When considering what percentage of your budget should be assigned to a home mortgage, a good rule of thumb is to allot no more than 30%. Some argue that it should be lower, such as 25% or 28%. But as long as you keep 30% as the upper bound, your home can often fit within your budget.
One important thing to remember is that your monthly payment can also include other costs, which are put in escrow. For example, many mortgage lenders will escrow money to cover the cost of property insurance, which is required by the mortgage lender, and the payment of property taxes, which are required by the local government. So a portion of that monthly payment will be allotted to the principal, the interest and the escrow.
Why should you not exceed 30%?
Everyone’s situation is unique, so exactly what you can afford depends on your other financial obligations, your income level and things of this nature.
But staying under 30% means that your house will truly be an affordable part of your life. Remember that there are many costs that come along with owning a home, such as maintenance and upkeep or utilities. If you put too much of your budget toward a single monthly mortgage payment, there is no room for these other necessary costs.
In fact, when many people find themselves facing foreclosure, it is not that they have no income. It is simply that their income level is not enough to make their mortgage payments on a consistent basis. Budgeting in advance can help you avoid this outcome.
Making a home purchase
If this is the first time you are purchasing a home, it is important to be well aware of the legal steps you can take to make the process go smoothly. Planning in advance can be very helpful.