by Russell Dawson

Created on: January 02, 2007   Last Updated: April 18, 2007

As you browse through articles in this category, you will find writers who suggest that you should be able to afford a home that is worth 2 & 1/2 to 3 & 1/2 times your annual salary. This method will give you a reasonable idea of your range, but if you want to ensure that you do not overextend yourself, I strongly advise that you keep your monthly housing payments (mortgage & property taxes) to no more than 25% of your monthly household income. Banks will often approve you for more, but that is because it is in their best interest, not yours.

Trying to finance a property that is worth 3 & 1/2 times your annual pay when you are already carrying debt will become quite onerous. On the other hand, if you have been a good saver, or have money from a gift or inheritance, you may be able to carry that mortgage payment much more comfortably. You may think that you should be able to stretch your housing budget to 1/3 of your monthly income but doing so will drain you over the long run. In addition to the expenses you anticipate each month such as groceries, transportation, utilities, and communications, you will need to set aside money each month for the surprise expenses too: car repairs, the boss's birthday, and 2 am cough syrup purchases.

There is something to be said for keeping to the 25% guideline and building equity in your home. By making your payments, letting the housing market do its work, and maintaining or improving your property you will be in a good position after just a few short years to up-size if you so desire.

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