When I bought my co-op unit a year ago, my mortgage broker said something that surprised me: “You know, you could buy a bigger apartment.”According to him, the bank would let me borrow a lot of money – so much money that my housing payments could be 45% of my income. In other words, if I made $50,000, it could be okay by the bank for me to spend a whopping $22,500 of it on my mortgage, property taxes, and homeowners insurance per year.
Although it may be okay by the bank for housing to eat up that much of my budget pie, it’s not okay by me. As a real estate agent, I know better than to do that. Here’s my rule of thumb:
Aim for a Loan Balance 2 to 3 Times Your Annual Income
In other words, if you make $50,000, your ideal mortgage is between $100,000 (2 times your annual income) and $150,000 (3 times your annual income). “Income” is your gross salary, which is your pre-tax amount, or what they say they’ll pay you when you take a new job. It is not your net salary, which is what you see when you look at your paycheck.
Housing Costs Will Vary, but This Rule Will Keep You Out of Trouble
Obviously, your housing costs are going to vary depending on whether you buy an apartment (where you’ll be paying common maintenance charges) or a house (where you’ll have gutter cleaning and window repairs). That said, this rule of thumb will generally keep you from overspending and getting into a hole.
There’s a Lower Limit on Your Mortgage, Too
If you don’t spend enough of your budget on a house or an apartment, the place you get will probably feel too small or not luxurious enough. In my experience, that often incents people to move again fairly quickly—which means spending a lot more money on transactions costs. Instead, aim to find a place that’s big enough for you to stay comfortably for five years. If you think, “Well, I’ll move in two or three years anyway,” don’t buy.