28% Mortgage

[emanon1501]

I know that the mortgage should not be more than 28%. But, 28% of what? Gross income or take home pay? Also, does 28% include tax and insurance?

[Wino]

Mortgage: 28% of gross monthly income
Mortgage plus fees: 32% of gross monthly income
Total debt: 40% of gross monthly income

Those are the "rules of thumb" when it comes to affordable borrowing. Also, I'd add that you should have 20% down payment, as well, to avoid PMI, but they were recently offering 80+15 loans where you would need only 5% down, plus closing costs. Get the primary mortgage at 80% and a second mortgage at 15%. I don't know if they're still being offered, but I would not doubt it, if you have a 750+ credit score.

[Jerry91]

It will be ideal if your PITI (Principal, Interest, Tax and Insurance) does not exceed 28% of your gross income.

[riverwed070707]

Mortgage: 28% of gross monthly income
Mortgage plus fees: 32% of gross monthly income
Total debt: 40% of gross monthly income

Those are the "rules of thumb" when it comes to affordable borrowing. Also, I'd add that you should have 20% down payment, as well, to avoid PMI, but they were recently offering 80+15 loans where you would need only 5% down, plus closing costs. Get the primary mortgage at 80% and a second mortgage at 15%. I don't know if they're still being offered, but I would not doubt it, if you have a 750+ credit score.

This is a flawed assumption. I recently helped a friend refi who had fallen for the "do a 80 +15 loan to avoid PMI" when they bought a few years back. With a 7% interest rate of the 15% loan she was paying far more than the .05% pmi costs in interest every month and it wasn't making a dent in her principle. Better to have the 20%; if you won't wait it likely makes more sense to take the PMI but at the very least run the numbers and make an educated decision.

[Wino]

This is a flawed assumption. I recently helped a friend refi who had fallen for the "do a 80 +15 loan to avoid PMI" when they bought a few years back. With a 7% interest rate of the 15% loan she was paying far more than the .05% pmi costs in interest every month and it wasn't making a dent in her principle. Better to have the 20%; if you won't wait it likely makes more sense to take the PMI but at the very least run the numbers and make an educated decision.

In 2006, I got a 80/20 for 5% and 5.5%. Your numbers are way off for then, much less now. I'm guessing your friend had a credit rating just above room temperature or got those rates when Carter was president.

[riverwed070707]

In 2006, I got a 80/20 for 5% and 5.5%. Your numbers are way off for then, much less now. I'm guessing your friend had a credit rating just above room temperature or got those rates when Carter was president.

You're guessing wrong. Its pretty standard for the 80% to be market rate and the 15% to be 3-4% higher. Friend has a credit score in the high 700s. We also looked at the option when we bought in 09 and the numbers just didn't make sense to avoid the PMI.

[ua_guy]

You're guessing wrong. Its pretty standard for the 80% to be market rate and the 15% to be 3-4% higher. Friend has a credit score in the high 700s. We also looked at the option when we bought in 09 and the numbers just didn't make sense to avoid the PMI.

Agreed. I was one of those people that bought in 2006 and my numbers were similar. The gamble with the 2nd mortgage was to forego saving for a proper down payment because having that cash invested or available for improving the house appeared to be more advantageous than spending more time saving, or taking PMI. What we expected to be a leveling of a strong market where we'd see some appreciation, but not rapid growth, the market was razed instead. We bought with impeccable credit for our age and length of credit history.

[johntomba]

Mortgage: 28% of gross monthly income
Mortgage plus fees: 32% of gross monthly income
Total debt: 40% of gross monthly income

Those are the "rules of thumb" when it comes to affordable borrowing. Also, I'd add that you should have 20% down payment, as well, to avoid PMI, but they were recently offering 80+15 loans where you would need only 5% down, plus closing costs. Get the primary mortgage at 80% and a second mortgage at 15%. I don't know if they're still being offered, but I would not doubt it, if you have a 750+ credit score.

Great advice here. Go with the rules of thumb. Don't get yourself into a tricky situation.