# What Percentage Of Your Income To Spend On A Mortgage?

To buy a home responsibly, you should know what percentage of your income you should spend on a mortgage. If you spend too much, you will get stressed out. You might even lose your home to foreclosure or a short-sale if you overextend yourself.

Owning a home is one of the best ways to build wealth over time. Real estate tends to appreciate slightly faster than inflation. Meanwhile, homeowners are building equity with each mortgage payment.

The answer to what percentage of your income to spend on a mortgage depends on each person. Each person has different expenses, tastes, risk tolerance, and income projections.

However, the standard answer lies in the definition of affordability. For a home to be affordable, one should spend no more than 28% of your gross income on a mortgage.

In other words, if your gross income is \$5,000 a month, you should spend no more than \$1,400 a month on your total mortgage payment.

A mortgage payment is made up of four components: interest, principal, insurance, and taxes.

Although the general rule from lenders is that you can afford to spend up to 28% of your gross income on a mortgage, some lenders allow the borrower to exceed 30% and some even allow 40%.

For example, if you have a very large income, say \$50,000 a month. The lender may allow you to spend up to \$20,000 a month on a mortgage because you still have \$30,000 a month in gross income. The lender will look at your other liabilities and make a proper determination.

## The Percentage Of Income To Spend On A Mortgage

Affording a mortgage is one thing, affording the total cost of homeownership is another thing.

When deciding on what percentage of your income you're willing to spend on a mortgage, you must also consider:

1. Property taxes
2. Maintenance expense
3. Homeowner's insurance

For example, let's say you own a home worth \$500,000 and have a mortgage of \$2,000 a month. You will likely have to pay 1.2% – 3% of the property's value in property tax. We're talking \$6,000 – \$15,000 a year. Then you will probably have to spend 0.5% – 1% a year on maintenance and another \$500 – \$800 a year on home insurance.

As the price of your property increases, so do your property taxes, maintenance expense, and homeowner's insurance.

## Financial Samurai Housing Expense Guideline

Bank of America, Fannie Mae, and Freddie Mac recommend you don't spend more than 35 percent of your gross income on mortgage, property tax, and home insurance payments.

At 35 percent, this leaves you with 65 percent of your gross income to spend on food, clothing, transportation and shelter.

Below is data from the Bureau of Labor Statistics on the average percent of gross income Americans spend on Housing, Transportation, Food, Personal insurance, Healthcare, and Apparel and services.

As you can see from the chart, Americans spend on average between 30.2% – 32.8% of their gross income on housing.

Average is average. If you want financial freedom sooner, rather than later you need to be better than average.

I recommend readers spend no more than 20% of their gross income on housing. And for those who want to retire early and really be free from the corporate grind sooner, I recommend spending no more than 10%.

## Take Advantage Of Lower Interest Rates

Besides buying a smaller home that has no wasted rooms, the next best thing is to get a mortgage with as low of an interest rate as possible.

Mortgage rates came down since the late 1980s and reached all-time lows in 2021 as the economy became more productive thanks to technology. Interest rates are closely coordinated around the world now and the Federal Reserve is more efficient in controlling inflation.

Although rates started to rise in 2022 along with inflation, you may still be able to save money by refinancing if you have a higher interest rate.

The best way to get a low mortgage rate is to shop around. Check out the latest highly competitive mortgage rates online today. You can get free, real refinance quotes in one place from multiple qualified private lenders competing for your business. Thanks to technology, it's so easy to compare mortgage rates today.

All you've got to do is input your information and you should get real quotes to compare within three minutes.

## A Lower Mortgage Helps A Lot

I personally like getting an Adjustable Rate Mortgage (ARM), because their rates are lower than 30-year fixed rate mortgages (see chart). Further, the average ownership of a home in America is roughly 9 years. As a result, most Americans are paying more in mortgage interest than they need to.

It's always best to match the mortgage duration with the intended length of ownership or the intended length you plan to have a mortgage.

I refinanced my primary residence mortgage in late 2019 to a 7/1 ARM at 2.625% with no fees. In fact, I got a \$500 credit to refinance because I shopped around online for free.

Despite lower mortgage rates, you should probably still spend at most 30% of your gross income on a mortgage. What happens though is that you can afford much more house with a lower mortgage rate. Just don't get carried away.

## Spend The Least Amount Of Your Income On A Mortgage

If you can keep your total housing cost to less than 20% of your gross income, you are well on your way to reaching financial independence. Don't be like the average American, spending 30%+ on housing.

In addition to mortgage debt, never carry expensive revolving credit card debt or take out an automobile loan. But if you so happen to have revolving credit card debt, I would take advantage of lower personal loan interest rates to consolidate your debt. Check Credible to compare personal loan quotes and lenders.

Below shows that the spread between the average personal loan interest rate and the average credit card interest rate is at its highest. Therefore, consumers should take advantage and refinance or consolidate.

The more you make, the higher percent of your gross income you can afford to pay a mortgage. That said, your ultimate goal is to pay off all your mortgage debt by the time you retire.

Real estate truly is one of the best ways to build wealth over time. Just make sure you can comfortable afford your mortgage during good times and bad times. The last thing you want to do is have to foreclose or short-sale, like thousands of Americans did during the 2008-2009 financial crisis.

Compare the latest mortgage rates here. Nothing feels better than owning an appreciating asset while getting to lower your mortgage payments over time.

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