See How Much Home You Can Afford With the 30/30/3 Rule


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If you have been looking for a new home during the pandemic, you aren’t alone. With record-low mortgage interest rates and more people working from home, many folks are considering an upgrade. In fact, existing-home sales jumped by more than 20% in June—and July spiked by 25%, according to a recent National Association of Realtors report.

The problem is, there is more to buying a home than covering your monthly mortgage payment—which increases as property taxes and homeowner’s insurance premiums go up.

You also have to pay for ongoing home repairs and maintenance—at an average of $1,105 per year, according to HomeAdvisor’s 2019 State of Home Spending report. But many homeowners will spend more, so experts suggest setting aside 1-4% of your home’s value per year to pay for it.

There’s no doubt about it: Buying a home can be risky, particularly if you have to overextend your budget to do it, and it may be even riskier during an economic downturn. Although mortgages have their own set of affordability guidelines, it may be worth considering a more conservative approach.

Sam Dogen of Financial Samurai suggests measuring how much you can afford by following the 30/30/3 rule. Dogen says you shouldn’t spend more than 30% of your gross income on your monthly mortgage payment. He also suggests saving 30% of the home’s value—20% for a downpayment to avoid private mortgage insurance, and 10% for an emergency buffer. He also recommends limiting your home’s value to three times your annual household gross income.

Here’s an example: let’s say your family makes $75,000 per year. This means your family’s gross monthly income is $6,250 and your mortgage payment shouldn’t be more than $1,875, per Dogen’s guidelines. You should also limit your home’s purchase price to three times $75,000—or $225,000—and you should have 30% of $225,000—or $67,500—before buying a home.

While Dogen’s suggestions may be tough for the average family, running the numbers may still be a worthwhile exercise. After all, it’s tough to predict what the economy—or your job stability—may look like in the future. Spending less on a home may not be a bad thing, especially if you or your partner experienced a loss in income.



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