What Should Your Mortgage Payment Be?
With the high price of housing and the tendency for lenders to push borrowers into the highest levels of debt they can qualify for, it's very easy to put an undue strain on your finances from the day you move in.
A good rule of thumb concerning mortgage payments is that you should figure on spending right around 28 percent of your gross household income. Realize that what you spend monthly on your mortgage payment is only part of what you'll need to spend to keep up your property. Your total monthly housing expense includes your actual mortgage payment (principal and interest combined), property taxes, and homeowner's insurance. Lenders use the acronym PITI (principal, interest, taxes, insurance) to refer to these elements. And that doesn't even begin to pay for lawn fertilizer, paint, or repairs to the furnace.
Before the housing market started to falter in 2006, most lenders were telling customers they could easily go with a payment equal to 30 percent, 40 percent, or more of their gross income. When housing prices were going up at a double-digit annual pace and overall home values rising as reflected in lenders' appraisals, that might have been easier to justify. But slow markets and rising rates are always around the corner, so
If a mortgage lender tries to sell you on a bi-weekly payment plan, don't rush to sign. Ask whether it wouldn't make more sense just to pay a little more principal each month on the loan. You'll get the same benefits, and you won't have to pay a $200-$300 month fee to join the program.
If you're considering taking out a mortgage with payments equaling (or exceeding) 30 percent of your income, take a moment to ask yourself if you could make your payments under the following circumstances:
What if you or your spouse were fired tomorrow and couldn't get work for six months?
What if you suddenly had to buy a new car and had to take on a significant payment to do so?
What if your property and income taxes rose significantly in the coming year?
What if you had substantial credit card bills and one or both of your household incomes were cut?
What if you had a health emergency and had to pay $10,000 or more even after meeting your deductible?
What if you had substantial student loans to pay and one or both of your household incomes were cut?
As you see, the home-buying process isn't all about affording a mortgage payment. It's about affording
