How to Budget Your Mortgage Payment for Long-Term Stability

When it comes to homeownership, it’s not just about finding a home you love—it’s about ensuring a secure future without overwhelming yourself with a hefty mortgage.

Join us as we break down mortgage budgeting, offering tips to help you find peace of mind by borrowing within your means, ensuring financial stability for years to come.

In this article (Skip to...)

• What percentage of income should your mortgage be?
• Should you borrow the max you’re qualified for?
• How to determine your optimal monthly mortgage payment?
• The bottom line

What percentage of your income should your mortgage be?

You might imagine finding the perfect place with all the features you’ve dreamt about.

Before getting too carried away, though, it’s crucial to consider the financial side of things.

Typically, financial experts recommend the 28/36 rule when figuring out how much you can afford to spend on a new home. According to this rule, your housing expense shouldn’t exceed more than 28% of your gross monthly income. And all your debts, including your mortgage loan, shouldn’t be more than 36% of your gross.

Keep in mind that this isn’t a hard or fast rule (only a guideline), so it’s possible to qualify for a higher percentage on both ends.

But even if a mortgage lender says that you’re able to spend more on your monthly mortgage payment—perhaps up to 40% of your income—you have to be careful.

Spending too much on a home might leave you with less money for other important things, like saving for emergencies or paying off other debts. So it’s essential to look at your entire financial picture.

If you already have a lot of other expenses, like student loans or a car payment, you might need to spend less on your home to comfortably afford everything. You should also have money left over each month for savings, just in case something unexpected comes up.

Therefore, even if you can technically afford a bigger home loan, be cautious. Life is unpredictable, and unexpected expenses or changes in your income could make it tough to keep up with high housing payments.

Should you borrow the max amount you’re qualified for?

Lenders also consider several other factors when deciding how much you can borrow for a mortgage. This includes your income, credit history, debt-to-income ratio.

With that being said, even if you have a high credit score and earn enough money, high debt payments can potentially limit your qualifying amount.

Take, for example, two people both earning $130,000 a year.

Let’s say Borrower A has monthly debt payments totaling $1,200 for expenses like student loans and a car payment, while Borrower B doesn’t have any monthly debt payments.

Despite earning the same annual income, a lender might conclude that Borrower A cannot afford as large of a mortgage as Borrower B because a significant portion of their income goes to other debt payments.

However, regardless of how much you’re qualified to borrow, it isn’t wise to buy at the very top of your budget.

Borrowing the max amount means your monthly payments will be higher, which could lead to stress and make it harder to cover other expenses.

On the other hand, purchasing a house that’s less than your pre-approved amount gives you wiggle room and you’re less likely to experience “payment shock.” This is when your mortgage payment is much higher than what you’re used to paying and it’s hard to adjust.

Plus, the less you borrow the easier it’ll be to pay off other debts. You might even be able to put more toward your mortgage each month.

In the end, there’s peace of mind in knowing you can afford your home if unexpected expenses occur.

How to determine your optimal monthly mortgage payment

Setting a realistic budget for your mortgage payment is key to long-term financial stability. To do this, use a mortgage affordability calculator to get an idea of what you can afford before meeting with a mortgage lender.

This tool considers your income, expenses, and other factors to “estimate” a safe payment range.

You can also take the mortgage payment on a test run, where you set aside the estimated payment amount each month for several months. This is an easy way to gauge if you can comfortably manage it without any issues.

Also, think about your lifestyle and what you enjoy doing. Will a higher mortgage payment interfere with activities or expenses that are important to you?

Likewise, consider your financial priorities. Do you have any existing debt? Do you need to build up your savings? Are you still able to save for retirement? Your mortgage payment should leave room for these obligations.

It’s also important to take into account the full cost of homeownership, including property taxes, home insurance, maintenance, and potential repairs. You may even have to add private mortgage insurance if your down payment is less than 20%. Being realistic about these expenses helps you prepare for the financial responsibilities of owning.

Lastly, don’t splurge on a higher payment in hopes of earning more down the road. Nothing is guaranteed, so choose a monthly mortgage payment that can provide long-term stability.

The bottom line

When budgeting for a mortgage payment, it’s essential to consider what percentage of your income your mortgage should be, rather than automatically borrowing the maximum you’re qualified for. By following guidelines like the 28/36 rule and carefully considering your financial situation, you’ll be able to afford your payment without sacrificing other goals. Homeownership should improve financial stability, not strain it.