How Much Should I Spend On a House

Posted December 14th, 2011 in Real Estate by Jeremy Waller

Calculate A Mortgage Payment

Buying your first home can be overwhelming. You’re signing you name to a document that commits you to paying hundreds of thousands of dollars over the next 15-30 years.

That’s not a decision you should take lightly.

One of the biggest problems we’ve seen in the housing market over the last few years is people bought way more house than they could afford. To top it off, they didn’t just over extend themselves on a conventional mortgage. They over extended themselves on interest only loans and other creative financing.

How do you avoid the same mistake? How do you know how much you should spend on a house?

You can’t rely on the banks. They are often willing to lend you far more than you can actually afford. (They were the ones that were willing to do the creative financing that got so many people in trouble…) You can’t (or at least you shouldn’t) rely on what you mom, friend, neighbor, co-worker or favorite TV-personality says. They’re most likely just repeating something they heard from someone else.

There’s only one right way to make the decision. You need to understand the facts yourself and make the decision on your own.

But I Don’t Want to do Math!

Ah, you don’t have to!

The power of the internet has brought us many wonderful tools, including a plethora of mortgage calculators.

Once you put all of your information into the calculator, the mortgage payment including the principal and interest breakdown will be calculated for you.


Mortgage Calculator

Now you have your prospective mortgage payment – what do you do with it?

Your payment including taxes and insurance shouldn’t be more than 25% of your take-home pay. You can likely qualify for much more than that – but I don’t think the banks have  a very good track record with knowing how much house someone can afford. Can you say record levels of foreclosures?

He With The Most Information Wins

You should never go into a real estate transaction without having all of your ducks in a row. You don’t have to be a math whiz to be able to run the numbers. There’s calculators online for all kinds of things. You can find a property tax calculator, estimated insurance calculator, buy to let mortgages calculator, ROI calculators and practically anything else.

There’s no excuse to not being fully informed of the financial implications of your decision.

Don’t trust someone else to tell you what you can afford. Run the numbers yourself and you can be confident that you are making the right decision for you and your family.

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9 Responses so far.

  1. It is such an important decision – you want to get the most house you can afford usually, but you don’t want to be so close to the edge that you are always strapped to make the payments.

  2. I was reading recently that with mortgage costs and housing prices so low, the average household mortgage payment to monthly gross income is an amazing 12%.

    However, I’ve also read that lenders have been raising credit score requirement. Many won’t take below 750, if you can believe it.

  3. Dana says:

    Great points! Also if you are a first time home buyer don’t forget to factor into your budget all the extra costs that come with home ownership.

  4. Totally agree, do all your maths and analyze options before buying a home. Its the biggest expenditure one can make in his/her lifetime. Follow your own instincts. Good article!

  5. Charles says:

    i think it’s excellent time to buy right now. the interest rates are at record lows!

  6. Jackie says:

    Yeah I think the first rule of figuring out how much house you can afford is “don’t believe the bank”. You might be ok by taking their numbers and cutting them in half…

    I think 25% of your take home pay is a good rule of thumb, assuming that you’re including all of the costs associated with buying the home and you don’t have a ton of other bills. The best thing to do is budget/plan carefully with a worst-case scenario in mind.

    • Jeremy says:

      For sure – It’s a known fact that things break at the worst times possible. True story: 2 years ago, our furnace went out during one of the worst blizzards Oklahoma has ever seen.

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