Looking for your next home on Zillow is fun, but knowing whether you can afford it can be difficult. What are my total monthly payments including mortgage, taxes, insurance, and private schools? Do I make enough money to sustain these payments and keep saving for the future?
While the exact guidance might be specific to each home buyer, there are some simple rules of thumb to make the process easier. One popular metric is the 28% rule, which says that no more than 28% of gross household income (income before taxes) should go to housing expenses.
I found myself manually recalculating expense-over-income percentage a couple of times per year, and tinkering with different inputs (home prices, interest rates, etc.) to see whether the percentage is comfortably below 28%. To save time, I built this tool to make home buying analysis faster (and it gave me an opportunity to get some reps with javascript and HTML).
Alice and Bob are in the market for a new home. They found a house on Redfin for $850k. They are pre-approved for a 30-year loan at a 2.9% interest rate, and plan to make an initial 20% down payment.
The property tax on the home is 1%, and home insurance will cost $1200/yr.
Both Alice and Bob are employed, and their gross yearly income (before taxes and deductions) is $210k.
Alice and Bob populate the information into the Home Affordability Calculator and determine that after their down payment of $170k, they will have a monthly payment (which includes principle, interest, taxes, and insurance) of $3683.70.
That seems like a lot of money, but it accounts for only 20.8% of their income, safely below the recommended ceiling of 28%.
Later, Alice remembers that this new home is in a gated community which has a $600/month HOA fee. This should also be factored into the budget. Thankfully, there is one other input field called Extra Monthly Expenses, which can capture things like HOA fees, or even private school tuitions if they are a consideration for a housing change.
The new expense / income percentage is 24.2%, close to the recommended maximum of 26%. If both Alice and Bob continue to work, and if they don't have other large debts (cars, student loans, etc.), they can likely afford this home and still have income left over for savings, investments, and discretionary expenses.
I'm not a financial advisor (far from it). If you see anything else that should be considered in the roll-up, let me know!