Sunday, October 07, 2007

the 25% mortgage rule...

So a lot of experts recomend "the 25% mortgage" rule. Where you're mortgage including property taxes, insurance, interest is not greater than 25% of your salary. Some suggest this on a 15 year mortgage like DR, while others are content with a 30 year fixed mortgage. But which is right?

Well the average price of a house is $220k in the US while the median price was $227k. So assume the normal price of a home to be $225k. And a DP of $45k, so the mortgage would be $180k.

Now a 15 year payment @ 6% would be $1519/month. So PITI would be assuming 1% property tax and 1% repairs/annually, and insurance $600/year = $425 extra month = $1944/month PITI. This would require a net/gross salary of $7776/month or $93k/year. How many people make $93k, which is 2x the median salary in the US to afford just the average home of $225k?

A 30 year payment @ 6.5% would be $1138/month. So with the extra $425, the PITI would be $1563/month. So a family would need to earn net/gross $6252/month or $75k/year.

Honestly how many families earn that sort of income to stay within the 25% rules? I'd be very surprised to find many.

But I think for a couple starting out a 30 year fixed is not a bad choice. It makes it easier to afford a house. Plus there is the possibility of raises to help lower the % as they increase their incomes while the mortgage stays fixed.

But the 25% is probably best a guideline. It's not hard and fast, but something to really consider before you do anything. Personally I'm right at the 30% line and it's gone down since we bought. But we did consider what it meant to go higher and lower than the rule.


Anonymous said...

Medium income for family of 4 is between $50K and $75K with both adults working. It depends on where in the U.S. you live, property tax4es, insurance rates. 25-35% range should be almost comfortable.

Living Almost Large said...

If you read the US census median household salary for a family of four is $47k.

So it's unaffordable by the 25% rule of thumb. But I think it can become more flexibl because you do earn peak from 45-60. Not say 25-30 when you may be purchasing your first home.