As Rates Go Down, Mortgages Go Up
How much is too much?
For Immediate Release: June 5, 2003
ROCKVILLE, Md. — With mortgage rates still hovering at historic lows there has never been a better time to buy a home. But even though a lender may say you are qualified to receive a large mortgage, how do you know if you can truly afford it?
"The days of the 28/36 rule are gone," said Steve Rhode, president and co-founder of Myvesta.org, a nonprofit consumer education organization. "These days all you have to do is fog a mirror to get a loan. Lenders will approve you for the largest amount their formulas allow and it's up to you to determine if it's in your best interest to take on the loan."
The 28/36 rule is designed to protect a lender from issuing a loan to someone who might not be able to pay. The rule states that your total consumer debt should be no more than 28 percent of your income and your total debt, including a mortgage, shouldn't be more than 36 percent of your income.
"Instead of relying on some arbitrary formula, take the time to figure out what you can truly afford," Rhode said.
Rhode recommends taking these steps to determine how large a mortgage you can afford:
- Track your cash. Write down all your expenses for at least a month to figure out where your money is really going.
- Subtract your monthly expenses from your income. Your expenses should not exceed your income.
- Try your new mortgage payment on for size. Start setting aside the amount of your monthly mortgage payment before getting the loan. If you can then meet all of your expenses, put money into savings and maintain your current lifestyle, you can most likely afford the mortgage.
"Just because a home purchase may be seen as an investment, it doesn't mean it is a good idea to max yourself out with a big mortgage. It's important to balance your wants and needs and be realistic about what you can afford," Rhode added.
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MyvestaSM is dedicated to helping people create healthy financial lives. The organization provides a wide range of materials to inspire and inform people so that they can break down their barriers to financial and personal success. For more information visit Myvesta.org online.
