Earning a 125k salary? Get ready to buy a home worth around $500,000, suggests David Sayce, founder of Compare My Move, citing the common 2.5 rule. Assuming you take home $10,417 per month before taxes, you’d be able to afford a mortgage and housing expenses of approximately $35,000 annually.
In other words, your 125k salary can buy a house worth a cool half a million, providing a comfortable financial foundation for homeownership.
How Much of My $125,000 Income Should I Spend on Housing Expenses?
As a general guideline, it’s recommended that your housing expenses, including mortgage payments, property taxes, and insurance, should not exceed 30% of your gross income. For you, that would be $37,500 ($125,000 x 0.30).
Breaking Down the 30%
- Mortgage payments: 15% to 20% of your gross income ($18,750 to $25,000)
- Property taxes and insurance: 5% to 10% of your gross income ($6,250 to $12,500)
Calculate Your Housing Budget
- Calculate your total housing expenses using the 30% guideline: $37,500
- Adjust this number based on your individual circumstances, such as other debt payments or savings goals
Can I Afford a $200,000 Mortgage with a $125,000 Gross Income?
Mortgage affordability depends on several factors, including your income, expenses, credit score, and the type of mortgage you’re applying for. Let’s break it down.
Income
- Your gross income is $125,000 per year.
- To calculate your monthly income, divide your annual income by 12: $125,000 / 12 = $10,416 per month.
Mortgage Payments
- A $200,000 mortgage at a 4% interest rate would require a monthly payment of approximately $955 (not including other costs like property taxes and insurance).
- To determine how much of your income goes towards mortgage payments, use the 28/36 rule: 28% of your monthly income should go towards housing costs and 36% towards all debt payments.
- Based on your income, 28% of $10,416 is $2,917, and 36% is $3,759.
Affordability
- Given your income and mortgage payment, you can comfortably afford a $200,000 mortgage.
- Your monthly mortgage payment of $955 is well within the 28% threshold of $2,917.
- The total monthly cost of the mortgage, including other expenses, should still leave you with enough room in your budget for other necessities and discretionary spending.
How Much House Can I Afford with a $125,000 Gross Income?
So, you’re wondering how much of your hard-earned cash can go towards a new home. Let’s break it down.
To determine how much house you can afford, we’ll need to consider a few key factors:
Income
Your gross income, or the amount you earn before taxes, is a significant factor. In your case, $125,000 is a solid starting point.
Debt
We’ll also need to factor in any debt you may have, such as student loans, credit card debt, or car payments. This will affect how much you can afford to spend on a new home.
Credit Score
A good credit score can help you qualify for better interest rates, which can save you money in the long run.
Down Payment
Saving for a down payment is crucial. Aim to put down at least 20% to avoid paying private mortgage insurance (PMI).
Mortgage Interest Rate
The interest rate on your mortgage can significantly impact your monthly payments. Aim for a rate around 4% to 5%.
Other Expenses
Don’t forget to factor in ongoing expenses like property taxes, insurance, and maintenance.
Now, let’s crunch some numbers:
- Assuming a 20% down payment ($25,000), a 4.5% interest rate, and a 30-year mortgage
- Calculating your debt-to-income ratio, including your proposed mortgage payment, property taxes, insurance, and other expenses
- Considering your credit score
Based on these calculations, here’s a rough estimate:
You can afford to spend around $275,000 to $300,000 on a new home, assuming you meet the above criteria.
Of course, this is just a rough estimate, and your individual circumstances may vary. It’s essential to consult with a financial advisor or mortgage expert to get a more accurate picture of what you can afford.
Can I Afford a $1 Million Home with a $125,000 Gross Income?
To determine whether you can afford a $1 million home with a $125,000 gross income, we’ll need to consider several factors.
Housing Expenses
- Mortgage payment: Aim for 28% or less of your gross income for housing expenses. For you, that would be $35,000 or less.
- Property taxes: In the US, property taxes typically range between 0.5% to 2% of the home’s value. For a $1 million home, that would be $5,000 to $20,000 per year. Let’s assume an average of $12,500 per year.
- Insurance: Average annual homeowners insurance premiums in the US range from $800 to $2,000. Let’s assume an average of $1,400 per year.
Total housing expenses: $35,000 (mortgage) + $12,500 (property taxes) + $1,400 (insurance) = $48,900 per year
Income and Expenses
- Gross income: $125,000
- Other monthly expenses: This includes student loans, car loans, credit cards, and other debt payments. Aim to keep this no more than 36% of your gross income. For you, that would be $45,000 or less per year.
Can You Afford the Home?
Based on these calculations, your total housing expenses would be $4,075 per month. If you’re already spending 36% of your gross income on other monthly expenses, you might not have enough room in your budget for the $1 million home.
To afford the home, you could consider options like:
- Reducing other expenses
- Increasing your income
- Exploring alternative housing options or neighborhoods
- Adjusting your mortgage payment or term
Keep in mind that these calculations are just an estimate, and your individual circumstances may vary. It’s always a good idea to consult with a financial advisor or mortgage professional to get a better understanding of your financial situation.
