A typical rule is that your housing payment shouldn’t exceed 28% of your monthly income, with total debt staying under 36%. Use these benchmarks to calculate what’s affordable for you.
Why Central Arkansas is a Great Place to Buy
Central Arkansas, including Little Rock and surrounding areas, offers one of the most affordable costs of living in the U.S. This low cost of living allows you to stretch your budget further, often meaning larger homes or more desirable neighborhoods for the same price compared to other states. Property taxes are low, and insurance premiums are competitive, making homeownership more accessible here than in many other markets.
The amount of house you can afford depends on several factors, including your income, debt, down payment, and the loan's interest rate. Many financial experts recommend using two models to help determine a comfortable mortgage payment: the 28/36 rule. The idea is that your monthly housing costs should not exceed 28% of your gross income, and your total debt payments (including your mortgage) should stay under 36% of your gross income.
Applying the Models with a $200,000 Home
To better understand these formulas, let’s calculate what your income should be using a $200,000 home at a 6.5% interest rate with a 5% down payment.
- Total Loan Amount: $190,000
- Monthly Mortgage Payment: $1,202 (including principal and interest)
- Property Taxes: $225 per month
- Home Insurance: $175 per month
- PMI: $80 per month
Total Housing Costs: $1,682 per month
1. The 28% Rule
This rule suggests that your housing costs should not exceed 28% of your gross monthly income. Let’s calculate:
$1,682 ÷ 0.28 = $6,007/month (or $72,084/year)
To comfortably afford this home based on the 28% model, your household income should be around $72,000 per year.
2. The 36% Rule
This model accounts for total debt payments, including your housing, car loan, student loans, and credit card debt.
- Let’s assume you have an additional $600 in monthly debt payments.
- Total monthly debt with housing = $1,682 + $600 = $2,282
$2,282 ÷ 0.36 = $6,339/month (or $76,068/year)
With this model, you’ll need a gross income of at least $76,000 annually to comfortably afford the home and your other debts.
Additional Budget Considerations
While these models give a general idea, don’t forget to factor in other costs:
- Closing Costs: Typically 2-5% of the home’s price, paid upfront.
- Maintenance & Repairs: Plan for ongoing upkeep.
- Savings Cushion: Set aside 3-6 months of expenses for emergencies.
- Utilities & HOA Fees: Ensure these costs fit comfortably into your budget
Let’s Discuss Your Home Buying Goals
We’re here to help you find a home that fits your budget and lifestyle perfectly. Whether you’re exploring affordable areas or want to know what homes are available in your price range, our team can guide you every step of the way. With personalized searches and expert advice, we’ll ensure you’re ready to act when the right home hits the market.
