Wednesday, June 06, 2007

My House Payment As A Percent of Salary published a Home Affordability Calculator that estimates the maximum price one can afford. For people with an excellent credit rating, the calculator uses up to 34% of gross monthly salary to determine the maximum payment one can afford for Principal, Interest, Taxes and Insurance (PITI).

While the calculator allows up to a third of monthly income to be spent on PITI, I feel uncomfortable with that high of a percentage because there is no margin of safety for unexpected expenses. For my first house, I put 25% of my gross salary towards PITI and felt stretched. For our current house, we spend 20% of gross salary on PITI and that amount feels very comfortable. In each case, we used a higher down payment (20% and 43% respectively) to keep our monthly payment lower.

Of course, how much of one's monthly income to spend on PITI is a personal decision. One can always choose to cut spending elsewhere to enable a higher house payment. However, I am glad we never spent over 25% of gross salary and are currently at 20% of gross salary.

For more on The Practice of Personal Finance , check back every Wednesday for a new segment.

Photo Credit:, Daniel T. Yara

This is not financial or mortgage advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC


minimum wage said...

In my state, an estimated one in five renters pays at least 50% of their income for rent (NOT including utilities).

I guess a lot of us can't afford to rent!

Super Saver said...

Minimum Wage,

Thanks for your comment.

The data you shared was very interesting and caused me to learn more about rents as a percentage of income. It seems that there are a number of cities (e.g San Francisco, NYC and even cities in Colorodo and Kansas) where 20% of renters pay about 50% of their income towards housing.

Anonymous said...

Ah yes but in major cities like NYC and even San Fran, other costs are negated like car payments.

It all works out in the end.