Total housing expense is the cost of owning your home. Expenses considered in this figure include both the principal and interest of your mortgage payment, your home insurance, property taxes, and other regularly occurring fees that come as a result of owning a home. Understanding your total housing expense can help you budget your lifestyle accordingly, and some banks use this total to understand how much they should loan you.
Let’s take a look at total housing expense, how it works, and what it means for you.
Definition and Examples of Total Housing Expense
Your total housing expense is calculated by adding all your regularly occurring monthly expenses associated with owning your home. You can use this number to help create a full budget and understand your total out-of-pocket cost per month related to your home. Lenders can also use your total household expense to calculate creditworthiness and the interest rate for your loan.
- Alternate names: Monthly housing expense
Here are some examples of common costs you may encounter when figuring out your total housing expense:
- Mortgage principal and interest (P&I)
- Home insurance, including flood and earthquake insurance if necessary
- Private mortgage insurance if your total equity in the property is less than 20%
- Real estate taxes
- Special assessments
- Ground rent
- Second or additional mortgages on the property
- Homeowners Association (HOA) dues
- Co-op fees
Of course, not all of the above costs may apply to your situation, so you’ll need to calculate for yourself what your total housing expense is by adding together your costs.
How Total Housing Expense Works
Let’s say that you’re looking to buy a vacation home for you and your family. Your current mortgage costs you $1,200 each month, and you and your spouse bring home a combined income of $8,000 per month.
When trying to figure out whether you can afford a second home, you can use your total housing expense for your current home—and one for your potential new home—to determine your ability to carry another mortgage. This can also dictate the price range of the home you can afford.
Lenders use the housing expense ratio to decide if they’re willing to offer you a loan. Typically, this means that the total cost of your housing should not exceed 28% of your income and your debt-to-income ratio overall should not exceed 36%.
Your debt-to-income (DTI) ratio is the total amount of debt you owe compared to the total income you take in each month. It gives lenders an idea of your surplus income and how easily you can afford a loan.
Returning to our vacation home example, let’s say that your total housing expense for your first home tops out at $1,600 per month, including all your insurances, taxes, and other fees. You don’t have any other debt, so calculating your debt-to-income ratio between you and your spouse shows your total is 20%—well below both the housing limit and the DTI ratio preferred by lenders.
Once you understand your total housing expense for your current property, you can then calculate the expected total housing expense for any property you’d like to buy. Finally, add the two figures together. This can give you a good idea of what it will cost you each month for your houses.
Most lenders prefer that you keep your DTI below 36%. However, a loan from some government-sponsored programs, like the Federal Housing Administration, will allow you to hold a DTI up to 50% if you can compensate through other factors.
What Total Housing Expense Means for You
You’ve now seen an example of why you should take the time to calculate your total housing expense. This remains true even if you aren’t looking to buy a vacation home. Learning your total housing expense might be wise if you’re looking to purchase your first property or take a firmer grip on your monthly budget.
Regardless of your reason, understanding your total housing expense can make a major difference in everyday life and in how you conduct your monthly finances overall.
- Total housing expense is the sum of all your regularly recurring costs of owning a home.
- Mortgage payments, home insurance, property taxes, and homeowners association dues are common examples included in your total housing expense.
- Lenders use your total housing expense to decide your creditworthiness and interest rate.
- Understanding your total housing expense can help you budget for a new home or your current overall financial picture.