Buying a home is the largest financial decision most people ever make. Get the math wrong and you'll be "house poor" — technically an owner but unable to save, invest, or enjoy life. Get it right, and your home becomes a foundation for wealth.
Here's how to calculate exactly what you can afford before you start shopping.
The 28/36 Rule
Lenders and financial planners use the 28/36 rule as a starting point:
- 28%: Your monthly housing costs (mortgage principal + interest + property taxes + homeowner's insurance) should not exceed 28% of your gross monthly income.
- 36%: Your total debt payments (housing + car loans + student loans + credit cards) should not exceed 36% of gross monthly income.
Example: If you earn $80,000/year ($6,667/month gross):
- Max housing payment: $6,667 × 0.28 = $1,867/month
- Max total debt: $6,667 × 0.36 = $2,400/month
If you already pay $400/month on a car loan, your max housing payment drops to $2,000 — or $1,867 if you want to stay within 28%.
The Income Multiple Method
A simpler rule of thumb: you can afford a home worth 3–5× your annual gross income.
| Annual income | Conservative (3×) | Moderate (4×) | Aggressive (5×) |
|---|---|---|---|
| $50,000 | $150,000 | $200,000 | $250,000 |
| $75,000 | $225,000 | $300,000 | $375,000 |
| $100,000 | $300,000 | $400,000 | $500,000 |
| $150,000 | $450,000 | $600,000 | $750,000 |
The right multiple depends on your down payment, interest rate, other debts, and local property taxes.
What Goes Into Your Monthly Payment
Your mortgage payment is more than principal + interest. Budget for:
| Component | Typical cost |
|---|---|
| Principal + interest | Depends on loan |
| Property taxes | 0.5%–2.5% of home value per year |
| Homeowner's insurance | $100–$200/month |
| PMI (if down payment < 20%) | 0.5%–1.5% of loan/year |
| HOA fees (if applicable) | $100–$500/month |
On a $350,000 home with 10% down ($315,000 loan) at 7% for 30 years:
- Principal + interest: ~$2,095/month
- Taxes (1.2%): $350/month
- Insurance: $125/month
- PMI (~0.8%): $210/month
- Total: ~$2,780/month
That requires a gross income of at least $9,929/month ($119,148/year) to stay within the 28% rule.
How Down Payment Changes Everything
A larger down payment reduces your loan, eliminates PMI faster, and lowers your monthly payment:
| Down payment | Loan amount | Monthly P+I (7%, 30yr) | PMI | Total monthly |
|---|---|---|---|---|
| 3.5% ($12,250) | $337,750 | $2,247 | $253 | ~$2,775 |
| 10% ($35,000) | $315,000 | $2,095 | $210 | ~$2,580 |
| 20% ($70,000) | $280,000 | $1,862 | $0 | ~$2,137 |
The 20% down payment saves $443/month — that's $5,316/year and $159,480 over 30 years.
The True Cost of Homeownership
First-time buyers often underestimate ongoing costs. Budget for:
- Maintenance: 1% of home value per year (a $400k home = $4,000/year)
- Utilities: Higher than renting in most cases
- Closing costs: 2%–5% of purchase price (paid upfront)
- Moving costs: $1,000–$5,000 depending on distance
How Much Should You Save Before Buying?
Minimum to have before closing:
- Down payment (3.5%–20%)
- Closing costs (2%–5%)
- Emergency fund (3–6 months of expenses — do not drain this for the down payment)
- Moving costs
For a $350,000 home with 10% down: you need at least $35,000 + $10,500 closing + $15,000 emergency = $60,500 minimum.
The Bottom Line
- Follow the 28/36 rule: housing ≤ 28% of gross monthly income
- Budget for taxes, insurance, and PMI — not just principal + interest
- Aim for 20% down to eliminate PMI
- Keep 3–6 months of expenses in savings after closing
- Total savings needed before buying = down payment + closing costs + emergency fund
Use our Mortgage Calculator to find your exact monthly payment at any purchase price, down payment, and interest rate.
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