I’m here to lay out two rational paths for mortgage amounts:
- the aggressive path-spend around 35%-45% of your pre-tax a.k.a. gross income on your mortgage payment. This does NOT take into account PMI (private mortgage insurance…usually comes into play if you put less than 20% down). This also doesn’t take into account any homeowner’s insurance or HOA dues.
- the conservative path(made famous by Dave Ramsey)-spend 25% of your post-tax income on your mortgage or even your total house payment(add those things we discussed above to your mortgage)
The rational path to a mortgage is to buy the house you can afford. Either of these path’s will leave you room to spare and, taking into account our budget article, should leave you in good shape to fund your retirement and savings.
My thoughts on maxing out your mortgage:
Trying to purchase the largest or nicest home you can afford is setting yourself up for failure. Since rational people don’t actively try to fail, we usually try to avoid this path on this site. Nice homes mean nicer cars, clothes, furniture, daycare, etc. Homes aren’t investments either. Taking into account inflation, the average price of homes increased about 0.1% each year in value over the last century. If you invested $10,000.00 in an investment account 100 years ago, you’d be wearing a monocle and sailing in a yacht. This is not to say that homes are terrible investments, sometimes home values increase rapidly and everyone needs a place to live; however, your home should be a small portion of your portfolio.
My advice, take the Ramsey method and mold it to meet your needs. If you end up spending around 35%-45% of your post-tax income, the world won’t end and you are still ahead of the curve in terms of percentage of income spent on mortgage payments. If all else fails, move back in with your parents 🙂 Just kidding, mom and dad.
-B&T