How Much You Should Pay in Mortgage Payments and Other Debt

Here's another item on Money magazine's list of 25 rules to grow rich by. Today's tip lists how much you should pay in mortgage payments and other debt:

Your total housing payments should not exceed 28% of your gross income. Total debt payments should come in under 36%.

We've had a lot of discussion here at Free Money Finance on various topics related to this advice including how much you should borrow when you buy a home, evil house loans, my formula for buying a house and paying off your house early, so I probably don't need to say much more. But I will add, however, that I prefer having debt be as low as possible -- whether that be mortgage, car, credit card (especially!) or other kinds of debt.

Comments

[Jeremy]

Interesting. I guess we are in good shape although it doesn't always feel that way. We came in with about 19% of income for housing costs and 33% for debt payments. I'm assuming for housing payments they mean essential costs associated with the home such as electricity, water/sewer, etc. Oh well, it is good to know that I'm following one of Money's rules to grow rich by.

[Lord]

They only include principal, interest, taxes, insurance, and any homeowners association dues.

I would point out if you have no other debt then 36% for housing is fine, and certainly a lot better than the 50% many pay for rent in expensive areas. These are for the initial purchase. Over time, inflation will raise your income, deflate your costs, and raise rents, and you will pay down principal lowering these values.

[Scott]

I think these ratios are a great starting point for people in most situations, but that there are always exceptions to the rule.

For example, I decided to take on a higher monthly payements to go from a 30 year to a 15 year mortgage speading up my payoff and reducing the rate I'm paying.

It pushed me over these ratios (which are really debt service / income) but I don't spend nearly what most people do and I have an emergency fund sized to smooth over any problems that might occur.