The 28/36 rule
It suggests limiting your mortgage costs to 28% of your gross monthly income and keeping your total debt payments, including your mortgage, car loans, student loans, credit card debt and any other debts, below 36%.
You may be able to lower your mortgage payment by refinancing to a lower interest rate, eliminating your mortgage insurance, lengthening your loan term, shopping around for a better homeowners insurance rate or appealing your property taxes.
Your mortgage rate may be higher than average due to factors like a lower credit score, a smaller down payment, or a higher loan amount. Lenders may also offer higher rates for riskier loan types. To secure the cheapest mortgage rates, focus on improving credit and increasing your down payment.
If you pay $100 extra each month towards principal, you can cut your loan term by more than 4.5 years and reduce the interest paid by more than $26,500. If you pay $200 extra a month towards principal, you can cut your loan term by more than 8 years and reduce the interest paid by more than $44,000.
It suggests that homeowners who can afford substantial extra payments can pay off a 30-year mortgage in 15 years by making a weekly extra payment, equal to 10% of their monthly mortgage payment, toward the principal.
Faster Loan Payoff
By making 2 additional principal payments each year, you'll pay off your loan significantly faster: Without extra payments: 30 years. With 2 extra payments per year: About 24 years and 7 months.
The 28% Rule For Mortgage Payments
The often-referenced 28% rule says you shouldn't spend more than 28% of your gross monthly income on your mortgage payment. Gross income is the amount you earn before taxes, retirement account investments and other pretax deductions are taken out.
The longer you take to pay off your mortgage, the less your payments are each month. If you extend your term, you will end up paying more interest overall. If you can afford to pay more later on, you may be able to reduce your term again. Any changes will need to be agreed with your mortgage provider.
Refinance or modify your mortgage. If you can refinance your mortgage to a lower interest rate, then you can lower your overall mortgage payment — potentially offsetting a larger escrow account balance requirement. You can also use refinancing or modification as a means of extending your loan term.
Ask about a loan modification
It can involve lowering your interest rate, extending the repayment terms or even reducing the principal balance. The process and requirements vary by lender, but you'll need to provide documentation that verifies your financial situation.
An escrow account holds funds that have been set aside for additional expenses such as property taxes, homeowners' insurance, or any fees that may need to be paid at a later date. While you can add money to your escrow account at any time, it won't do anything toward lowering the actual amount of the principal.
A mortgage recast is when you make a large, lump-sum payment toward your mortgage's outstanding principal balance. Your lender then recalculates your monthly payments based on that reduced balance, which means that the payment amount drops. Your loan repayment term and interest rate won't change, however.
The Bottom Line. On a $70,000 salary using a 50% DTI, you could potentially afford a house worth between $200,000 to $250,000, depending on your specific financial situation.
The 35/45 rule
Lenders want your monthly debts to be affordable and recommend keeping your total monthly debt — including your mortgage payment — under 35% of your pretax income and 45% of your post-tax income.
At its February 2024 meeting, the Reserve Bank Board decided to leave the cash rate target unchanged at 4.35 per cent. This decision supports progress of inflation to the midpoint of the 2–3 per cent target range within a reasonable timeframe and continued moderate growth in employment.
Your monthly payment for a $300,000 mortgage and a 30-year loan term could range from $1,798 to $2,201, depending on your interest rate and other factors. Learn more about the upfront and long-term costs of a home loan.
According to the 28/36 rule, you should spend no more than 28% of your gross monthly income on housing and no more than 36% on all debts. Housing costs can include: Your monthly mortgage payment. Homeowners Insurance. Private mortgage insurance.
The mortgage on a $500,000 house is $2,952 per month toward your mortgage principal and mortgage interest, assuming a 6.86% interest rate and a 30-year fixed term with 10% down.
You decide to increase your monthly payment by $1,000. With that additional principal payment every month, you could pay off your home nearly 16 years faster and save almost $156,000 in interest.
In exchange, the lender gets a second lien on your property. You pay the loan back in monthly installments with interest, just like your original mortgage. Most home equity loan terms range from 5 to 30 years, which means that you pay them back over that set time frame.
A biweekly mortgage means that the borrower is paying every two weeks, or 26 half payments. The result is effectively 13 full payments over a 12-month period, accelerating the payoff of the loan.