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MoneyWatch: Managing Your Money
By Joshua Rodriguez
Edited By Angelica Leicht
/ CBS News
If you're in the market to buy a new home, it's important to consider how much that home costs and whether or not you can comfortably afford to purchase it. After all, the majority of people who buy a house agree toa 30-year commitmentto making their mortgage payments on time.
But if you're a first-time home buyer, it may be difficult to accurately estimate the cost of the home you can afford to buy. For example, let's say you fall in love with a $250,000 house. How much money would you need to earn per year to comfortably afford the mortgage payments on it? The answer is it depends.
Find out if you qualify for a $250,000 mortgage now.
How much income do you need to buy a $250,000 home?
There are a few different rules of thumb you'll come across online to determine how much house you can afford to buy on your current income. Two of the more common are the 28% of your income rule and the 2.5 times your income rule. Here's how those rules work and how much you would need to earn to comfortably afford a $250,000 home when using them:
The 28% of your income rule
According to the 28% of your income rule, you shouldn't spend any more than 28% of your income on mortgage payments. So, how much does a $250,000 home cost in terms of monthly payments? Here's what you can expect to pay with and without a down payment. (Payments were calculated using Bankrate's mortgage calculator. The data below assumes a 7% interest rate, a 30-year term, and that the home is located in the 32446 ZIP code):
- With a 20% ($50,000) down payment: Your payments would be $1,561 per month or $18,732 per year with $1,330 going toward principal and interest, $165 going toward property tax and $66 going to homeowner's insurance.
- With a 0% down payment: Your payments would be $1,894 per month, with $1,663 going to principal and interest, $165 going to property tax and $66 going to homeowner's insurance. That works out to $22,728 per year. It's also important to keep in mind that when you purchase a home with less than 20% down, you'll likely have to pay for private mortgage insurance (PMI). For example, if PMI costs $300 per month, your total mortgage payment would be about $2,194 per month or $26,328 per year.
Based on these figures and the 28% rule, you would need to earn about $66,903.57 per year to afford a $250,000 home with a 20% down payment — or about $81,171.43 per year to afford it with no down payment. When you factor in the cost of PMI, you may need to earn as much as $94,028.57 per year to purchase a $250,000 home with 0% down using the 28% rule.
Find out what your mortgage rate would be on a $250,000 home now.
The 2.5 times your income rule
If you follow the 2.5 times your income rule, you divide the cost of the home by 2.5 to determine how much money you need to earn annually to afford it. Based on this rule, you would need to earn $100,000 per year to comfortably purchase a $250,000 home.
What do the experts say?
Although rules of thumb can give you a general idea of your payment, it's not usually wise to follow these rules without considering your unique circ*mstances. After all, one rule says you can afford a $250,000 home if you make as little as $66,903.57 per year while the other suggests you should earn at least $100,000 per year to purchase a house at this price.
Ultimately, it all boils down to your circ*mstances and personal situation.
"There are several different factors that determine how much you can afford when buying a home," says Stacey Black, BECU's financial educator. Those factors include "your income, debt, down payment and interest rates."
Moreover, Black warns that you shouldn't assume you can afford any size mortgage you get approved for.
"It's important to remember that you could get approved for more than you can afford - only you know your future goals and spending habits that may impact how much you can truly afford," Black says.
Bill Banfield, executive vice president of capital markets at Rocket Mortgage, has a similar opinion.
"There are many factors that play into figuring out how much income is needed to purchase a $250,000 home," Banfield says. "Some of these include the amount of money the buyer chooses to spend on a down payment, their monthly debt and the tax and insurance costs for the home."
Though the amount of income you need to buy a $250,000 home is unique to you, Banfield says that Rocket Mortgage clients who buy a $250,000 home using its ONE+ mortgage "have an average annual income of $65,000."
However, Banfield warns that "because of all of the complex and intricate components that go into determining what a consumer can afford, it is best to consult professionals and shop around to find the most comprehensive solution" for your unique needs.
"Every borrower has their own unique financial situation," Joe Lamberti, vice president and general sales manager of residential lending at Rockland Trust Bank, says. "It's really important for prospective buyers to work alongside a mortgage loan officer to understand their options."
Find out the mortgage rates you could qualify for today.
The bottom line
Whether or not you can afford a $250,000 home depends on more than the cost of the mortgage payments and the size of your paycheck. You should also consider your spending habits and the amount you can comfortably spend on mortgage payments each month rather than following any particular rule of thumb when making this important decision.
