How Much of your income should go to your mortgage?
Learn how much of your income should go towards your mortgage and discover 4 ways to lower your monthly payment. F
(And 4 Ways to Decrease Your Monthly Payment)
Choosing how much to spend each month on your mortgage can have a huge impact on your financial life in the future and your ability to reach other financial goals. Committing to a mortgage that is too large can prevent you from being able to save for retirement, meet other financial obligations, pay off debt, or have the flexibility to make other investments. With this in mind, properly establishing your mortgage in a way that you can afford, be comfortable with and still buy the home you want is important.
In an ideal world, how much of your income should go toward your mortgage payment?
A good rule of thumb is that your mortgage payments should be no more than 25 percent of your monthly income. This means that if your household brings in $4,000 a month, your mortgage payments should be no more than $1,000. Of course, if you are able to spend less than 25% of your monthly income on this payment, this will free up your income even more.
It’s also important to consider other expenses when deciding how much of your income should go to your mortgage. Just because your payment is $1,000 per month, does not mean that that will be your total monthly investment. You should also factor in things like taxes, insurance, and home maintenance costs. Don't forget unexpected expenses!
When you’re considering how much of your income should go to your mortgage, remember that your home is an investment. Make sure you’re making the right decision for your financial future and taking the time to comfortably afford the payments.
How to Lower Your Monthly Mortgage Payment
Make educated decisions about how much you want to invest overall and how much you can afford on a monthly basis. There are a few things you can do to affect your monthly payment on your mortgage. You can:
Choose to spend less than you’re approved for.
Just because your mortgage lender approves you for a certain amount, does not mean that you have to buy a home for the full amount. As the homebuyer, it is your decision on how much of the amount to actually use on your purchase.
For example, if you are approved for $350,000 - you may choose to look at houses that are closer to $300,000 in order to lower your overall payment every month.
PRO TIP: If you’re trying to spend less on your home than approved for, ensure that you only entertain homes within the range you want to spend. Just like cars, once you test-drive the upgraded version - it’s difficult to go back to the basic version!
Improve Your Credit Prior to Applying
Seeking financial advice on ways to improve your credit score prior to committing to a mortgage can make a huge difference. Often your lender will have a lot of experience on tips and tricks to improve your credit (and sometimes in a reasonable amount of time) with a few simple steps. Taking this step a few months before you’re ready to buy can have a huge impact on your interest rate which will directly affect your monthly payment.
Put Down a Larger Down-Payment Upfront
If you’re able to put down a larger down payment, your mortgage payments will be lower. For example, if you put down 20 percent, you’ll be able to get a lower interest rate, which lowers your monthly payments. However, if you don’t have the full 20 percent, you’ll likely need to pay for PMI (private mortgage insurance) to cover the lender’s risk. This will increase your monthly payments.
Refinance Your Mortgage when Lower Interest Rates are Available
In the event that you’re already committed to a mortgage that is more than you’d like to be spending on a month-to-month basis, you can strategically choose to refinance your home when lower interest rates are available. Improving your credit, the economy, and your debt-to-income ratio will all affect the interest rate you are approved for. So preparing for this and choosing the right time to refinance can make all the difference.
Know your income and lower your payments
Once you know how much you can comfortably afford, you can start shopping for a home. When you find one you like, calculate the monthly payment and make sure it fits within your budget. Buying a home is an exciting experience, but it’s important to make sure you’re making the right decisions. Knowing how much of your income should go toward your mortgage will help ensure you’re making the best decision for your future. To learn more about the homebuying process, make sure to check out our courses!