Definition: The Mortgage to Salary Ratio is a financial metric that measures the percentage of total income required for homeownership based on the amount of principal balance outstanding or the monthly mortgage payment.
To calculate it, subtract the current home equity from your gross annual income (your net income before taxes and other deductions). For example, if you earn $30,000 per year and owe $25,000 in mortgage debt, your Mortgage to Salary Ratio would be:
(Mortgage balance) / ([Current annual income - mortgage balance]
12)
This formula assumes that the home value is constant each year.
The Mortgage to Salary ratio is typically used as a means of evaluating financial health and risk. It helps individuals understand how much of their total income they need to save or borrow in order to purchase a home. If you're considering refinancing your mortgage to lower your monthly payment, for example, the Mortgage to Salary Ratio may be useful as it shows how many months' worth of payments would be required before your balance is paid off.
For more specific information and examples, consult a financial advisor or refer to reputable sources such as the National Association of Realtors or the Bureau of Labor Statistics.
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