage but once we switched to a 15 year it became more than what we should have purchased.

I think right now we are at 28% of take home income on a 15 year loan but not including taxes and insurance, adding in those puts us right around 33%. That does NOT include utilities (which thankfully only run about $200-$250/mo.)


Thanks for clarifying.

Dawn

[disneysteve]

DR is more conservative with his 25% for 15 years advice.

The general advice is 28% for principal, interest, taxes and insurance for 30 years. That does not include utilities.

Total debt servicing should be no more than 36% including the home.

[dawnwes]

Thanks Steve.

We don't have any other debt than the house and we have a decent enough income that 33% is fairly comfortable. We are saving over $170K in interest by switching to a 15 year.

My guess is that in the next couple of years it will fall into a 28% due to raises and such.

Dawn

[maat55]

Originally Posted by dawnwes

Thanks Steve.

We don't have any other debt than the house and we have a decent enough income that 33% is fairly comfortable. We are saving over $170K in interest by switching to a 15 year.

My guess is that in the next couple of years it will fall into a 28% due to raises and such.

Dawn

You'll be fine as long as you have a sufficient emergency fund, live below your means and stick to a debtfree lifestyle.

[greenskeeper]

I think you have to look at total debt payments to income instead of just strictly the mortgage.

If have no other debts but the mortgage, should you still be held to the 28-36%?

[disneysteve]

Originally Posted by greenskeeper

If have no other debts but the mortgage, should you still be held to the 28-36%?

The guideline is 28% to mortgage and 36% to debt overall, so if you have no other debt, you could stretch the mortgage to 36% and still be within the overall debt guideline.

Obviously, though, your goal should be less debt, not more debt. Just because the guideline recommends a limit of 28% doesn't mean you need to go out and spend that much. We certainly didn't. When we bought our house, we were only around 22%. As our income rose, that dropped even more and now stands at about 18% of take home even though taxes have doubled over the years and insurance has risen.

So use the guideline as a maximum, not as a suggestion, for how much to spend.

[jpg7n16]

28% is a guideline/rule-of-thumb


It includes any cost of owning the house (mortgage, taxes, insurance, HOA dues, etc.)

-You want to limit these expenses to under 28% of takehome. If a cheaper house meets your needs great! If your calculation comes in at 29%, you're close enough. But if you're at 35-40+%, your house is likely taking up too much of your cashflow.


It does not include costs of using/maintaining the house (yardwork, repairs/maintenance, utilities, solar panels, appliances, etc.).

-These should be accounted for in the rest of your budget.

[greenskeeper]

My mortgage is the only debt I have. I pay monthly on time plus 200% additional principal payment.

This puts me at nearly 50% of my income. However on this pace I will pay off my 30yr note in just under 12 years.

I have no car payment, no credit card debt, put 15% towards 401k (wifes employer matches, my employer does profit sharing) and have adequate emergency fund.

If all goes well I can have a paid-for house by age 40.

Then I can maximize retirement savings, or at worst case need minimal income to live comfortably, as the home mortgage is a big chunk of monthly expenses.

[disneysteve]

Originally Posted by greenskeeper

My mortgage is the only debt I have. I pay monthly on time plus 200% additional principal payment.

This puts me at nearly 50% of my income.

Just to be clear, the 28% guideline references the required payment, not any extra payments that you choose to make.

[jpg7n16]

Originally Posted by greenskeeper

I pay monthly on time plus 200% additional principal payment.

This puts me at nearly 50% of my income.

Originally Posted by disneysteve

Just to be clear, the 28% guideline references the required payment, not any extra payments that you choose to make.

Agreed.

That means for you (greenskeeper), the required payment would count against the 28%. If you're paying 200% of the principal portion amount, you're likely around 25-30% as required by the loan terms.

Then you are choosing (with additional money left over in the remaining portion of your budget) to pay an additional amount to your mortgage. These extra payments are not required to own the home, therefore would not be considered part of the 28% metric.


Now if you were required to make a minimum payment of nearly 50% of your income, you would obviously be in a much worse financial postion. That is the point of the guideline. To highlight when there is a problem.

[jpg7n16]

Originally Posted by greenskeeper

...put 15% towards 401k (wifes employer matches, my employer does profit sharing)...

BTW - are you counting employer contributions as part of your 15%?

[LivingAlmostLarge]

I know when we first bought years ago it was like 50% of our income, that first place. It was hard, but then it was cheaper than renting because rents were expensive and our income was small. Then we got into the more manageble area of 30% of gross. Now it's probably 17% of our gross. But of our take home? Something ridiculous like 50% of our money we see in our bank account monthly, I get very confused on take home. But I guess that means we live on very little and save a lot and pay a lot in taxes. I am not sure how to calculate it because we save for retirement, short term/long term and then my DH's actual take home is less than half his gross after everything.

[dawnwes]

I always figure net is anything that is not considered tax.

We see fairly little of the paycheck as well since we have our investments (retirement, 401K, Fidelity savings, college savings, medical insurance and such taken out. But that doesn't mean it isn't part of the NET amount.

After all of the above it taken out, our mortgage (including taxes and insurance) is about 43% of that. However, it is only 33% of our net salary.

Dawn

Originally Posted by LivingAlmostLarge

I know when we first bought years ago it was like 50% of our income, that first place. It was hard, but then it was cheaper than renting because rents were expensive and our income was small. Then we got into the more manageble area of 30% of gross. Now it's probably 17% of our gross. But of our take home? Something ridiculous like 50% of our money we see in our bank account monthly, I get very confused on take home. But I guess that means we live on very little and save a lot and pay a lot in taxes. I am not sure how to calculate it because we save for retirement, short term/long term and then my DH's actual take home is less than half his gross after everything.

[GREENBACK]

I think a lot of these guidelines come from mortgage companies and realtors who want you to borrow as much as possible without defaulting. the numbers come in a bit high in my opionion. I would be paying three times the amount that I do if I followed those rules. I like the idea of living in less of a house than some formula says I can afford and having money for the other aspects of life.

[LivingAlmostLarge]

We lived in CA and everyone we knew was renting for 50% of their income. So it's not great but most people were spending a lot on a mortgage. And I didn't think it out of line, just everything else was bare bones.

[jpg7n16]

Originally Posted by GREENBACK

I think a lot of these guidelines come from mortgage companies and realtors who want you to borrow as much as possible without defaulting. the numbers come in a bit high in my opionion. I would be paying three times the amount that I do if I followed those rules. I like the idea of living in less of a house than some formula says I can afford and having money for the other aspects of life.

The point is to establish some standard by which someone can know if their housing payments are taking up too much of their cashflow.

To answer the question, "how much is too much?"

Not to answer the question, "what should I be spending on housing?"


If you are well under the 28% guideline, and are meeting all your family's housing needs, you're doing very well