How much should my mortgage be?

[Wagner11]

My wife and I are looking to buy our first home. Are there any general rules for how much a mortgage should be in relation to income? I heard one person say after 20% down, the mortgage should be equal or less than 1/4 of monthly household income? Is that gross or net income?

Does anyone know any other good rules of thumbs or agree with this rule? Should property taxes be included to figure out what is owed monthly and add that to mortgage to know what we can afford?

We don't want to be house poor but want to find our max limit and hope we find something we like less than that price.

[bjl584]

Don't buy a house that cost more than 3x gross annual income. Put 20% down, and you should be fine assuming that the rest of your finances are in order.

[disneysteve]

Don't buy a house that cost more than 3x gross annual income. Put 20% down, and you should be fine assuming that the rest of your finances are in order.

Agreed. 2-3X income, a 20% down payment, a 6-month emergency fund in place. Also, your total debt payments shouldn't exceed about 35% of income so it matters what else you owe with cars, student loans, credit cards, etc. If you have a bunch of other debt, spend less on the house (or put off the purchase until you clean up some of the other stuff).

[Wagner11]

Agreed. 2-3X income, a 20% down payment, a 6-month emergency fund in place.

Do you include property/school taxes with this formula? Or do you favor that in as part of the 35% max debt of annual income?

[Wagner11]

Your mortgage (PITI) should be no more than 25% of your monthly take home pay.

Also be sure to have an emergency fund of 3-6 months expenses in place before you buy your house. I guarantee, there will be emergencies creep up and if you don't have your EF in place, your dream home will become a night mare pretty quickly.

Is this for 15 or 30 year mortgage?

[Eagle]

My wife and I are looking to buy our first home. Are there any general rules for how much a mortgage should be in relation to income? I heard one person say after 20% down, the mortgage should be equal or less than 1/4 of monthly household income? Is that gross or net income?

Does anyone know any other good rules of thumbs or agree with this rule? Should property taxes be included to figure out what is owed monthly and add that to mortgage to know what we can afford?

We don't want to be house poor but want to find our max limit and hope we find something we like less than that price.

I agree for the most part with what others have suggested.

Put 20% to avoid PMI. Should save you about $80-300 a month on payments depending on the size of the mortgage.

Your monthly payment should be ideally 25-30% or less of your monthly take home pay for a 30 year note.

I'd personally be more at ease with a 6-12 mo e-fund. But do have at least 3-6 months worth in your e-fund.

I'd say don't by a house that costs more than 2x your annual income. 3x seems a bit much to me but I probably am more risk averse than some...

Questions:

1. How much is your monthly household income?

2. How much is your monthly household expenses?

3. How much debt do you have?

4. How much do you have in your e-fund or other savings?

[Michael Thompson]

I think, It will be depend on your income. If you have good income then you should try it. Good luck

[Wagner11]

Questions:

1. How much is your monthly household income?

2. How much is your monthly household expenses?

3. How much debt do you have?

4. How much do you have in your e-fund or other savings?

1) it fluctuates but on average $6,000 per month
2) roughly $2,000 per month not including rent but including utilities and car payments.
3) about $70 in student loans and $10 left on both cars. Student loans at 3.5% with 20+ years left and cars @ 1.9% and roughly 4 years
4) our EF includes our savings for a down payment - we have roughly $100k saved not including retirement savings

[Eagle]

1) it fluctuates but on average $6,000 per month
2) roughly $2,000 per month not including rent but including utilities and car payments.
3) about $70 in student loans and $10 left on both cars. Student loans at 3.5% with 20+ years left and cars @ 1.9% and roughly 4 years
4) our EF includes our savings for a down payment - we have roughly $100k saved not including retirement savings

1/2 You seem to have really low monthly expneses. So if your income is 6k per month I'd suggest a mortgage of no more than 2k.

3. 70k in SL and 10k on the cars. Personally, I'd pay off the cars before considering buying a house. And preferably reduce your SL debt by 1/4 or 1/2.

4a. Follow-on question: How much of your savings cash allocated towards an e-fund and how much goes towards the down payment?

