Housing is one difficult beast to work around and talk about these days. Home prices increased quickly during the COVID years (unusually so) and interest rates have jumped up to Pre-2008 levels again. Though it is expected that rates will go back down at some point in the future, we still don’t really know when that will be. We also are all speculating to what ranges rates will drop. Though anything lower than the 7% to almost 8% ranges that we have seen in the last years will be helpful. Many people won’t see comfortable payments again (in comparison to average income) until interest rates start with a 5, consistently.

But, even though we have a few more woes with housing payments than we had previously, this ebb and flow of house payment amounts, in comparison to income, is nothing new. Generations in the past have had higher housing payment averages (compared to average income) than we have right now (and of course there are many times where average house payments were lower than now, compared to income, also).

The main thing to think about on your side is what can you do to both keep your home payment at a financially responsible range, and try to lock in a portion of that payment for the long-term.

The second piece is actually pretty simple. If you purchase a home with a fixed rate mortgage, then the majority of your monthly payment (for average mortgage loan amounts) will stay the same for the life of the loan (until you sell or refinance). So, if you stay in that home and stay with that mortgage for a decent number of years, your payment will no longer be affected by the movement of rates or the increase of home values (outside of small but regular changes to your property taxes and homeowners insurance). So, from that point until you change something down the road, you are largely outside of the worries of the rest of the housing world and can ignore the hype. That is not to say that adjustable rate mortgage options may not be a better fit for many, but the majority of the country will and should focus on the fixed rate mortgage options.

The more difficult piece of the pie is, what if you want to buy a home now? How do you focus on doing so in a financially intelligent way, despite higher interest rates and onward moving home prices?

For this, one of the best focus points for your planning future is to focus on what percentage of your income, on a monthly basis, would actually be used up by the home payment. This is called your “housing ratio“. There are a number of studies that have come out on this topic. One you can read through, if you would like, would be here – Harvard University JCHS Study. This study discusses if the 30% housing ratio rule-of-thumb is still the best direction to follow.

To summarize the study, it states that for most people the 30% housing ratio rule-of-thumb is the one to follow (in comparison to other options for rules of thumb) and that people who have higher than a 30% housing ratio can be considered (in this study) to be “housing cost burdened”.

So, what the heck does that mean? It means that in order to provide you the flexibility to cover other costs in your life and to invest for your future, we need to keep your housing costs down as much as possible. It also means I need to show you how to calculate your housing ratio and that your overall goal should be to have your housing payment be 30% or less than your total income, if possible.

The housing ratio, as calculated by mortgage lenders and others, is the percentage of your MONTHLY GROSS income that is used up by your total monthly housing payment. It is an easy calculation – Gross monthly house payment divided by gross monthly income.

If you make $60,000 a year, and your house payment is $1500 a month, you would divide the $60,000 a year by 12 (which is $5000 a month) and then divide the $1500 a month house payment by $5000. 1500/5000 = .3 or 30%.

Take a moment to figure out your current housing ratio. It is not hard, just identify your monthly housing payment costs and then figure out the average monthly income you make before taxes, deductions, etc. Follow the calculation.

One thing to note, due to the higher rates and ongoing home price increases, it is more difficult, currently, to be at 30% or less of your income being used up on your house payment. For many of you reading this, it may be extremely difficult, depending on your income and the area that you live in. So, a secondary goal could be to try to be at 35% of your income or less.

Let us take a look at what house payments you would need, at different income levels, to get a 30% housing ratio and a 35% housing ratio, just so you have a good visual. In other posts, we will jump into how to lower your ratios to these ranges, if they are not there currently for you.

To have a 30% housing ratio:

If your household income is –

$40,000 a year – you need to be at $1000 a month or less for housing payment.

$60,000 a year – you need to be at $1500 a month or less for housing payment.

$80,000 a year – you need to be at $2000 a month or less for housing payment.

$100,000 a year – you need to be at $2500 a month or less for housing payment.

$120,000 a year – you need to be at $3000 a month or less for housing payment.

$140,000 a year – you need to be at $3500 a month or less for housing payment.

To have a 35% housing ratio:

If your household income is –

$40,000 a year – you need to be at $1167 a month or less for housing payment.

$60,000 a year – you need to be at $1750 a month or less for housing payment.

$80,000 a year – you need to be at $2333 a month or less for housing payment.

$100,000 a year – you need to be at $2917 a month or less for housing payment.

$120,000 a year – you need to be at $3500 a month or less for housing payment.

$140,000 a year – you need to be at $4083 a month or less for housing payment.

Hopefully this helps out with some good visual goals to focus on. If you are still having trouble being at 35% or lower for your housing ratio, then you should check out the post on ways to lower your mortgage payments when buying –

Also, for something completely unrelated to this post, enjoy one of the “Best Science Images” of 2024 –