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The 650 Rule

At least once a week I’m asked by a prospective buyer to estimate the monthly mortgage expense for a specific property. Usually, I look up at my forehead, pause a second, and produce a fairly accurate figure. Sometimes, during a slow open house, I show off by computing the calculation for a number of down payments.

I’m neither a math genius nor a savant. What’s my secret? It’s the 650 Rule and you can use it to do the same calculations in your head. Simply stated, for every $100,000 you borrow, you can estimate a monthly mortgage payment (a.k.a. Principal and Interest) of $650. Borrow $200,000 and your payment is $1300. Borrow $500,000 and you’ll have to cough up $3250 a month. Want to verify it? Just go to any standard mortgage calculator , enter $100,000 for the Loan Amount, 6.75% for the Interest Rate, and 30 years (or 360 months) for the Term. What do you get? OK, admittedly, not $650 spot on, but would you read a post called The 648.60 rule? One other thing, 6.75% is a little higher than today’s average interest rates, but we’re erring on the side of caution.

Remember this estimate is just for the money you’re borrowing not the entire purchase price. For example, you are purchasing a two bedroom Condo in Crown Heights for $500,000 and are putting 20% down. What is your monthly mortgage payment? Answer: $2600. How did I calculate it?

Down Payment = $500,000 X 20% = $100,000
Amount Borrowed = $500,000 – $100,000 = $400,000
Monthly Payment (applying the 650 rule) = 4 X $650 = $2600

There are other monthly expenses (fodder for another post), but the 650 Rule calculates the bulk of your expenses and is a damn good estimate in a pinch. Thanks for reading, Jim.

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Categories: Buy It
  1. Yerm
    June 23, 2007 at 1:09 pm

    Hi Jim:

    Regarding the “650 Rule”, in many areas of the city, when you purchase a condo/coop/condop, there are monthly maintenance charges that average approx $1000 (This figure was derived from a YSI study of the following:
    Manhattan > $1000, other boroughs

  2. Jim Winters
    June 23, 2007 at 4:00 pm

    Hi Yerm,

    Good point. The 650 rule only applies to the mortgage components principle and interest. Soon, I’ll be posting a follow-up article that will explain how to calculate total monthly expenses, including maintenance/common charges, utilities, taxes, etc.

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