The smart 28/36 rule helps you reduce stress when borrowing to buy a house

The 28/36 Rule of Borrowing

To own a valuable asset such as real estate, most people often take out a mortgage from the bank. However, not everyone knows how to use financial leverage and how it fits their financial health.

Many people often spend more money than they can afford to buy a house without realizing they are making a mistake. A survey by CNBC found that 22% of young home buyers in the US feel they are paying too much interest on their mortgage. 14% feel overwhelmed by their mortgage payments.

Therefore, you need to plan your budget carefully before signing a home loan to avoid falling into a difficult situation. Financial experts around the world often advise people to use the 28/36 rule to balance the source of capital to buy a house from debt.

This rule says that you should spend no more than 28% of your income on housing costs and 36% on total debt. Note that this income is what you have left after taxes.

Steps to Implement the 28/36 Rule

First, determine the monthly cost of owning a home. Ownership costs include mortgage principal and interest, taxes, average maintenance costs (assuming an average of 2% of the home's value), and real estate commissions.

Next, calculate the total value of other debts including credit cards, car loans, alimony, and child support payments.

More specifically, if your after-tax income is 30 million VND, the maximum payment for home ownership is 8.4 million VND. The total debt calculated on your income must not exceed 10.8 million VND.

In case after adding the home loan debt, your total debt is 15 million VND (accounting for 50% of income), it does not meet the 28/36 rule.

You should not spend more than 28% of your after-tax income on home loan repayments (Photo: Tien Tuan).

What to do if you exceed the 28/36 rule?

If you apply the 28/36 rule and find yourself paying more than you can afford, try to reduce your debt load before deciding to borrow more.

People typically use two basic strategies to reduce debt. The first is to pay off the smallest debt, working hard and gradually paying off larger debts. The second is to pay off the debt with the highest interest rate first and work your way down to the debt with the lowest interest rate.

Along with paying off debt, you also need to find ways to increase your income from part-time jobs, freelance work, and overtime.

Debt repayment is important because it affects your credit score. Credit score is one of the important criteria for banks to approve loans as well as interest rates.

People with high credit scores are more likely to get loans than people with low credit scores. In fact, rich people with high credit scores can get loans at lower interest rates than others.

Experience in applying the 28/36 rule

However, you should not use the 28/36 rule too rigidly and mechanically. For example, as of 2021, the cost of a home loan in the state of California, USA is $2,523. If you apply the 28/36 rule, this means that a home buyer's total monthly income must reach approximately $9,010 (about $108,128/year) to be able to afford the payment.

But according to California census data from 2021, the median household income in the state is $84,097. If machines applied this rule, many people would be unable to own a home due to their inability to get a loan.

Source: https://dantri.com.vn/bat-dong-san/quy-tac-thong-minh-2836-giup-ban-vay-mua-nha-bot-ap-luc-20231228144027003.htm