How much mortgage payment can a person afford for his house?


How much mortgage payment can a person afford for his house?

 It is indeed a dream for everyone to buy a house with all those super luxe amenities but there is always a question that will come in your mind. How much worth of house can I afford? This is apparently the most searched question about finance on google. So let's look at it.

A typical household or an individual has all sorts of mortgages like house loan, car loan, student loan, credit card etc. So how can you really know what is the optimum price of the house that you can afford or in other way what is the maximum monthly EMI you should be targeting to pay.

The 28/36 rule is what banks or lending institutions follow, and is also taken as a global standard. But what is this 28/36 rule. Let me break it down for you:

  • The 28: It says that a household or an individual must spend a maximum of 28% of their gross monthly income on housing expenses. Housing expenses will involve your monthly payment towards principal and interest, the property taxes, the insurance payments and the maintenance expense. So take for example a person earns $4,000 in monthly income, he can spend $1,120 (28%) towards payment of housing expenses. Isn't that simple. But the question now is what about the 36 in the 28/36 rule. Yes you are absolutely right if you are thinking the below pointer.
  • The 36: When we talked about mortgages above, we saw there are also other sorts of fixed monthly payments towards debt for your car, student loan or credit card. The 36 rule states that all the housing expenses along with other fixed monthly mortgage payments must not exceed 36% of your gross monthly income. So for the guy who was earning $4,000 in monthly income, his total monthly payment for mortgages can be $1,440 i.e. an additional $320.
The above is a standard rule applied in the global mortgage industry, and is said that this method makes the most optimum condition that a person will repay his entire debt. But where there is a solution, there are also some pointers to keep in check.
  • Consistent Income: Keep in mind that your income should keep coming in till the tenure of your mortgage or loan. Because if you are close to retirement and use this formula, you are in for a big problem. How are you going to meet the monthly payments if you don't have the cash inflow.
  • Future requirements: When taking a loan for your house, keep in mind your future requirements, like taking an education loan or business loan in future. If you exhaust your whole borrowing capacity i.e. 28% in house loan, you will not be able to borrow loan for other purposes.
  • Potential of your investment through mortgage: It is a good habit to check what your house has for you in the future. Finding a locality i.e. growing rapidly and has increasing real estate rates of 5-6% annually is a good way to mitigate towards some of the interest you are paying off. You can at any time sell your home and clear debt, if some uncertainty arises.
I hope you have understood the rule and are ready to build your dream home.

Thanks for reading!

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Comment on any query you had like me to address.

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