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The 28% rule and the 35%/45% model are two mortgage affordability tactics. The 28% rule states that a mortgage payment should (ideally) be about 28% or less of your monthly gross income. The 35%/45% model states that your total monthly debt, including your mortgage payment, shouldn’t be more than 35% of your pre-tax income or 45% more than your after-tax income.
While these practices may be helpful, they aren’t for everyone. How much mortgage you can afford will depend on personal circumstances like income, employment status and credit. If you’re interested in understanding more about what mortgage you can afford, consider trying out our affordability calculator.
Your down payment will depend on your mortgage type and personal affordability. If you’re looking to lower your monthly payments and avoid paying private mortgage insurance, your down payment would be at least 20% of your home’s total cost. If you aren’t able to put 20% down, don’t worry, there are many mortgage options that accept less.
Finding a mortgage starts with understanding your financial goals and plans. The interest rate structure and term length you choose can make big differences, so here are a few key things to consider:
- Fixed vs. adjustable rates: A fixed-rate mortgage offers consistent mortgage payments for the life of the loan, which could be helpful for long-term budgeting. An adjustable-rate mortgage may start with a lower interest rate but can fluctuate over time based on market conditions. Exactly when the rate begins to adjust and how often it does will vary.
- Short terms vs. long terms: A 15-year mortgage is considered shorter and usually comes with lower interest rates but higher monthly payments. This can also help you build equity at a faster pace. Meanwhile, a 30-year mortgage may offer more manageable payments but generally results in paying more interest over time.
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Your mortgage interest rate impacts how much you pay each month. Generally, higher interest rates mean higher monthly payments, while lower rates give you smaller monthly payments. Some mortgages have a fixed rate, which means the payment stays the same each month. Others can have adjustable interest rates, which means the payment can change month to month.
Principal, interest, property taxes and homeowner’s insurance are the building blocks of a mortgage payment and a few of the common mortgage terms you’ll find on the homebuying journey. Principal is the amount you borrow. Interest is what the lender charges for borrowing money and varies depending on the market and candidate. Taxes and insurance costs depend on where you live, home price and some environmental factors.
Getting preapproved for a mortgage early in your homebuying process can help you understand how these components fit into your potential monthly payment. Preapproval gives you a clearer picture of what you can afford and shows sellers you’re a serious buyer.
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