What Kind of Home Payments Can I Afford?

To calculate the maximum principal and interest amount you can afford to pay each month, there are two basic factors you need to know:

- Your gross income--Your income before any taxes are paid.

- Your monthly debts--This includes car payment(s), other installment loans, and credit cards. This does not include the current rent or house payment.

When you calculate your affordable house payment, you will work on two separate estimates. The first estimate is based on your housing expense. The second estimate is based on your monthly debts. Your final figure will be the lower of the two estimates.

Example: Suppose you make $30,000 a year and have monthly debt payments of $150.

Estimate 1:

- Gross Income (before taxes) each year: $30,000

- Divide by 12 (to calculate monthly income): $2,500

- Multiply monthly income by 33% (.33): $825. This result provides you with your maximum house payment.

Estimate 2:

- Gross monthly income: $2,500 (from second bullet above)

- Multiply by 38% (.38) -- (A)=$950

- Total monthly debts -- (B)=$150

- Subtract B from A: -- $800. This result provides you with your maximum house payment.

Remember that the estimate you should use is the lower number. So, using the example above, the most you should pay each month on your mortgage is $800.