# How Much Money You Need To Afford A \$500,000 Home?

How much money you need to make to be able to afford a \$500,000 home?.

Now, most bankers and lenders follow something called the 28/36 rule. This is not something that I recommend you follow, but this will at least start the discussion.

Let’s assume that you want to put down 10%, which in this case is \$50,000. This means you are going to finance the other \$450,000. So, you’re going to get a \$450,000 mortgage. If you can get this mortgage at a 7% 30-year fixed rate, that means your monthly mortgage costs are going to cost you \$3,000 a month. This doesn’t include your property taxes or your HOA fees, this is just your monthly mortgage cost.

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## 28/36 RULE

Now, once you have this, you can apply the 28/36 rule. The 28/36 rule says that your total monthly housing cost should not exceed 28% of your gross monthly income, and your total monthly debt costs should not exceed 36% of your gross monthly income.

Let me explain what that means.

So now, \$3,000 a month is just your mortgage cost.

If we add in, let’s say, another \$300 a month to cover your taxes and your HOA fees (which is your homeowner association), that brings your total housing cost to \$3,300 a month.

Now, if we follow the 28/36 rule, you’re going to take this monthly housing cost, which is \$3,300 a month, and divide it by 28 or 28%, which will bring us to \$11,785 of a gross monthly income or right under \$142,000 a year of income if you want to be able to afford a half a million dollar payment.

But the second part of this 28/36 rule says that you also cannot have monthly total debt exceeding 36% of your total monthly gross income. That means you’re going to take a monthly gross income before taxes and multiply it by 36, which is going to give us \$4,26. This is the most amount of money you’re allowed to pay every single month on your total debt costs.

Now, you’re already putting \$3,300 a month towards your housing costs, which leaves you with \$960 a month extra for your other debt payments. This could be your car payment; this could be your student loans; this could be your credit card debts. So, you have \$960 a month that can go towards your other debts, and the maximum housing payment here is \$3,300 a month.

This means, according to Banks, if you want to be able to afford a half a million-dollar home where you’re putting down 10%, which is \$50,000, you’re financing \$450,000. That means your monthly costs are going to cost you \$3,300 a month. That means you’re going to have to make \$142,000 a year in order to be able to afford this half a million-dollar home, according to Banks.

But I don’t want you to let Banks decide your financial decisions because this is the bank’s rule of thumb. Because all the bank wants to make sure is that they get paid. They don’t care if you are investing money into your own investments that will make you wealthy. All the bank cares about is that you have money to pay the bank.

I want you to not use this home as a money pit but rather to use this home as a place to live while you can continue to build your wealth. So, what does that mean? Don’t just rely on the bank’s numbers. I want you to do something a little bit different.

So, based on the bank’s numbers, if you want to afford this half a million-dollar home, you have to make \$142,000 a year. If you really want to be able to afford the home that you live in, then don’t go max out the bank’s numbers. Instead, I want to give credit where credit’s due. I want you to follow Dave Ramsey’s plan here because I’m a big fan of his plan when it comes to buying a home.

Which says that no more than 25% of your net income, which is your take-home pay after taxes, should be going to your housing costs. So now, how do we do that? Well, the same way as before. If we put down 10% for the down payment, so you have \$50,000 saved up to buy a home, that means you’re going to be financing \$450,000. If you finance \$450,000 at a 7% mortgage, there should be a k \$450,000 at the 7% mortgage. That means your mortgage costs are going to cost you \$33,000 a month. And then we’ll add in your property taxes and your HOA fees. I just factored in a simple \$300 a month for that. So, \$3,300 for your housing costs. This cannot exceed 25% of your take-home pay. So now, let’s keep working backward.

If \$3,300 is a monthly cost, and this can be no more than 25% of your take-home pay, if you multiply this number by four, that is going to give us \$3,200. This can be your take-home pay after taxes. Now, if we multiply this number by 12, that means your annual income has to be \$158,00.

So, now how much money do you have to make before taxes? What does your salary have to be? Well, that depends on what city and state that you live in because every state’s going to have different taxes. But if we assume that you live in Chicago, Illinois, that means that you are going to have to make \$233,000 a year in your salary to be able to afford a \$450,000 mortgage at a 7% interest rate.

The reason why I prefer Dave Ramsey’s 25% rule is that I look at the home that you live in like a liability rather than an asset. So many people think that the way that you’re going to build generational wealth is by owning this home and then paying it off. But that type of generational wealth is one of the worst kinds of generational wealth.

Sure, it’s nice to have a home that you can pay off, but there are so many other ways for you to build real wealth that you end up missing if you stretch yourself so thin to buy a home that’s way out of your reach because now you don’t have money to buy rental properties which can make you even wealthier than the home that you’re buying yourself.

You don’t have money to invest in stocks; you don’t have money to invest in your business idea. You don’t have money to invest in other people’s business ideas.

