Buying a home within your comfort zone

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What makes up a monthly mortgage payment?

A monthly payment isn’t just the principal and interest payment on your loan, but also taxes, insurance and, depending on your down payment amount, private mortgage insurance (PMI). Below is an example of what a monthly mortgage payment might look like.

Example

P.I.T.I.

Principal. Interest. Taxes. Insurance.

Loan details: 30-year fixed, 4.051% APR*

Home price

$250,000

20% down payment

$50,000

Loan amount

$200,000

Monthly payment

$1,278

Principal

$286

Interest

$675

Taxes

$250

Insurance

$67

*APR and monthly payment are for illustrative purposes only; this is not an offer or advertisement of mortgage interest rates.

What’s a comfortable monthly mortgage payment?

Before you fall in love with a home, and even before you start looking at homes, take the time to put together a budget. Even if you’ve been prequalified for a mortgage loan amount, check to make sure what mortgage payment will fit within your lifestyle without putting any other financial plans on hold.

Example budget allocations

Debt

Expenses

Monthly budget*
Mortgage: 28%
Personal debt: 13%
Food: 21% 
Transportation: 8%
Savings: 7%
Insurance: 6%
Utilities: 6%
Clothing: 4%
Health care: 3%
Personal care: 3%
Misc. items: 1%

*Example allocations based on net monthly income.

Setting a budget
Once you have a budget set, you can better estimate what a monthly mortgage payment would be.
Follow these three steps to set a budget.

Step 1:

Know your income and expenses—Add up your monthly expenses and deduct that amount from your net monthly income.

Step 2:

Set your priorities—If you need more room in your budget to save, it’s helpful to separate your expenses into “need to have” and “like to have” categories.

Step 3:

Track your spending—Keep track of where your money goes each month and balance your budget.

28% Mortgage payment ratio

It’s not about the maximum amount you can borrow based on your income; it’s about what you can comfortably afford. For a starting point, take whatever you make each month, before taxes, and multiply that by 28%. That’s how much a manageable monthly payment might be for you, including taxes, insurance and PMI.

Income may include:

Your income
Co-borrower income (partner, spouse or guarantor)
Rental income
Investment income
Trust funds

Example

$5,000 Gross monthly income x 28% Industry average = $1,400 Max. monthly mortgage

36% Debt-to-income ratio

A good benchmark is to spend no more than 36% of your gross monthly income on your total debt, including your mortgage payment and other debt such as car payments and credit card payments. If you are paying more, you may want to consider lowering your mortgage payment.

Debt may include:
Monthly debt payments $400 + Monthly mortgage payments $1,400

Example
$1,800 Monthly debt payments / $5,000 Gross monthly income = 36% Debt-to-income ratio

Calculating affordability
To figure out your budget and how much home you can afford, use Bank of America’s affordability calculator.

Home price: $250,000
$1,335 monthly payment

Close Disclaimer
The material provided on this website is for informational use only and is not intended for financial or investment advice. Bank of America and/or its affiliates, and Khan Academy, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.

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