How Much of Your Income should go towards Mortgage?
Managing one’s finances is not a small job. At least that is the case for a large part of the population. But there is something we all need and it is housing.
Housing is an important need regardless of how much you earn and your take home. As a prudent measure, it is important to determine how much you would be committing to your mortgage on a monthly basis.
A large part of our working population is in debt. For some, it could be auto while for some it could be mortgage or both.
Paying off our mortgage is a primary concern for most of us whenever our paycheck arrives.
Most of the time, the problem is not with paying off the mortgage but with how much we should commit to our mortgage payments.
There are a number of ways through which you can pay down the amount of your mortgage.
Some have advocated that you pay a little more every month, which is, paying an amount higher than you paid the previous month.
This approach is not sustainable because if you continue at that rate, you would not have much savings and could end up committing a rather too large size of your income to paying off your mortgage, and this could come at the expense of other pressing needs.
A better approach to making your mortgage payments is the percentage formula. This is a payment approach where you commit a certain percentage of your income into paying off your mortgage.
If this approach is better, the question becomes what amount should I commit to my mortgage?
The amount or percentage of your income to commit would depend on certain factors. Such factors include what the banks allow and what percentage you as an individual is comfortable with.
So how much of your net income should you spend on your mortgage?
Understanding your Mortgage
When talking about your mortgage, it is important that you understand what it entails. Your mortgage does not only refer to the principal loan amount on the property or home but includes other costs such as insurance, taxes and the interest on the principal loan amount.
Therefore, you need to have this understanding before you can make the decision of what percentage of your income should be your mortgage.
Should I Talk to my Bank?
Yes, of course, you can talk to your bank but the ultimate decision of the percentage of your income which should be your mortgage rests with you.
You can talk to your bank to find out what are the conditions and the maximum amount you can receive as loan considering your income and credit score.
The Right Percentage
There may not be a right percentage, the widely accepted percentage of your income that should be your mortgage is 28%. That said, the right percentage should be (+/-) 28%.
To arrive at the right percentage, some important calculations should be made.
The Monthly Income
To arrive at the right percentage, it is important to understand what your monthly income is and how the banks and mortgage companies calculate it. Your monthly income could be net or gross. Net means after taxes while gross means before taxes.
To use a hypothetical example, if Ben earns an annual income of $70,000 (U.S. dollar), his monthly income would be calculated as $70,000 divided by 12, which would equal to $5,833.33.
Therefore, Ben’s monthly income would be $5,833.33 (U.S. dollar). If the amount stated above is Ben’s net monthly income, most banks would calculate it higher, because most of the banks work with gross income rather than net income.
In the case of our example above, assuming a 15% tax rate, the gross monthly income which the bank would be working with would be $874.9995 + $5,833.33 = $6,708.33, therefore, the banks would be working with a gross monthly income of $6,708.33 for Ben.
In this case, 28% of Ben’s monthly income would be $1,878.33 (U.S. dollar), which is the figure most banks would be working with.
Total Mortgage Payment
From the example we used above, if Ben’s mortgage costs $100,000 (U.S. dollar), that means that a total amount of $1,878.33 x 12 = $22,540 (U.S. dollar) from Ben’s annual income would go into his mortgage annually.
The Place of a Budget
It is important to maintain a budget. When putting down your housing budget, you should know that your mortgage is just a subset of your housing budget and expense.
We all wish for the day when we will not have to make that mortgage payment again. That would be a feeling to cherish, no deductions going to the banks for a mortgage payment.
To be able to achieve this goal, it is important that you commit to paying off your mortgage using a percentage of your income.
Ensure that the percentage of your income which you commit to your mortgage is a percentage you are comfortable with.
How much of your salary should go on your mortgage?
If you think 28 percent of your income is too much to be your mortgage, having duly considered your unique situation, ensure that the percentage does not go below 25 percent, this percentage would ensure that you successfully pay off your mortgage in your most productive years.