MSN.com 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.
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Photo Credit: morgueFile.com, Daniel T. Yara
This is not financial or mortgage advice. Please consult a professional advisor.
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3 comments:
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!
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.
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.
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