Use This Simple Rule To Know How Much To Spend On Housing

House in nice neighborhood

As mortgage rates remain high, it’s more important than ever to know how much to spend on housing. Get caught up in a bidding war or rush into a rental agreement, and you could make a decision that cripples your personal finances for years to come.

Today we’ll discuss two simple financial rules to help you rent or buy a home while keeping your finances in spectacular shape. We’ll also outline the factors people fatally ignore by making these rules a little too simple. After all, there’s nothing worse than real estate regret.

The 30% Rule

The most common “rule” people follow when deciding if a home is affordable is the 30% Rule. It’s elegantly simple: Your housing expenses shouldn’t exceed 30% of your gross income.

But what qualifies as a “housing expense”? It’s a common mistake to assume you’re following this rule simply because your rent or mortgage payment is 30% of income.

When calculating your housing expenses, be sure to factor in utilities like water, heat, and electricity—most of which will be higher in a larger home. Buyers will also want to include mortgage interest, homeowner’s insurance, property taxes, and HOA fees. Renters will want to include renter’s insurance and any other fees inflicted by their landlord. Your “housing expenses” should include essentially any cost you wouldn’t absorb if you weren’t living in that house.

Feeling like that leaves you with very little wiggle room? Two factors in the rule might open up a few more options:

  • Don’t forget to calculate 30% of gross income. We’re talking salary or pre-tax income, not your take-home pay.
  • If you’re in a household with more than one income, be sure to roll them all together before calculating your 30% figure. A double-income family with a higher cumulative income will have more housing options.

While the 30% rule is simple and easy to follow, another slightly more complicated rule has also been gaining momentum in personal finance circles.

The 28/36 Rule

The 28/36 Rule pertains to home buyers only, and it provides two guardrails to keep your finances in good shape and ensure you don’t overestimate how much you should spend on housing.

To determine whether a house is within your price range, make sure:

  1. Your housing expenses (mortgage, property taxes, insurance, utilities) won’t exceed 28% of your gross monthly income
  2. Your total debt (credit cards, student loans, auto loans) doesn’t exceed 36% of your gross monthly income

As with the 30% Rule, use total household income when determining these percentages. And just as importantly, factor in all debts accumulated across the household.

Find a Home Knowing How Much You Can Spend on Housing

With remote work increasingly available to employees, you may be able to get more for your 30% (or 28%) somewhere else. Now might be a good time to investigate the best and worst cities for first time home buyers.

Ryan Rabasa

Ryan Rabasa is an associate editor at Wealth Gang. His passions are technology, writing, business, and media. He won't trust an investment strategy that doesn't incorporate both technical and fundamental analysis.