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I've seen 2.5 times your income as the "rule of thumb" for the size of your mortgage. When was this rule created and what was the interest rates at the time? I remember hearing this rule back in early 2000, how far back does it go?
I've heard around 3x income. Of course, it depends on interest rates. A better way to look at it is that your total housing payments (mortgage, tax and insurance) shouldn't be more than 28% of your gross income, and that plus your other debt payments shouldn't be more than 36% of your gross income.
That's for a relatively young person with an average income. For older people or high income people, the percentages should be lower IMO because of higher risk of being unable to maintain current income level.
I strongly believe that Americans in general devote too much of their income to housing and need to rein it in.
In 2000, 30-year mortgage interest rates were in the 8-9% range and salary levels were an average of 20% lower (?). Therefore, if one considers 2.5-times mortgage-to-income ratio from 2000 as the standard for comparison, one could calculate the current ratio (based on 4-5% interest rates) to be about 6-times one's income level.
Ignore rules of thumb and simply look at what YOU can afford month to month and what you think you NEED. My wife and I bought our first house 4 years ago, and we bought at around 1.3x our salary and our base mortgage payments were only 10% of our gross income. Using the 2.5-3x or 28% ROT was just way more than we needed to spend on our first house.
The other mistake people make? They get pre-approved and then want to spent every last penny of what they are approved for. We were approved for almost 4x our salaries yet bought something at 1.3x.
Ignore rules of thumb and simply look at what YOU can afford month to month and what you think you NEED. My wife and I bought our first house 4 years ago, and we bought at around 1.3x our salary and our base mortgage payments were only 10% of our gross income. Using the 2.5-3x or 28% ROT was just way more than we needed to spend on our first house.
The other mistake people make? They get pre-approved and then want to spent every last penny of what they are approved for. We were approved for almost 4x our salaries yet bought something at 1.3x.
This, with one amendment. You should take what your mortgage cost and then add costs such as utility, property taxes, and PMI (If applicable). You should also allocate a few hundred each month for maintenance. That's the true cost of home ownership.
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