# The Truth About How Much House You Can Afford

Buying a home is a big decision, and one of the most often overlooked steps is to figure out your price range. It’s exciting to scroll through Zillow and check out open houses, but your first step should really be to figure out how much you can afford so you don’t get attached to a home that’s just not realistic for you.

When we talk about how much house you can afford, what we’re really talking about is *your total monthly payments that go towards housing*. This starts with your mortgage payment, but it doesn’t stop there. It also includes homeowners insurance and property taxes, expected maintenance, HOA fees (if applicable), and PMI (private mortgage insurance). All of that added together is your monthly housing cost, and that’s what you have to fit into your budget.

Mortgage Payment

This will depend on the amount you borrow, the length of the loan, and the interest rate you qualify for. The amount borrowed will be the cost of the home minus your down payment. Once you have that amount you can use an online calculator (like this one) to see what monthly payments you would have with a standard 30 year mortgage at current interest rates (you can find estimates of those here). For example, borrowing $300,000 for 30 years at 7% interest means a monthly payment of about $1,996.

PMI (Private Mortgage Insurance)

If your down payment is less than 20% then you will probably have to pay PMI for at least the first few years of your mortgage. It ranges from 0.5% to 2% of the purchase price. Let’s say you were able to put down $25,000 in that previous example, making the total cost of the home $325,000 (remember you borrowed $300,000). If PMI is 0.5% then you’d pay 0.5% of the total value of the loan per year in PMI, or $125/month.

Homeowner’s Insurance

The average homeowner’s insurance cost in 2023 is about $1,500 for $250,000 in coverage. Your costs can vary significantly depending on where you live, how big your home is and what type of coverage you get. For our example we’ll use the average to estimate a $125/month cost.

Property Taxes

Your property taxes are essentially a percentage of your home’s *assessed* value. It depends on where you live and you can get an estimate by using an online calculator like this one. We’ll assume a 1.25% property tax rate on our $325,000 home for annual taxes of $4,062 or $339/month.

Maintenance

Ongoing maintenance costs aren’t smooth; you can go years without having to fix or replace anything and then spend thousands on a new water heater or air conditioner. A popular rule of thumb is to assume at least 1% of the cost of the home in annual maintenance costs. For our $325,000 home that’s $3,250 annually or $271/month

HOA Fees

If the home you’re interested in has a home owners association (HOA) you’ll have to pay annual fees. These fees can range from a few hundred dollars a month to thousands, so we’ll use $150/month for our estimate.

Adding all of these costs up can be quite a shock. In our example we’re buying a $325,000 home and the basic mortgage cost is estimated at $1,996/month. However, when we add up all of the related costs we get a total of $3,006/month that you’re spending on housing! **The actual mortgage payment is only about 2/3 of the total cost.**

So how much should that total monthly housing cost be?

There’s a rule of thumb that mortgage lenders use that says your housing costs should not be more than 28% of your gross (before taxes, in other words) income. If you’re buying a home with someone, you would use your combined income for this. In our example, $3,006 is 28% of $10,736 so that the homebuyer(s) would need pre-tax income of $10,376 to be able to safely afford that home.

Here’s another quick example, from the mortgage lender perspective. If you make $75,000 and your partner makes $90,000 your combined pre-tax income is $165,000 per year, or $13,750 per month. 28% of $13,750 is $3,850. The same mortgage lender rule of thumb says to keep all debt payments to under 30% of your gross income. That means when you add up your mortgage payment, your auto loan payments, student loan payments, etc they shouldn’t total more than $4,125 per month.

But keep in mind that **these are the mortgage lenders rules, not yours! **They are concerned with your ability to pay back your mortgage, and that’s it so they aren’t necessarily taking *all *of these costs into account. They also don’t take into account your other goals or other obligations you may have. The amount you qualify for *is not necessarily what you can afford. *Buying a home is a big decision and you’ll be making these monthly payments for years to come. It’s easier said than done to find something affordable and not stretch your budget to the breaking point, but you really want to make sure you understand your price range *before *you start shopping.