Author Topic: How much house can I afford?  (Read 3831 times)

FrugalSpendthrift

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How much house can I afford?
« on: May 30, 2015, 10:58:58 AM »
I know there is a big difference between what the banks will lend me and what a true mustachian would borrow for a house and I fall somewhere in the middle.  I'm 36, wife is 32, children are 2yo & 6months.  Net worth is about 10 times our current annual spending.  I would like to reach FI by age 50.  I'm planning to move into a different school district in a couple years and I would like to buy more than my current house, but I don't want to get too carried away.  So assuming I'm going to put 20% down and stick to a 15 year term, what is a reasonable percentage of my income to commit to a mortgage?

I am willing to share more numbers, but was hoping to start by establishing a range of percentages.

rjbf65

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Re: How much house can I afford?
« Reply #1 on: May 30, 2015, 11:10:27 AM »
I would not go over 25% personally.

matchewed

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Re: How much house can I afford?
« Reply #2 on: May 30, 2015, 11:17:46 AM »
What percentage allows you to still reach your goal?

justplucky

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Re: How much house can I afford?
« Reply #3 on: May 30, 2015, 11:18:09 AM »
I think there are too many variables to give a percentage estimate without more details. Some of these include:

- Your ideal savings percentage (some people would be okay with 35%, while others wouldn't be with anything less than 50%)
- Your spending on other stuff (if you've got a large expense like daycare or are paying your own medical insurance, that could make things tight if the house is too big of a percentage)
- What houses are available at what prices in your area

If I were taking out a mortgage at this point in my life with my current set of circumstances, I would feel comfortable at 25% of my take-home pay. But that's me, knowing my spending habits and savings goals.

ender

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Re: How much house can I afford?
« Reply #4 on: May 30, 2015, 11:49:41 AM »
You are asking the wrong question and don't have enough information.

It's not, "what is a reasonable percentage of my income?" because this answer is meaningless. If you make, for example, $200k/year then you could buy an absurd house compared with someone making $50k or $100k.

It also depends on your other required spending. If you have child support and $100k in student loans to payoff that's different than someone who has no mandatory expenses.



HenryDavid

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Re: How much house can I afford?
« Reply #5 on: May 30, 2015, 01:09:20 PM »
I can't understand why people use the phrase "how MUCH house can I afford."
It implies that the goal is to maximize the amount of "house." As if more = better. It doesn't.
Why not ask "what housing arrangements does my family's happiness require?"
Does happiness require a detached house? Why?
If yes, does it require a yard? Why? A garage? For what? More than one bathroom? Why?
And so on . . ..
You might find that "what you can afford" does not relate to what would make you happy.
What you need to be happy might be far LESS than you can "afford." That's true in my case.
For instance, I don't need a fancy neighbourhood, but do want close to zero commuting time (by bike); prefer a low-maintenance yard/exterior; require low heating/utility/tax costs . . . etc. It's not "how much" but "precisely what/where?" then you try to get close to that.
BANKS ask the question "how much can you afford."

Ricky

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Re: How much house can I afford?
« Reply #6 on: May 30, 2015, 01:21:46 PM »
I don't think OP is asking the wrong question, they're just not asking the right question first. The first question is "how much house do I need?". The second question is "how much can I afford to spend on this house that I need?". And that leads into will you be in a great/decent/bad neighborhood. Also there are general rules of thumb like 2-3x annual income. Some are ridiculous around here and purchased on 1x-1.5x income but I imagine that was when things were much cheaper.

FrugalSpendthrift

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Re: How much house can I afford?
« Reply #7 on: May 30, 2015, 01:37:57 PM »
I don't have any other debt, besides the mortgage.  I don't have any daycare expense.  The numbers should improve when the kids start school and my wife goes back to work.

What percentage allows you to still reach your goal?
I'm currently saving about 54% of my net income and spending 19% of my net income on the mortgage.  I think I could still hit my FI goal if I dropped my savings rate down to 25% of net income for the next 14 years.

I can't understand why people use the phrase "how MUCH house can I afford."
It implies that the goal is to maximize the amount of "house." As if more = better. It doesn't.
Why not ask "what housing arrangements does my family's happiness require?"
Does happiness require a detached house? Why?
If yes, does it require a yard? Why? A garage? For what? More than one bathroom? Why?
And so on . . ..
I do want more house.  A better layout.  An extra bedroom.  A bigger garage.  I certainly don't need more, but I would like to see what I can get.

Bicycle_B

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Re: How much house can I afford?
« Reply #8 on: May 30, 2015, 02:04:25 PM »
I think your approach is reasonable - you know what your goals are, you're starting with the ones most important, then determining what your options are within that.

One way to put numbers onto your goal-based approach is determine what percentage of savings you need (25%, you said), then multiply your income by that (obviously the income you expect after moving), then subtract other expenses.  That would give you the annual amount you can spend on housing.  Don't forget your repairs and capex (capital expenditure, meaning periodic replacement of everything major).

Example:  Suppose you earn 60k, then you need 15k savings rate.  Suppose other expenses are 20k (but use your real numbers for this, and include any allowances in case of higher living cost after your move).  60 less 15 = 45, 45 less 20k = 25k, that's your max for total housing.  Perhaps you will conclude 18k for annual principal, interest, insurance and taxes; determine insurance and tax rates in the new area are 50% of principal and interest (again, please research real numbers, 50% is my example); therefore 12k of principal and interest.  Then determine expected interest rate (could go up in 2 years, per the Fed).  Then calculate from that, using a 15 year note to own the home at age 50, what down payment and mortgage would fit the 12,000 per year in your max affordable budget.

I don't know your numbers for all these variables, but I would use 5% interest to be safe (accounts for 2% increase in next couple of years; may or may not happen).  Anyway, have fun exploring, and I hope all of your plans bear fruit.