Home affordability is a national crisis. The median monthly mortgage payment hit an annual high of $2,647 in June, according to Redfin data.High home prices and mortgage rates hovering around 6.5% are the two main reasons monthly housing payments have soared.When we spend a large percentage of our incomes on monthly mortgage payments, we risk becoming “house poor.” This means that, although we may be homeowners, we spend so much on the house that there isn’t enough room in our budgets to save, invest, or build wealth in general.”You deserve more than a life that’s loaded with stress about whether or not you can make a house payment,” bestselling personal finance author and radio host Dave Ramsey posted to his Facebook page on June 26.The post included a clip from an episode of his podcast, The Ramsey Show.”You become house poor when your payment is too big a percentage of your take-home pay,” Ramsey said in the clip. “You need that margin to be able to build wealth, to be able to be generous, and to be able to build a quality life. And if you pinch yourself with a huge freaking house payment as a percentage of your take-home pay, it’s very difficult to do.”What’s included in monthly housing payments?When people refer to “monthly housing payments” or “monthly mortgage payments,” you may think they’re talking about what you put toward your mortgage principal and interest each month.But a monthly housing payment includes much more than the principal and interest.To calculate your monthly payment, think of the acronym PITI. This stands for principal, interest, taxes, and insurance, according to the Consumer Financial Protection Bureau.Related: Americans face major decision with mortgage rate newsThe “taxes” in PITI pertains to property taxes. The “insurance” is both homeowners insurance and mortgage insurance. The type of mortgage insurance you need depends on which type of mortgage loan you have.If you get a conforming conventional loan and make a 20% down payment, you don’t have to pay for private mortgage insurance (PMI). In that case, the only type of insurance that would factor into your monthly payment would be homeowners insurance.You should also incorporate homeowners association (HOA) dues into your monthly housing payment, if applicable. I understand why monthly housing payments are so high. Yes, it’s expensive homes and relatively high mortgage rates. But these other costs also increase. For example, mortgage insurance is a percentage of your loan amount. The exact cost depends on various factors, but PMI usually ranges from $30 to $70 monthly for every $100,000 you borrow, according to Freddie Mac. As home prices increase, homebuyers may need to borrow more with a mortgage loan. The more you borrow, the more you’ll pay each month toward mortgage insurance.So, with monthly housing payments being so expensive, how do you avoid becoming house poor?Vanguard emphasizes the importance of a budgetIt’s not enough to simply think about how much you can afford to put toward a housing payment each month.”Look at your budget,” writes financial services company Vanguard. “What would you consider a comfortable monthly mortgage payment? This will help you determine how much you can afford to pay for a house.”The keyword here is “comfortable.” Don’t just consider what you can afford if you scrape by each month. That’s how you become house poor, unable to save, cover emergencies, or even afford to enjoy discretionary spending. Instead, decide what you can comfortably afford.More Housing Costs:Housing costs force a generation to put moving out on holdRedfin sees shift in housing market, home pricesWhy first-time homebuyers face a stacked deck right nowVanguard suggests using the 50/30/20 rule to determine how much you can comfortably afford each month.With the 50/30/20 rule, you use 50% of your post-tax income for necessary living expenses. This includes your monthly housing payment, along with costs such as groceries, utilities, and health care.Then, you spend 30% on things you want. The last 20% goes toward saving, investing, and debt repayment.Using this rule, you’d calculate 50% of your post-tax income and determine how much you already spend on necessities. Then, you’d see how much room you have left to put toward a monthly housing payment.Dave Ramsey focuses on 25% rule, 15-year mortgagesDave Ramsey is also a huge proponent for only spending what you can comfortably afford on a house each month. Ramsey’s overarching message for his readers and listeners is about how to build wealth. It’s impossible to build wealth if you’re putting so much money toward your house that you can’t save or invest.As I wrote about on June 21, Dave Ramsey is a huge proponent of the 25% rule. With this rule, you spend 25% or less of your post-tax income on housing payments. He believes this leaves enough of a margin for people to reach other financial goals.”It’s why I only recommend getting a mortgage where the monthly payment is no more than 25% of your take-home pay at no more than a 15-year, fixed rate,” Ramsey wrote in his June 26 Facebook post.”That’s not easy to do for most people, but being hard doesn’t change the math of the situation,” he said.That’s right, not only does Ramsey recommend sticking to the 25% rule — he is also very opinionated that you should only get a 15-year, fixed-rate mortgage loan.
Dave Ramsey is adamant that homebuyers use the 25% rule to determine what they can comfortably afford.Jackson Laizure / Getty Images
My home affordability calculationsIn the long run, Ramsey’s 15-year advice has merit. A 15-year mortgage charges a lower interest rate than the popular 30-year fixed-rate mortgage. You’ll pay your home off in half the time, and you’ll pay a lot less in interest.However, I don’t think the 15-year mortgage rule aligns with the rest of his advice about keeping monthly housing payments low.A monthly payment on a 15-year mortgage will be much higher than one on a 30-year mortgage.I’ll use an example with a $400,000 mortgage and the current average mortgage rates for 30-year and 15-year terms, according to Freddie Mac data. Keep in mind, these monthly payments only include the principal and interest, not taxes, insurance, or HOA dues. I’m calculating these numbers using the Bankrate mortgage calculator.If you take out a $400,000 mortgage with a 30-year term and 6.43% interest rate, your monthly payment toward the principal and interest would be $2,510. A $400,000 loan with a 15-year term and 5.79% rate would cost $3,330 monthly.That’s an $820 difference per month. For most of us, that is a fairly significant portion of our monthly income.Personally, I don’t agree in the hard-and-fast 15-year fixed-rate mortgage rule. If high monthly payments and home affordability are the main problems facing today’s homebuyers, it’s not very logical advice.I think the 25% rule is a good option for determining how much house you can comfortably afford. The 50/30/20 rule is also totally valid, but it takes a lot more mental math, considering you have to figure out how your housing payment and all of your other necessary expenses would add up to 50% of your take-home pay.Personally, I think the 28/36 debt-to-income (DTI) ratio rule makes the most sense for determining how much you can comfortably afford.The 28/36 rule suggests that you spend a maximum of 28% of your gross (pre-tax) monthly income toward housing payments, explains Chase Bank. You also should spend no more than 36% of your pre-tax income toward all monthly debt obligations, including your mortgage, credit cards, or other loans.After years of writing content about mortgages, I’ve found the 28/36 rule to be the most reliable when deciding how much house you can comfortably afford. It’s a popular “rule,” and many mortgage lenders use it when deciding whether to approve your mortgage application.Related: New home-selling strategy threatens to hurt buyers