How Much House Can You Actually Afford? Do the Math Before You Fall in Love

Every house-hunting story starts the same way. You scroll listings, you find a place you love, and the price feels almost possible if you squint. Then you run the real numbers and the monthly payment is hundreds more than you expected. That gap is not a surprise. It is the difference between the price of the house and the cost of owning it. Before you fall in love with a kitchen, figure out what you can actually afford, because the math is not complicated, and it will save you from a mortgage that eats your whole paycheck.

Start with the rule lenders use. Most of them want your total housing payment, including principal, interest, taxes, and insurance, to stay under about 28 percent of your gross monthly income. They also want all of your monthly debts combined, including the house payment, car loan, student loans, and minimum credit card payments, to stay under about 36 percent. Those are called the 28/36 rules, and they are a decent starting point. They are not a law. They are a guardrail.

Run your own numbers. Say you make $45,000 a year. That is $3,750 a month before taxes. Twenty-eight percent of that is $1,050. That is the ceiling for your full housing payment under the rule, not just the mortgage. Now look at what a house actually costs per month. A $250,000 house with 10 percent down means a $225,000 loan. At a 7 percent interest rate on a 30-year mortgage, principal and interest alone come to about $1,497 a month. That is already over your $1,050 ceiling before you add a single dollar of taxes or insurance. You would need to earn roughly $75,000 a year to comfortably carry that payment under the 28 percent rule, or you would need a much bigger down payment, a cheaper house, or a lower rate.

That is why the monthly payment is the number that matters, not the sticker price. A $200,000 house and a $250,000 house are only $50,000 apart on a listing. But at 7 percent, the monthly principal and interest difference is about $332. Add property taxes and homeowners insurance, which run higher on the more expensive house too, and the real gap is closer to $400 a month. That is $4,800 a year, every year, for 30 years.

Property taxes and insurance are the part first-time buyers forget most. They are not optional, and they are not small. Property taxes vary a lot by state and county, but 1 percent of the home's value per year is a common rough estimate, and in some places it is double that. On a $250,000 house, 1 percent is $2,500 a year, or about $208 a month. Homeowners insurance might add another $150 to $250 a month, and it has been going up fast in a lot of states. Your lender will usually roll taxes and insurance into your monthly payment through escrow, so you pay them every month whether you think about them or not. When you see a mortgage calculator that says "$1,497 a month," that is only the loan. Add taxes, insurance, and possibly private mortgage insurance if you put less than 20 percent down, and the real number is often 30 to 40 percent higher.

Private mortgage insurance, or PMI, is worth understanding before you buy. If your down payment is less than 20 percent, most lenders charge PMI, which protects them, not you. It typically costs 0.5 to 1 percent of the loan amount per year. On a $225,000 loan, that is roughly $95 to $190 a month, on top of everything else. You can get rid of PMI once you have 20 percent equity, but until then it is real money every month for something that gives you nothing.

Then there is the down payment itself. Twenty percent is the classic target because it avoids PMI, but it is a huge amount of cash. Twenty percent of a $250,000 house is $50,000. That is why plenty of first-time buyers put down 3 to 10 percent instead, using FHA or conventional low-down-payment loans. That is fine, but be honest about the trade-off. A smaller down payment means a bigger loan, a higher monthly payment, and PMI. It also means you start with very little equity, so if home prices dip, you could owe more than the house is worth.

And then there are the costs nobody puts in the listing. Closing costs usually run 2 to 5 percent of the purchase price, which is $5,000 to $12,500 on a $250,000 house. A house needs maintenance, and the rule of thumb is to budget 1 percent of the home's value per year for repairs.

So how do you actually decide? Work backward from your monthly budget, not forward from a listing. Figure out what you can pay every month for housing without giving up your emergency fund, your retirement contributions, and your ability to live like a normal person. Then use that number to find your price ceiling, including taxes, insurance, and PMI. Get pre-approved, but remember that a pre-approval is the maximum a bank thinks you can borrow, not the amount you should borrow. Banks are happy to lend you enough to be house-poor. Your job is to borrow less than the maximum.

A house is supposed to be a home, not a financial trap. The people who regret buying usually do not regret the house itself. They regret the payment. Do the math first, fall in love second, and you will end up in a place you can actually afford to keep.

Disclosure: This article was drafted with AI assistance and reviewed by the author.