How Compound Interest Grows Your Savings Over Time

It's the most asked question on r/personalfinance, and it has been for years: "How much house can I actually afford?" The answers vary wildly — some say 3x your income, others say 5x, and every calculator online gives you a slightly different number. Here's why, and how to actually figure it out.

The problem with most "how much house" calculators

Most online mortgage calculators only compute principal and interest. That's the loan amortization formula — clean, precise, and missing about a third of your actual housing cost. Property taxes, homeowners insurance, PMI (if your down payment is under 20%), and HOA fees all stack on top. A $340,000 loan at 6.85% shows $2,228/month for principal and interest, but your real payment with taxes and insurance is closer to $2,800–$3,000.

This is why people get pre-approved for a number, buy the house, and then feel house-poor within six months. The bank's number is based on lending risk — how much they think you can pay back without defaulting. Your number should be based on how much you can pay without sacrificing everything else you want to do.

The 28/36 rule (and when to break it)

The guideline that comes up most often on Reddit is the 28/36 rule:

• 28% — Your total monthly housing payment (principal + interest + taxes + insurance + HOA) should not exceed 28% of your gross monthly income.
• 36% — Your total monthly debt payments (mortgage + car loans + student loans + minimum credit card payments + any other debt) should not exceed 36% of your gross monthly income.

On $100,000/year gross ($8,333/month), that means: housing payment up to ~$2,333/month, and total debt payments up to ~$3,000/month.

When to be more conservative than 28%:

• You have irregular income (commissions, freelancing) — use your conservative-year income, not your best year.
• You're not maxing out retirement accounts yet — a mortgage that eats 28% will make catching up hard.
• You have kids in or heading toward private school or college.
• You live in a high-tax state — your take-home is smaller, so the same percentage hurts more.

The true cost of homeownership (beyond the mortgage)

Reddit's most upvoted advice on this topic always includes the same warning: the mortgage is the floor, not the ceiling. Here's what people forget:

1. Maintenance — Budget 1% of home value per year minimum. A $425,000 house means $4,250/year, or about $355/month. Roof, HVAC, water heater, fence — something always needs fixing.
2. Closing costs — 2–5% of the purchase price when you buy. On a $425,000 home, that's $8,500–$21,000 in cash you need on top of the down payment.
3. Transaction costs to sell — Typically 6–8% of the sale price (agent commissions, closing costs). You need price appreciation of at least that much just to break even, which is why the "break-even" horizon is usually 5+ years.
4. Property tax increases — Many jurisdictions reassess after a sale. The previous owner's tax bill may be much lower than yours will be.
5. Utilities — A bigger house means higher heating, cooling, water, and electricity. Budget 20–40% more than your current place.

Worked example: $100k income, 20% down, 6.85% rate

Let's run the numbers for a household earning $100,000/year gross:

• Gross monthly income: $8,333
• 28% housing budget: $2,333/month (P + I + taxes + insurance + HOA)
• At 6.85% on a 30-year fixed, $2,333 minus ~$500 for taxes and insurance leaves ~$1,833 for principal + interest
• That translates to a loan of about $280,000
• With 20% down, the purchase price is about $350,000

So on $100k income with 20% down at current rates, a reasonable purchase price is around $340,000–$360,000 — not the $450,000+ the bank might pre-approve you for.

Drop the down payment to 5% and add PMI (~$200/month), and the affordable purchase price drops to about $290,000 — because PMI eats into your monthly budget and you're financing more.

What about the "3x your income" rule?

The old rule of thumb was "buy a house worth 3x your annual income." At current interest rates (6.5–7%), that rule is too aggressive. At 3%, the same income bought 50% more house because interest payments were so much lower. The 28/36 rule is more reliable because it's based on monthly cash flow, not a multiplier that ignores rates.

What to actually do

1. Use a calculator that includes all costs — not just principal and interest. The DigiCalc mortgage calculator includes property tax, insurance, PMI, and HOA by default.
2. Check the 28/36 rule against your gross income. If you're over 28%, you'll feel it.
3. Add 1% of home value per year for maintenance to your mental monthly cost.
4. Model the down payment impact — 20% vs 10% vs 5% changes both your monthly payment (PMI kicks in below 20%) and your cash-to-close.
5. Stress-test the rate — if rates drop 1 point, refinance. If they rise 1 point after you buy with an ARM, can you still afford the payment?

The bottom line: the bank will always lend you more than you should borrow. The 28/36 rule, plus maintenance and the full cost picture, gives you a number you can actually live with — not just qualify for.