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MORTGAGE—MAKE SURE YOUR MONTHLY PAYMENT DOESN’T EXCEED 28 PERCENT OF YOUR GROSS SALARY

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Keep your monthly mortgage within your budget limits. This means keeping your monthly mortgage
plus property tax plus insurance to 28 percent of your current monthly gross income. If you truly want
to be safe, bring the 28 percent down to between 20 and 25 percent.
Many people forget to factor in insurance and property tax costs. These are significant costs that can
affect your ability to pay your monthly fees.
To bring this to life, let’s look at an example:
▪ $250,000 home purchase
▪ $50,000 down payment (20 percent down)
▪ $200,000 fifteen-year mortgage (with a 6 percent interest rate)
▪ $1,687/month mortgage payment
▪ $300/month property tax ($3,600/year)
▪ $100/month insurance ($1,200/year)
Your monthly mortgage plus property tax plus insurance costs would equal $2,087 ($1,687 plus $300
plus $100).
Thus, using the 28 percent rule, you would need to make around $7,500/month ($2,087 = 28 percent
of $7,500), or $90,000 a year, to feel comfortable purchasing the home.
Many people buy their homes without doing these simple calculations (you can find similar
calculators on numerous Internet sites). By changing the variables (price, down payment, interest rate,
taxes, and insurance), you will find that monthly payments can change considerably.
Just make sure you stay at (or below) the 28 percent level so you can avoid the trap of buying more
house than you can afford.

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