Understanding Home Affordability: The 28% Rule Explained
The 28% rule is one of the most widely used guidelines in mortgage lending. It states that your monthly housing costs — including principal, interest, property taxes, and insurance (PITI) — should not exceed 28% of your gross monthly income. This rule helps lenders assess risk and helps buyers avoid becoming “house poor,” a situation where too much income goes toward housing at the expense of other financial goals like retirement savings, emergency funds, and daily living expenses.
For example, if you earn $75,000 per year, your gross monthly income is $6,250. Under the 28% rule, your maximum monthly housing payment should be $1,750. This includes your mortgage principal and interest, property taxes, homeowners insurance, and any HOA fees. Our affordability map uses this calculation to determine which states are affordable, a stretch, or unaffordable based on median home prices.
How We Calculate Monthly Payments
The monthly payment shown on each state card uses the standard amortization formula with a 30-year fixed mortgage at 6.22% APR (the current national average) and assumes a 20% down payment. The formula is: M = P[r(1+r)^n]/[(1+r)^n-1], where P is the loan amount (80% of the home price), r is the monthly interest rate, and n is the total number of payments (360 for a 30-year loan). This gives you the principal and interest portion of your monthly payment.
Keep in mind that actual housing costs include more than just principal and interest. Property taxes vary dramatically by state — from 0.27% in Hawaii to over 2% in New Jersey and Illinois. Homeowners insurance, PMI (if you put less than 20% down), HOA fees, and maintenance costs all add to your true monthly housing expense. The figures shown here represent a simplified but useful comparison across states.
Regional Differences in Housing Affordability
Housing affordability varies enormously across the United States. The Midwest and Southeast generally offer the most affordable housing markets, with states like Mississippi, West Virginia, Arkansas, and Indiana featuring median home prices well under $250,000. In contrast, coastal states like California, Hawaii, Massachusetts, and Washington have median prices exceeding $500,000, making them challenging for median-income earners.
However, home price alone does not tell the full story. States with no income tax (like Texas, Florida, and Tennessee) may have higher property taxes or insurance costs that offset the tax savings. A state with a lower home price but very high property taxes (like Illinois at 2.07%) may end up costing more monthly than a state with a slightly higher home price but lower property taxes. Always consider the total cost of homeownership, not just the sticker price.
Tips for Improving Your Home Affordability
If the map shows most states as unaffordable at your current income, there are several strategies to improve your position. First, increasing your down payment reduces the loan amount and eliminates PMI if you reach 20%. Second, improving your credit score can qualify you for lower interest rates — even a 0.5% reduction in rate can save tens of thousands over the life of a loan. Third, consider adjustable-rate mortgages (ARMs) if you plan to move within 5-7 years, as they often offer lower initial rates. Finally, look into first-time homebuyer programs in your state, which may offer down payment assistance, reduced rates, or tax credits that make homeownership more accessible.
Remember that the 28% rule is a guideline, not a hard limit. Some lenders will approve loans with housing ratios up to 36% or even higher for borrowers with excellent credit, low other debts, and significant savings. However, just because you can qualify for a larger mortgage does not mean you should take one. Building financial resilience requires leaving room in your budget for unexpected expenses, investment contributions, and quality of life spending.