Mortgage & Home Affordability

The traditional 28/36 rule caps affordability at two thresholds: housing cost (principal, interest, taxes, insurance) should not exceed 28% of gross monthly income, and total debt payments (housing plus car, student, and credit card minimums) should not exceed 36%. Lenders writing conforming loans typically enforce a 43-45% back-end DTI ceiling, but the 36% rule is the sustainability benchmark — above it, housing costs routinely crowd out retirement savings and emergency reserves.

A household earning $100,000 per year ($8,333 per month gross) can therefore afford roughly $2,333 per month in housing cost — which at current 30-year rates supports a mortgage of approximately $320,000-$350,000 on top of a 20% down payment, meaning a home price of roughly $400,000-$440,000. Property tax and insurance vary by state: Texas and Florida pay 2-3% effective property tax including HOA-equivalent costs, while California caps property tax at roughly 1.1% but has much higher home prices.

Interest rate and loan term together determine the bulk of total cost. At 6.3% (the Freddie Mac 30-year average in April 2026), a $350,000 mortgage costs roughly $773,000 over 30 years — $423,000 of that is interest. A 15-year term at 5.65% costs $517,000 total ($167,000 interest) — 33% less total cost but 60% higher monthly payment.

Down payment affects cost through three channels: loan size (smaller loan, less interest), private mortgage insurance (PMI at roughly 0.3-1.5% annually applies until loan-to-value drops to 80%, so 20% down eliminates PMI entirely), and interest rate (lenders typically offer 0.125-0.25% rate reductions at 25% down payment). Closing costs run 2-5% of the loan amount and include origination, appraisal, title insurance, transfer taxes, and prepaid escrow. Property tax and homeowners insurance are ongoing costs that rise roughly with property value and are included in the monthly escrow payment on most mortgages.

The break-even comparison depends on five inputs: expected holding period, local rent-to-price ratio, mortgage rate, expected home appreciation, and opportunity cost of the down payment. A common rule of thumb: if the home price exceeds 18-20× annual rent for an equivalent property, renting and investing the difference often beats buying. In 2026, San Francisco and Manhattan routinely show 30-40× price-to-rent ratios, favoring renting; Cleveland, Pittsburgh, and Detroit show 10-15× ratios, favoring buying.

Short holding periods favor renting because closing costs (2-5% going in, 6-8% going out via realtor fees) require 5-7 years of appreciation or principal paydown to break even. Tax treatment changes the math for itemizers — mortgage interest and property tax are deductible up to federal caps ($750,000 mortgage for interest; $10,000 SALT cap for state/local taxes), but the 2026 standard deduction is $16,100 single / $32,200 MFJ, which many borrowers do not exceed on itemized deductions alone.