Free calculator for applying the 28% Rule to budget your first home purchase

This article teaches you about the importance of the 28% rule in home purchase budgeting and provides links to Google Sheets and Excel templates that you can use to calculate your budget.

Your home purchase budget is perhaps the single most important decision you need to make before starting the home buying process. Without a budget, you can easily end up buying more house than you can afford or, conversely, buying a home that feels cramped and unsuitable within just a year or two.

It's crucial to exercise caution when starting your housing search. Some people you speak with may have a financial incentive to push you toward a more expensive home. It’s wise to establish a firm budget before initiating these conversations.

Likewise, relying on "what the bank will approve me for" can lead you to borrow more than what is prudent based on your income. Don't mistake bank approval for careful budget planning.

Introducing the 28% Rule

A classic rule of thumb in home purchases is the 28% rule: "Only spend up to 28% of your gross income on housing." Simple enough, right? However, calculating what that 28% should cover can be more complex than it seems.

The basic formulation of the rule includes mortgage principal, interest, taxes, and home insurance. As a financial advisor, I also encourage my clients to consider additional costs of home ownership, such as HOA fees, regular maintenance, and utilities. These expenses often exceed the expectations of first-time homebuyers.

Let's take an example: Suppose you earn $150,000 per year, which translates to $12,500 per month. 28% of that amounts to $3,500. How do we convert this into a home purchase budget? There are numerous variables that influence this relationship, including the down payment, interest rate, local property tax rate, mortgage insurance, home insurance rate, HOA fees, and more. Get the calculator for Google Sheets here or Excel here.

How to use the calculator

To address these variables, I have created the 28% Rule Calculator in both Google Sheets and Excel.

1. Open the calculator in your preferred platform

   1. Google Sheets: link

   2. Excel: link

2. Make sure iterative calculation is turned on:

   1. Excel:

   2. Google Sheets:

3. Enter your assumptions % variables:

   • Down payment: Input the percentage of the down payment you plan to make. Unless you have other plans, assume 20%.

   • Mortgage term (years): Enter the term of the mortgage in years. The standard is 30 years.

   • Mortgage interest rate: Input the anticipated mortgage interest rate. You can refer to a resource like [website] for current rates.

   • Mortgage insurance cost: If you're putting less than 20% down, you may require Mortgage Insurance. As a default, we recommend 0.50%, but this can vary based on your credit and participation in special programs.

   • Combined income: Sum up the income of all individuals who will be contributing to the mortgage payment. Use the pre-tax, pre-deduction income.

   • % of gross income used on housing: This is the 28% rule. By default, we use 28%, but if you want to be more conservative, you could enter a lower percentage.

   • Estimated HOA: Enter an amount for HOA fees based on the homes you have been considering. Single-family homes typically have lower or no HOA fees, while condos often range from $300 to $500, depending on the community.

   • Property tax rate: Research the property tax rates in your state and local area. Property taxes often include additional costs such as sewage, trash, and other city services. As a rule of thumb, you can add 0.25% to your state property tax rate.

   • Utilities: Estimate the monthly cost of utilities. This expense can often be higher than expected, especially if you're transitioning from an apartment to a single-family home.

   • Home maintenance costs (annual): If you're purchasing a condo, the HOA often covers a portion of the maintenance costs. As a general guideline, assume $1 per square foot per year. However, if you're buying a single-family home where the HOA is not responsible for any maintenance, estimate $2 or $3 per square foot.

   • Home insurance: You can obtain a rough estimate of home insurance from websites like Zillow. Keep in mind that if you're purchasing in a high-risk area with frequent flooding or wildfire risks, you should anticipate significantly higher home insurance costs.

4. Scroll down to the Results section and review the information provided. This section will indicate the maximum amount you can borrow and the overall home price that fits within your budget.

Conclusion

By utilizing the 28% Rule Calculator, you can gain a clearer understanding of your financial boundaries when it comes to purchasing a home. It empowers you to make informed decisions and ensures that your home buying process aligns with your budgetary constraints while considering various factors that impact affordability.

Remember, setting a budget is vital for a successful home buying journey. It helps prevent financial strain and ensures that you find a home that comfortably fits your lifestyle and financial goals.