The mortgage payment is only part of owning a home. Taxes, insurance, association dues, and maintenance all arrive every month too, and a home that looks affordable on the mortgage alone can strain a budget once they are added.
How it works
The full monthly housing cost, often called PITI plus extras, is principal and interest + property taxes + homeowners insurance + mortgage insurance if your down payment is under 20 percent + HOA dues + a maintenance allowance. The common affordability rules are: housing costs at or below 28 percent of gross monthly income, and total debts including housing at or below 36 percent. Work both rules, and let the stricter one set your budget.
Step by step
- Write down gross monthly income and all monthly debt payments.
- Compute the 28 percent housing cap: income x 0.28.
- Compute the 36 percent total-debt cap: income x 0.36, minus your other debts, for the housing amount left.
- Take the smaller of the two housing amounts as your monthly housing budget.
- Build the full monthly cost for a candidate home: mortgage payment plus taxes, insurance, HOA, and maintenance.
- Compare that total with your budget, and work backwards to a maximum price if it exceeds it.
Worked example
Gross income $6,000 per month, other debts $500. Housing cap by 28 percent = $1,680. Total-debt cap = 6,000 x 0.36 = $2,160, minus $500 debts = $1,660 housing. The stricter cap is $1,660. A candidate home: mortgage $1,200 + taxes $250 + insurance $120 + HOA $100 = $1,670, slightly over budget before maintenance. Either negotiate the price down, raise the down payment, or keep looking.
Common mistakes
- Budgeting on the mortgage payment alone and discovering taxes and HOA later.
- Using take-home pay in a rule designed for gross pay, or the reverse, which shifts the cap.
- Forgetting maintenance. A common allowance is about 1 percent of home value per year.
- Stretching to the lender maximum instead of the payment you can carry comfortably for years.
Try it with the free tool
You can follow every step above by hand, but the free tool below does the same calculation instantly. Try your own numbers in it, then check one result by hand so you trust the method as well as the answer. Open the full tool here: open the tool.
Checklist before you finish
- Write down every input number first, with its unit, before you calculate anything.
- Work through the steps in order, and do not skip the unit conversions.
- Check the answer against the worked example above: is it the right size, and does the direction make sense?
- Round only at the end, and keep the unrounded figure for any follow-up calculation.
Practice with your own numbers
Pick three cases of your own and work each one by hand. First, try a simple round-number case you can check mentally. Second, try a realistic case with awkward numbers, the kind you will actually meet. Third, try an edge case, such as a very small or very large input, and confirm the answer still behaves sensibly. If any case gives a surprising result, re-check the units and the formula step by step before you trust it.
If your answer looks wrong
Most errors come from a small set of causes. Check that you used the same units throughout, that you divided where the formula divides and multiplied where it multiplies, and that you applied any percentage as a decimal. Check the order of operations: powers and brackets come before multiplication and division, which come before addition and subtraction. Finally, test the method on the worked example in this guide. If your method reproduces the example answer, the method is right and the inputs deserve a second look.
Quick tips
Run the numbers at a higher interest rate than today quote, so a rate rise before closing does not break your budget. Keep an emergency fund separate from your down payment; a home without savings is a fragile purchase.