Spending

How much money is too much to spend on housing each month? This calculator can help you figure it out

"Spending as little as you possibly can on your housing is the ultimate goal."

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While house or apartment hunting, it's easy feel the pull of that glamorous high-rise or high-end kitchen and think you can just make it work with your budget. But even if you get approved for that new dream home, it's important to be aware of just how much you'll be spending on housing every month and how that financial obligation can affect your other money goals and priorities.

Guidelines for how much to spend vary by whether you're buying or renting, and they aren't one-size-fits-all. Where you live, your lifestyle, and your other expenses all factor into the equation. And with housing prices rising for both buyers and renters, it can be difficult to keep your housing costs within the recommended parameters.

"You want people not only to be able to buy something, but you want them to be able to buy something and still have a life," says Mark La Spisa, a certified financial planner and president of Vermillion Financial.

Use Grow's calculator below to determine the monthly housing expense recommendation based on your income. Remember to include the income for everyone in your household if you share expenses. Grow does not store your information.

The 28/36 rule and other housing spending guidelines

For renters, the most common guideline is to not spend more than 30% of your gross income.

Some experts advise homeowners follow the 28/36 rule, which lenders typically use when issuing mortgages. This rule stipulates that no more than 28% of your monthly gross, or pre-tax, income go toward housing costs and no more than 36% go toward total debts (including a mortgage and other housing costs).

Some lenders will allow you to go even higher: Regulations allow Fannie Mae and Freddie Mac to buy mortgages with debt ratios as high as 43% and FHA loans can allow up to 41%, says Keith Gumbinger, vice president at mortgage research site HSH.com.

Lender guidelines can be a good jumping off point, but remember that what the bank thinks you can afford may be overly generous, La Spisa says. While lenders will look at your income and debts to determine if you meet their criteria, they may not factor in other expenses that can affect your spending power, such as child care or retirement contributions.

In general, La Spisa recommends allocating 25% of your income to housing. This includes not only your rent or mortgage payment but also associated costs such as utilities, property taxes, and insurance. Keeping your housing costs lower will leave more to spend in other areas of your life. "We're not trying to expose people to the highest payment they could have and then have no lifestyle," he says.

For example, say you make $60,000 per year, or $5,000 per month. With the 25% guideline, you could spend up to $1,250 on housing costs. Keep in mind that this is a percentage of your pre-tax income, so housing will wind up taking up more than a quarter of your take-home pay in this scenario.

How to keep housing costs manageable in a pricey market

Lower mortgage interest rates have led to increased demand in the housing market during the pandemic, and even though mortgage rates are beginning to rise, home prices are still at all-time highs.

Location is a big factor in how easy it is to follow housing budget recommendations. "What may work in Arkansas doesn't work in New York," La Spisa says.

Another guideline La Spisa and other experts recommend for buyers is to not take out a mortgage more than three times their annual income, but in two-thirds of metro areas, the median home price in 2020 was greater than three times the median household income.

And while rents fell in more expensive markets throughout 2020 as people purchased homes and young adults moved in with family, rental prices have bounced back in 2021. Nationally, rents were 15% higher in September than they were a year earlier, according to Apartment List. Only five cities — San Francisco, Oakland, Minneapolis, San Jose, and Washington, D.C. — still have rents below pre-pandemic levels.

'Spending as little as you possibly can' is the goal

Whether you're renting or buying, Gumbinger says keeping housing costs to 25%-30% of your budget can be "just terribly unrealistic" for many people today. "That's kind of the bad news," he says. Still, "spending as little as you possibly can on your housing is the ultimate goal."

Here are two ways to stretch your housing budget:

  • Boost your credit score: "If you're really interested in buying yourself a home, get your credit rating as high as it can possibly be," says Gumbinger. Interest rates can have a larger effect on the cost of your monthly payments than you realize, so having a great credit score is key. For example, borrowers with a credit score of 640-659 could pay $150 more per month on a $250,000 mortgage than borrowers with a score of 760 or greater, according to FICO's calculations.
  • Reduce other debts: Mortgage lenders look at required monthly payments, not total debt, Gumbinger says. To lower your monthly obligations, you might look into refinancing auto loans and student loans, or using balance transfer offers to lower credit card payments.
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In the end, you may have to adjust your expectations to find a home in your budget. Consider extending your search area or buying a smaller home. Compromise is the key, Gumbinger says. "You really don't have any control over what's for sale in the marketplace. All you can buy is what there is at a price you can afford."

And if buying a home would put you in difficult financial straits, it might not be the best choice right now. Consider renting for a while longer, even if prices go up, Gumbinger says, so that you can get yourself into a better circumstance.

"You might see out there that it's a great time to buy a home, and it can be, but it's a challenging time to buy a home," he says.

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