How much mortgage is too much?

Steve Merrell |

Q: With interest rates as low as they are, my wife and I are looking at buying a larger home. Our credit is good and our mortgage banker assures us we can qualify for the mortgage we would need, but that much debt scares us. How much can we safely borrow?

A: I’m glad you are nervous about taking on a big mortgage. Debt is serious and money should be borrowed only after careful consideration. J. Reuben Clark described it well:

“Interest never sleeps nor sickens nor dies; it never goes to the hospital; it works on Sundays and holidays; it never takes a vacation. . . it has no love, no sympathy; it is as hard and soulless as a granite cliff. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands nor orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you.”

Unfortunately, too many people have developed a casual attitude toward debt. Large mortgages are common and people seem to take them on without a second thought. California leads the country in this regard. According to the most recent consumer finance survey by the credit agency Experian, Californians have an average mortgage debt of $347,652—the highest in the country.

Looking for advice on mortgages can be tricky. A mortgage banker will tell you how much they can lend, but they don’t know enough about your personal financial situation to tell you how much you should borrow. In fact, if you borrow as much as a mortgage lender is willing to give you, I can almost guarantee you won’t have enough money for your other goals.

Mortgage underwriting relies heavily on a metric called the Debt-to-Income ratio or DTI. DTI is calculated by adding up the monthly payments required to service all your debt, including your mortgage, student loans, car payments, credit cards, etc. PLUS property taxes, homeowners insurance and HOA fees and dividing them by your gross income. Generally, mortgage lenders like to see DTIs less than 43%. However, if you borrow up to that 43% DTI limit, you are going be house poor. Let’s do some numbers.

Suppose your household annual income is $100,000. If you have good credit and no other debt, the 43% DTI rule means a mortgage lender will assume you can support a monthly payment of about $3,500, including property tax and insurance. Given current interest rates, this means they would probably approve you for a mortgage limit of around $650,000. However, do you really want to live with a $3,500 monthly payment?  After taxes, that would leave you with only about $3,800 each month to pay all your other expenses—not much when you consider the cost of food, clothing, utilities, medical care, home maintenance and transportation. And what about saving for college or retirement?    

A better way to think about your mortgage is to figure out how much of a house payment you can afford without neglecting your other financial priorities. Once you have that number you can work backward to see how much house that payment will buy. If you go the other way (i.e., finding the house you like and then trying to qualify for the mortgage you need to buy it) you will likely overspend. We all tend to want more than we can actually afford.

People often sabotage their long-term priorities because they fail to make the short-term sacrifices those priorities require. They buy too much house for their income and they don’t have enough resources left over to properly save for retirement or their children’s education. Make sure you include long-term goals in your cash flow planning for your mortgage.

Finally, build some cushion into your mortgage payment. If your budget shows that you can afford a $2,500 per month mortgage payment, settle instead for $2,000 per month. That extra cushion will give you added resilience when you confront the inevitable challenges of life.



Steven C. Merrell  MBA, CFP®, AIF® is a Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investments, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to