5. When do you plan on buying a house? What size of a house are you looking for? See these two posts that might help you:

Home Buying: pre-qualified, pre-approved, and a loan commitment?
and
Checklist for Buying a House

6. How stable is your job? What are the chances of you moving in the next 3-5 years?

[Eagle]

It should be for either one, HOWEVER, in my opinion, you should always get a 15 year mortgage....or less.

Why should people always get a 15 year mortgage?

Why not get a 30 year mortgage and pay it off early?

I guess it really depends on your monthly income, your monthly expenses, your other debts if any, how stable your job is, the size of your e-fund, and your tollerence for risk.

[disneysteve]

Do you include property/school taxes with this formula? Or do you favor that in as part of the 35% max debt of annual income?

Yes, total housing including principal, interest, taxes, and insurance shouldn't exceed 25% (some use 28% which is okay but pushing the limit IMO).

[TheCudder]

Most people think they can get a 30 year mortgage and pay it off early, however, very few actually do. If you get a 15 year mortgage, you are guaranteed to have it paid off in 15 years or less.

I have owned a home, but I personally feel that forcing a 15 year option could potentially deplete your emergency savings should something happen such as a job loss. With the 30-yr option you can always pay extra on the principle and shoud anything unexpected happens you can revert to paying say $650 a month on the 30 yr option and not end up stuck paying out $1000 a month when you have no income. But I do agree that taking 30 years to pay it off is less than ideal.

[Wagner11]

1/2 You seem to have really low monthly expneses. So if your income is 6k per month I'd suggest a mortgage of no more than 2k.

3. 70k in SL and 10k on the cars. Personally, I'd pay off the cars before considering buying a house. And preferably reduce your SL debt by 1/4 or 1/2.

4a. Follow-on question: How much of your savings cash allocated towards an e-fund and how much goes towards the down payment?

5. When do you plan on buying a house? What size of a house are you looking for? See these two posts that might help you:

6. How stable is your job? What are the chances of you moving in the next 3-5 years?

1-2) we try very hard to be as frugal as we can. And we got married recently so no kids yet.

3) we wanted to save all we could for the home, after we purchase the home we will throw the rest at debt minus the EF

4a) we didn't distinguish in separate accounts we just have one big pile of money and our plan was to pay 20% for a home, remove the EF and throw the excess at debt. Would you suggest we do it differently?

5) we are looking to but now or soon. With roughly $25-$30k in EF we could afford 20% down payment on a $300k home, which was our max - is that too high? But our lease is monthly so we aren't in a rush and plan to shop around.

6) I don't have a tenure job or anything with the government so I'm not that secure but my security is above average and in the unlikely scenario I lost my job, I could easily find work in my field with just a slight (10-20%) pay cut in less than a week.

[Wagner11]

Why should people always get a 15 year mortgage?

Why not get a 30 year mortgage and pay it off early?

I guess it really depends on your monthly income, your monthly expenses, your other debts if any, how stable your job is, the size of your e-fund, and your tollerence for risk.

Would there be a big difference in total payment made? The interest rate would be slightly higher, right? But not enough to make a big difference?

[Singuy]

Would there be a big difference in total payment made? The interest rate would be slightly higher, right? But not enough to make a big difference?

YES! ALWAYS GET A 15 YEAR MORTGAGE IF POSSIBLE!

Borrow 300k
30 year mortgage interest:4.2%
15 year interest: 3.2%
(interest based on bankrate.com)


15 year monthly mortgage is 2100/month(excluding tax/insurance).
30 year mortgage is 1467/month

Lets say you put 2100 dollars/month toward both type of mortgages. This will simulate the 30 year mortgage paying it off faster plan.

Total interest paid in the 15 year mortgage after 15 years is 78,130
Total interest paid in the 30 year mortgage after 16.5 years (pay off if you put 2100/month toward 30year mortgage) is 116,612

Benefit of 15 year mortgage
1. Pay off 1.5 years early
2. Saved 38,482 in interest

Shortcomings of a 15 year mortgage
1. Need a bigger emergency fund
2. Require you to make more or you may have to buy a smaller house.