You're thinking about moving and you feel financially ready to rent or buy a new place. However, you should double check your funds and consider whether you will be able to comfortably afford that new apartment or property by calculating your housing budget.
Calculate Your Housing Expenses Like a Regular Budget
To calculate your budget for a mortgage or your rent, you will have to treat it like a regular budget. Add up your total income and expenses related to your new rent or mortgage monthly payments. While you could do the calculations yourself on paper, a mortgage calculator could simplify the process and prevent you from making costly math errors. You can also adjust your housing payments if anything changes, which is easier to do with the calculator than on paper.
Add Up Gross Monthly Income
Add up all of your household salaries, any extra side jobs wages and other sources of income. For example:
- Spouse 1 income: $40,000
- Spouse 1 investments: $10,000
- Spouse 2 income: $30,000
- Total gross income: $80,000
How to Calculate Rent
Since there are few factors that go into paying your rent, calculating how much you can afford is simpler than accounting for all the costs of a mortgage. The usual guideline you might hear is that your rent should be about 30 percent of your income, according to Apartment Therapy. A short cut to reach this figure is to divide your annual income by 40 to give you the monthly rent payment you can afford.
With the above example of $80,000 in household income, the amount of rent you can handle would be calculated: $80,000 / 40 = $2,000
Based on the calculation shortcut, you can afford a monthly rental rate of $2,000.
How to Calculate Mortgage
Compared to renting, buying a home is trickier because you have to consider other costs besides the principal and interest. Before you go house hunting, think about your desired home budget. Depending on your income, you may want to adjust your home budget to how much you can realistically afford on rent or the mortgage each month. Lenders may look at your total household income and compare it to your debt as a way to approve you for a certain amount for the home loan.
To calculate how much rent or mortgage payments you can afford each month you'll have to consider your expenses as well as your income. Known as debt-to-income ratio, this is defined as all your monthly debt payments divided by your gross income each month, according to the Consumer Financial Protection Bureau.
With the introduction of Qualified Mortgage standards, home loans have become harder to obtain because under the rules, home buyers must achieve good credit ratings as well as have a certain level of financial stability, including an acceptable debt-to-income ratio, to qualify for a mortgage. The rules state the highest debt-to-income ratio you can have to qualify for a QM is typically 43 percent with some exceptions.
Determine Down Payment
Next, determine how much of a down payment you plan to have for your home and how much you expect to receive for a home loan. Subtract the down payment from the expected total purchase price of the home to get the remaining mortgage balance. An example mortgage might look like:
- Home purchase price: $200,000
- Down payment (15 percent): $30,000
- Interest rate: 3.5 percent
- Loan type: 30-year fixed-rate mortgage
- Property taxes: 1.2 percent
Find Total Monthly Mortgage Payment
According to Zillow's mortgage calculator, based on the above information, your monthly home loan payments could be:
- Principal and interest: $763
- Home insurance: $67
- Private mortgage insurance: $62
- Taxes: $200
- Total mortgage payment: $1,092
Through calculating your monthly mortgage payments, you are more prepared to take on a big financial responsibility like a mortgage head on.