What Percentage of Your Net Income Should Go Towards a Home Mortgage?

Even though home prices have undergone a prolonged period of decline and are now far more reasonable than they were even five years ago, it's still easy to go overboard and purchase an unaffordable piece of property. Plenty of first-time home buyers are suckered into paying too much for a home that they can't afford. Whether the culprit is a slick real estate agent who knows just what to say to make a sale or a flashy balloon mortgage that seems far cheaper than it actually is, there are plenty of ways in which innocent home buyers can be persuaded to purchase an unnecessarily-expensive new home.

If you're in the market for a new home, you should carefully consider your financial situation before touring any houses. Even though it's likely that your earning power will increase as your career advances, most financial professionals argue that you should use your current income as the benchmark for your purchasing decision. In other words, you should assume that you'll continue to earn your current salary for the foreseeable future. This ensures that you'll make a conservative purchasing decision and won't subject yourself to a massive monthly mortgage payment that you can't afford without making considerable sacrifices.

In addition, you may find it difficult to "adjust" to a major new obligation like your mortgage payment. During your first several months of home ownership, you may need to rework your household budget and downsize certain other aspects of your lifestyle. For instance, you may wish to give up your gym membership and start running outside. You may also need to cut back on the number of restaurant meals that you eat. As time goes on, you'll probably find it easier to manage your new obligation and may be able to replace some of these once-coveted lifestyle choices.

If you wish to reduce the number of lifestyle changes that you'll need to make in order to afford your new home, you should strive to keep your total monthly home ownership costs at less than 25 percent of your net income. In fact, most home ownership gurus argue that you should keep your total mortgage-related expenses below 33 percent of your total gross income. Depending upon the tax bracket into which you fall, this may well require you to keep your total mortgage expenses below 20 percent of your net income. If you live in an expensive area, this may be difficult to accomplish.

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