Mortgage Rate News

One of the main questions that many people have is what is the mortgage payment that they can afford. This is an important question because, as we are finding out in the aftermath of the subprime lending crash, if you can’t answer this question properly, you could be out of a home.

Two rules of thumb for mortgage payment

There are two different rules of thumb that you can use (you can even combine them) to determine the mortgage payment you can afford.

25% Rule. This rule states that your monthly mortgage payment should be no more than 25% of your monthly income. Therefore, if you make $4,000 a month, your mortgage payment should be no more than $1,000. To be extra safe, I like to include all of my housing expenses in that number. My mortgage payment plus insurance plus taxes should not exceed 25% of my monthly income.

45% Rule. This is a rule that comes from personal finance guru Suze Orman. She says that if you are looking to get a mortgage payment similar to what you pay in rent or your current mortgage, you should take 45% of that and then add it. If you are paying $800 right now, you multiply that by .45 to get $360. Then you add the $360 to the $800. $1160 would be the true cost of your home ownership.

Testing out your ability to make the mortgage payment

Buying a new home should be a process. Instead of doing it on a lark, you should plan ahead. Test whether you really can afford to pay more in for a mortgage. Take six months to do this. First, figure out the mortgage payment you think you can handle. Then, look at what you pay now in rent. If you think you can handle $1,200 and you pay $800 in rent, that is a $400 difference. Pay your rent as usual. Then take that $400 and put it in a savings account.

Do this for six months. Are you struggling? Do you have to raid your savings to make ends meet? If you are having trouble, the mortgage payment you picked is too high.

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