Buying a Home or Car: The Math Before You Sign

How to work out what you can really afford for a home or car, using simple rules and real numbers.

The biggest purchases of your life deserve a few minutes of math. These rules keep you out of trouble.

Home: cash first

For a $320,000 home with 10% down and 3% closing costs you need $41,600 in cash before moving. Use the home buying plan calculator to see your cash target and how long it takes to save.

Home: the monthly payment

The same home on a 6.5% 30-year loan costs about $1,820 in principal and interest and about $2,220 with tax and insurance. Lenders often want housing costs under 28% of gross income, so you would need roughly $95,000 a year. Check your limits in the house affordability calculator and the mortgage calculator.

Refinancing later

If rates fall, divide closing costs by the monthly saving to find your break-even. $4,500 of costs and a $156 monthly saving breaks even in 29 months. See the refinance calculator.

Car: the 20/4/10 rule

Put 20% down, borrow for no more than 4 years and keep all car costs under 10% of gross income. On $60,000 income that is $500 a month. After insurance, fuel and upkeep of $260, $240 goes to the loan, supporting a car near $15,000 with $5,000 down. Run your numbers in the car affordability calculator.

A cheaper used car or a smaller home often leaves you much more money for savings and investing. This article is general education, not financial advice.