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Affordability Formula:
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The 28% rule is a standard guideline used by lenders and financial advisors to determine how much of your monthly income should go toward housing expenses. This includes mortgage or rent payments, property taxes, and insurance.
The calculator uses the affordability formula:
Where:
Explanation: This calculation provides the maximum recommended monthly payment amount that should be allocated toward housing expenses while maintaining financial stability.
Details: Maintaining housing costs within 28% of gross income helps ensure you have sufficient funds for other essential expenses, savings, and discretionary spending while avoiding financial stress.
Tips: Enter your gross monthly salary in dollars. The calculator will determine the maximum affordable monthly payment based on the 28% rule. Use this as a guideline when budgeting for housing expenses.
Q1: Is the 28% rule based on gross or net income?
A: The 28% rule typically uses gross monthly income (before taxes and deductions) as this is the standard used by most lenders and financial institutions.
Q2: What expenses are included in the 28% calculation?
A: This includes principal and interest on mortgage, property taxes, homeowners insurance, and if applicable, private mortgage insurance (PMI) and homeowners association fees.
Q3: Is 28% a strict limit or just a guideline?
A: While it's a widely accepted guideline, individual circumstances may vary. Consider your total debt load, savings goals, and other financial obligations when determining what's truly affordable.
Q4: What about the 36% total debt rule?
A: Many lenders also use a 36% rule for total debt-to-income ratio, which includes housing payment plus all other monthly debt obligations like car loans, credit cards, and student loans.
Q5: Does this rule apply to renters as well?
A: Yes, the 28% guideline applies to both homeowners and renters when determining affordable housing costs relative to income.