Raise your hand if you have ever used a “housing affordability” mortgage calculator to determine how much house you could afford. Wow, that’s a lot of hands. Did you know that all of those “housing calculators” are/were/and always will be wrong? Yeah, that’s not good. And if you acted on the “advice” that you learned from that calculator, then you may be living in a house that isn’t exactly affordable.
The major issue is that mortgage calculators often allow (recommend) that you allocate up to 33% of your gross monthly income to a mortgage payment. I don’t know about you, but I spend my net income, not my gross income. Pete the Planner recommends that you only allocate 25%. This is a HUGE difference. And don’t get your math twisted, it’s not just 8%.
Let’s take a look at an example. Let’s say that you have a household income of $70,000 per year.
That would mean that 33% of your gross monthly income would be $1,924
$70,000 / 12 = $5,833
$5,833 X 33% = $1,924
In contrast, 25% of your net income on $70,000 would be approximately $1,020.
$70,000 X 70% (30% for taxes and benefits) = $49,000
$49,000 / 12 = $4,083
$4,083 X 25% = $1,020.
That means that a mortgage calculator would tell you that you could afford $1,924, and your trusty Pete the Planner tells you that you can afford $1,020. That is a difference of $904 per month!!!
Therefore the difference between 33% of gross and 25% net is actually 15.5% of gross. HOLY CRAP!!!
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.