How Much House Can You Afford? Beyond the 28/36 Rule

The 28/36 Rule

A common guideline lenders use is the 28/36 rule. Your monthly housing costs (mortgage principal, interest, taxes, and insurance) should stay at or below 28% of your gross monthly income. Your total debt payments — including the mortgage, car loans, and credit cards — should stay at or below 36%.

Max housing payment = gross monthly income × 0.28
Max total debt = gross monthly income × 0.36

Example: $100,000 Income

Gross monthly income is about $8,333. By the 28/36 rule, your housing payment should stay at or below $2,333/month, and your total debt payments (including housing, cars, student loans, and credit cards) at or below $3,000/month. If you already pay $500/month for a car and $300 in student loans, your max housing drops to $2,200 — even though 28% says $2,333.

It's Not Just Principal and Interest — Meet PITI

Your mortgage payment is usually four things bundled together, often called PITI:

• Principal — the amount that pays down your loan balance
• Interest — what the lender charges you
• Property Taxes — set by your local government (can vary wildly by county)
• Insurance — homeowners insurance, and possibly PMI if your down payment is below 20%

Two homes with the same sticker price can have very different monthly payments depending on property tax rates and insurance costs in that area. A $400,000 home in a high-tax county might cost $300+ more per month than an identical home one county over.

PMI: The Hidden Cost of Small Down Payments

Private Mortgage Insurance (PMI) is required by most conventional lenders if your down payment is below 20%. PMI typically costs 0.5% to 1.5% of the loan amount per year, added to your monthly payment. On a $320,000 loan with 0.5% PMI, that's roughly $133/month — not trivial. Once you reach 20% equity, you can request cancellation.

PMI Example

• $400,000 home, 10% down ($40,000)
• Loan amount: $360,000
• PMI at 0.5%: $150/month
• That's $1,800/year — or $54,000 over a 30-year loan — before you even hit 20% equity

Beyond the Rules: Your Actual Budget

The 28/36 rule is a lender's guideline, not your personal budget. If you have other goals — retirement, education, an emergency fund — a payment well under 28% of your income may be the smarter choice. Many financially comfortable homeowners spend 20-25% of their income on housing, leaving room for savings and life.

Interest Rates Change Everything

A 1% change in interest rate can swing your monthly payment by hundreds of dollars on a typical mortgage. At 6% on a $320,000 30-year loan, you pay about $1,919/month (principal and interest). At 7%, it jumps to $2,129/month — a $210 difference, or $75,600 more over the life of the loan. Shopping around for rates is one of the highest-ROI hours you'll ever spend.

15-Year vs 30-Year: The Trade-Off

A 15-year mortgage typically comes with a lower interest rate (often 0.5-1% less) and builds equity faster, but the monthly payment is significantly higher. On a $320,000 loan at 6%, a 30-year term costs $1,919/month, while a 15-year term costs $2,700/month — nearly $800 more. If you can afford the higher payment, you'll save tens of thousands in total interest.

Closing Costs: The Upfront Surprise

Closing costs typically run 2-5% of the home's purchase price. On a $400,000 home, that's $8,000-$20,000 in addition to your down payment. These include appraisal fees, title insurance, origination fees, and prepaid taxes and insurance. Budget for them separately — they're not part of your down payment.

Affordability Is Personal

Rules of thumb are starting points, not commands. Run your own numbers before falling in love with a listing. Factor in maintenance (1% of home value per year), potential HOA fees, and the reality that property taxes and insurance premiums rise over time.