How Much Should I Have After Paying Mortgage & Expenses?

Owning a home is far from inexpensive.

Owning a home is far from inexpensive.

The cost of owning a home -- everything from your monthly mortgage payment to utility bills to annual maintenance -- will consume a major portion of your monthly household budget. If you want to avoid future financial problems, you need to budget realistically for the expenses of home ownership. This is the only way you'll know if you're making enough money to afford that home you're considering.

Your Mortgage

The biggest cost associated with owning a home for most people is the monthly mortgage payment. It's important to remember, though, that your mortgage payment doesn't just include the cost of your loan's principal balance. Your monthly payment will also include interest payments and, most likely, extra amounts for property taxes and homeowners insurance. A good rule of thumb for determining whether a mortgage is too much for you to handle is to use the same debt-to-income ratio that mortgage lenders use. Most lenders want your total mortgage payment to equal no more than 28 percent of your gross monthly income -- which is your income before taxes are deducted. You can figure this ratio, known as the front-end ratio, yourself by dividing your total estimated housing payment -- say, $1,500 a month -- into your gross monthly income, say $5,000 a month. The front-end ratio in this case comes out to 30 percent, which is a bit too high. If instead, your gross monthly income was $6,000 a month, the front-end ratio would be 25 percent, a more comfortable figure.

Other Expenses

Lenders use a second debt-to-income ratio, known as the back-end ratio, to determine whether a mortgage payment plus a borrower's total monthly debts consumes too much of that borrower's household income. In general, lenders don't want your total monthly debts to consume more than 36 percent of your gross monthly income. If your housing payment and other monthly debts -- including regular utility bills, credit-card minimum monthly payments and car loans -- total $1,700 while your gross monthly income is $5,500, your back-end ratio would come out to about 31 percent. This should leave you enough money to cover your bills.

The Cost of Homeownership

When determining whether you can afford a house, don't forget that owning a home involves more costs than just your monthly mortgage payment. Annual home maintenance is a figure that many homeowners neglect to include in their household budgets. However, mortgage data firm, HSH Associates, estimates that homeowners spend an average of 1 percent of the purchase price of their homes on repairs and maintenance every year. This means that if you buy a house for $200,000, you can expect to pay about $2,000 a year on repairs and maintenance. It's essential to include this amount in your budget when calculating how much money you need to afford a home.


When debating whether you can afford a house and its mortgage payments, don't forget to include utility costs. Energy Star, a joint program of the U.S. Environmental Protection Agency and the U.S. Department of Energy states that the average annual energy bill for typical single-family home in the United States hit $2,200 in 2009. You'll need to factor in the yearly cost of heating, cooling and powering your home when determining how much of a bite owning a home will take out of your household budget.

Discretionary Spending

Once you're done paying your mortgage bill, car-loan payment, student-loan payments and utilities, you're left with discretionary income. You can spend this income on whatever you like, including groceries, entertainment, furniture, clothing and haircuts. You should also set aside some money each month for an emergency fund, savings and retirement. You might also want to reserve money for investments, such as IRAs or stocks. How much you'll need for these expenses, which aren't fixed like your mortgage payment or car bill, is flexible. But Harvard professor Elizabeth Warren recommends that you reserve 30 percent of your after-tax income for discretionary -- or non-fixed -- expenses and 20 percent for savings. That leaves 50 percent of your after-tax income for fixed expenses.


About the Author

Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.

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