See How Much Home You Can Afford With the 30/30/3 Rule
If you’ve been looking for a new home during a pandemic, you are not alone. With record low mortgage interest rates and a large number of people working from home , many people are considering an upgrade. In fact, according to a recent report by the National Association of Realtors, existing home sales jumped more than 20% in June and up 25% in July. The problem is that buying a home is more than covering your monthly mortgage payment, which increases as property taxes and homeowner insurance premiums rise.
You also have to pay for home repairs and maintenance – an average of $ 1,105 per year, according to HomeAdvisor’s 2019 Home Spending Report . But many homeowners will spend more, which is why experts suggest setting aside 1-4% of your home’s value per year to pay for it.
There is no doubt about it: buying a home can be risky, especially if you have to overshoot your budget, and it can be even more risky during an economic downturn. While mortgages have their own set of affordability guidelines , it might be worth considering a more conservative approach.
Sam Dogen of Financial Samurai suggests measuring how much you can afford by following the 30/30/3 rule . Dogen says you shouldn’t spend more than 30% of your gross income on your monthly mortgage payment. He also suggests saving 30% on the value of the home – 20% on the down payment to avoid private mortgage insurance, and 10% on contingency reserves. He also recommends limiting the value of your home to three times your family’s gross annual income.
Here’s an example: suppose your family earns $ 75,000 a year. This means your household has a monthly gross income of $ 6,250 and your mortgage payment must not exceed $ 1,875 per Dogen’s guidelines. You should also limit the purchase price of your home to three times the $ 75,000, or $ 225,000, and you must have 30% of the $ 225,000, or $ 67,500, before buying the home.
While Dogen’s sentences can be difficult for the average family, counting numbers can still be a rewarding exercise. After all, it’s hard to predict what the economy – or the stability of your job – will be like in the future. Spending less on a home can be a good thing, especially if you or your partner have experienced a loss of income.