How Much of My Income Should a Mortgage Be?
May 30, 2009 by Miranda Marquit
Filed under Finance
One of the issues covered last night on ABC’s “Unbroke” special was mortgages. This was an important issue to cover, since things got out of hand recently, and some of the crazy mortgages played a big role in the recent financial crisis and 
subsequent recession. However, I quibble with one bit of the advice Seth Green offered. (I also didn’t like the special’s focus on individual stocks .) He said that a general rule is to spend no more than 1/3 of your gross monthly income on housing expenses. Your gross monthly income is the amount you get before taxes. Personally, I think that to be safe you should keep it to 1/3 of your net — after tax — income .
Better yet, consider keeping it to 28% if your income. That way, you fall within the 28/36 qualifying ratio that is coming back into vogue amongst mortgage lenders. This is a number that expresses the preferred debt load you carry. 28% for your home, and 36% of your income for your total debt payments . This ratio is used mainly for seeing if you qualify for the best mortgage interest rates. And if you do qualify, you can save thousands over the life of you mortgage loan.
Did you watch Unbroke? What did you think?
I think the KISS principle applies to mortgages too. Steer clear of fancy, complicated products. Go with a simple 15 or 30 year fixed rate mortgage, and the traditional rules of thumb of 28/36 make as much sense now as ever. Don’t buy a home unless you plan to live in it at least 5-7 years.
I agree completely.