So, I’d rather you live a little bit smaller here. That way, you have more money to invest because I’d rather see you follow something like my 75 15 10 plan when it comes to actually spending your money.

What the 75 15 10 plan says is for every dollar that you earn from now on, from here on out, and this is after taxes, 75 cents is the maximum that you spend, 15 cents is the minimum that you’re investing, and 10 cents is the minimum that you’re saving. So, your monthly mortgage cost is going to fit right here in your spending. And then you’ve got to pay for everything else. You’ve got to pay for your groceries; you’ve got to pay for your vacations; you’ve got to pay for your clothes; you’ve got to pay for all the other nice stuff here while you have to make sure that you still have money to invest, and you make sure that you still have money to save.

The key here now is that you’re not overspending here and then eating away the opportunity for you to actually invest here. Where can you invest your money? You can invest in stocks; you can invest in rental properties; you can invest in a business idea. There’s a lot of places where you can invest. But the key for you to be able to invest is to not overspend.

So many people can tell you, well, one of the things that most agents will say is that your home is the biggest investment that you’ll ever make. And when you can sell somebody the idea that your home is an investment, well, now you’re going to be more likely to buy a little bit bigger because you’re going to be able to pass this home on to your kids one day; you’re going to be able to pay it off. And so if you’re going to be working to build equity, might as well go a little bit bigger. And when you do that, you stretch yourself a little bit thinner, which means less money to invest, less money to save.

I’d rather you live in a home that you can actually afford. That way, now you have more money to invest in other things. That way, you can continue to build your wealth and not live in a home that becomes a money pit. Because what ends up happening for so many people is now you have to upgrade the kitchen, you upgrade the basement, you upgrade the bathrooms, and now the furnace breaks; you have to upgrade that as well. And now it keeps constantly taking money out of your pocket instead of actually making you any money.

So now, when you go to buy a home, there are three things I want you to pay attention to. We just talked about the mortgage payment, but there are two other things I want you to remember as well.

If you really want to be able to afford the home that you live in, there are three different things that you have to be able to afford. We talked about being able to afford the mortgage, so I’m not going to go over this again, but you also have to be able to afford the down payment, and you have to be able to afford the moving cost.

Let me talk about this one because this one is usually overlooked, but it’s something you should remember because when you go to actually move into a home, the cost of the home isn’t just what you pay because now when you move into the home and you want to upgrade the kitchen or you want to upgrade the basement, you want to upgrade the bathrooms, factor that cost in as well because that’s going to be expensive. And then if you have to get movers, factor that cost in as well because that can get expensive.

And then if you plan on getting new appliances or you plan on getting new furniture, factor that cost in as well because all these things are going to factor into your housing cost and the money that’s going to be leaving your bank account.

So please factor in the moving cost in addition to just the down payment and the mortgage.

Now, when it comes to your down payment, there’s a couple different ways that people like to look at this.

Some people want to put down as much of a down payment as possible so that you have already equity in the home. That way, you have a head start in paying off the home.

Other people want to put down as little as possible because they say,

“You know what? I don’t want to put this much cash in right now. I’d rather invest this money somewhere else or do something else with the money instead of putting it into this down payment.”

What I want you to do here is just understand that the more equity you build in, the less you’re going to have to pay off later on.

And if you have a better use for the money, like if your mortgage is 7%, but you can invest this money into your business and get a 20% return, then sure, maybe you don’t need to put down a 20% mortgage. But understand that if you don’t put down 20% for your mortgage, then you’re going to have to pay other fees, like potentially PMI, which is an insurance that you’re paying to ensure not yourself but the bank that in case you go into foreclosure, the bank has insurance.

So, when you pay PMI, you’re paying for the bank’s insurance. So, just understand when you don’t put down 20%, you’re going to have to pay additional fees; you might not get the best interest rates. But there’s a pro and a con with that.

What I don’t want you to do is put down a smaller down payment just because you don’t have the money because you want to keep saving up money to buy other nice things. I’d rather you put more money here than use this money to buy a car, to buy a vacation. Use this money to actually build some equity in your home. That way, now you don’t have as big of a mortgage.

But the key, remember, just remember all the numbers in a system where you have to make sure you can afford the mortgage. This mortgage should fit within the 25% rule, which should fit within the 75 15 10 plan, which allows you to have enough of a payment here that allows you to keep investing. And then your down payment should just fit within that plan.

So, everything is kind of like systematically organized where everything plays on top of one another. And whatever the down payment is, as long as it fits within all the numbers, we can then make it work. But then also understand the pros and cons of having a big down payment vs a small down payment.

So, there you have it, the 3 things you need to be able to afford, that we can actually afford the home that you live in, not just so you can buy the home that you live in. It’s easier to buy a home, it’s tougher to be able to afford it. But if you really want to be able to afford the home that you live in, that means you still have money to invest in your future and build real wealth.