Author Topic: You shouldn't buy a home more than xxx ?  (Read 23743 times)

EconDiva

  • Handlebar Stache
  • *****
  • Posts: 1130
You shouldn't buy a home more than xxx ?
« on: August 23, 2013, 07:36:18 PM »
Compared to your gross income, what do you consider a realistic maximum house purchase amount?

No more than 3 times your gross income? No more than 2 times your income?

Know anybody who bought a house close to their annual income...?

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8663
  • Registered member
Re: You shouldn't buy a home more than xxx ?
« Reply #1 on: August 23, 2013, 07:47:33 PM »
Buy a house with payments that fit within your savings goal.  Unless renting is cheaper.

slothkey

  • 5 O'Clock Shadow
  • *
  • Posts: 13
Re: You shouldn't buy a home more than xxx ?
« Reply #2 on: August 23, 2013, 08:26:45 PM »
When we bought our house 13yrs ago, I think it cost around 1.5 times our combined income.
We wanted to make sure that we could live comfortably on one income just in case something bad happened.
Nothing bad happened and were able to pay it of fairly quickly.

I would suggest buying something that you think you would be comfortable in for a long time,  with a price tag that still lets you meet your saving goals. Houses can be expensive- even if you are frugal and diy, there are still many things to buy. Often renting is a better option.

sol

  • Walrus Stache
  • *******
  • Posts: 8492
  • Age: 42
  • Location: Pacific Northwest
Re: You shouldn't buy a home more than xxx ?
« Reply #3 on: August 23, 2013, 08:31:13 PM »
I think the general rule out in the world is that you shouldn't mortgage more than 2.5x your annual income, but that ignores the relatively large impact that different down payment amounts can have on the total.

It's also complete BS for large swaths of the country.  Around here, the median home price is about 4x the median salary.

It's a surprisingly germane question right now.  That oft-quoted 2.5x number is based on a target debt to income ratio for your monthly payment.  For a fixed amount of income and debt, how much house you can afford is totally dependent on what interest rates you can get.   Since rates have been historically low recently, people have been buying home at crazy multiples of their incomes (5x?  7x?) because they can still hit the bank's required monthly debt to income ratio with a 2.5% mortgage.

meadow lark

  • Magnum Stache
  • ******
  • Posts: 4831
Re: You shouldn't buy a home more than xxx ?
« Reply #4 on: August 23, 2013, 09:17:32 PM »
We are in the process of buying a $105k house, we made $168k last year.  We are downsizing from a $150k house.

steveo

  • Handlebar Stache
  • *****
  • Posts: 1944
Re: You shouldn't buy a home more than xxx ?
« Reply #5 on: August 23, 2013, 09:35:46 PM »
I'd say that buying a house in Australia the general principle is more like 5 times your annual income. Houses are way too expensive in Australia.

willn

  • Stubble
  • **
  • Posts: 248
Re: You shouldn't buy a home more than xxx ?
« Reply #6 on: August 24, 2013, 12:35:17 PM »
For most wage earners, a payment that is 25% or less of your monthly income toward a 15 year mortgage is prudent.  Plenty leftover in the budget to save, debt term is short enough to see the light at the end of the tunnel.

Ramsey and others use this guideline.  Many people see this as overly conservative but the more you pay the harder it is to save, and harder to get through downturns, layoffs, medical issue etc that can affect income...

Frankies Girl

  • Magnum Stache
  • ******
  • Posts: 2977
  • Age: 81
  • Location: The laboratory
  • Typical Ghoul Next Door
Re: You shouldn't buy a home more than xxx ?
« Reply #7 on: August 24, 2013, 12:44:25 PM »
I live in an area that was not hit by the recession and has very reasonable home prices. Seriously upscale housing starts at about $200K and you can get mansion-type uber fancy for $400K, so middle class housing runs around $75-$150K roughly.

When we bought our house, we were approved based off my husband's salary alone, as my income was from freelance and they said that it was too uncertain to be included. The house we ended up buying was about $40k less than what the bank approved us for. It cost about 2.5 times what he made then (nice middle class neighborhood in my city) but with my income as well, it was more like 1.5x our combined income. Despite the fact that I have a job that now pays about double of husband's original salary (and he's making a bit more than then as well), we've stayed put as the house is a fine for our needs and in a good location for us. We could go out and buy a house that costs double of this one, but there's no point as we're happy where we are and VERY happy with the laughably low payment and the fact that we'll be paying it off in a year or so.

So basically in my opinion, you shouldn't go off of any "experts say this" type of advice. If it was me, I'd do the same thing all over again. The important thing is to not buy more house than you actually need just because of some idea of that's the type/size of house you should be buying based off of income levels or lifestyle inflation crap.

Find a decent neighborhood that is BELOW the range of what all the advice tells you you can technically afford and get a size of house that is reasonable for your family size. And also seriously consider how to maximize the usage of every room - having a formal living and dining room when you already have a family room and breakfast nook seems like wasted space to me, and definitely don't fall for the "gotta have a guest bedroom" unless it's a multipurpose type thing - office/guest room or the like. Buying a bunch of sq ft that you only use parts of occasionally is wasted space and wasted money (besides the initial mortgage outlay, also costs you to heat/cool and maintain).

Self-employed-swami

  • Handlebar Stache
  • *****
  • Posts: 1094
  • Location: Canada
Re: You shouldn't buy a home more than xxx ?
« Reply #8 on: August 24, 2013, 12:56:16 PM »
I bought a house 9x my annual income (I was making $42,000/year, and the house was $374,000) but I had a $200,000 downpayment.  I was approved for a mortgage of 4.1x my annual income.

Tyler

  • Handlebar Stache
  • *****
  • Posts: 1142
Re: You shouldn't buy a home more than xxx ?
« Reply #9 on: August 24, 2013, 12:56:51 PM »
This question reminds me of a story I once heard about a man interviewing drivers for a very dangerous cliff-side road in Peru.

Man: How close to the edge of the cliff are you comfortable driving?
Driver #1: I can drive 3 feet from the edge with no problem.
Driver #2: I drive 1 foot from the edge all the time.
Driver #3: I always drive as far from the edge as I can.

Guess who got the job.  ;)

When shopping for houses, it's easy to get caught up in looking at more and more expensive options to see what your money can buy.  But if you instead look for the least expensive house you can find that you'll be perfectly happy living in, you'll generally be better off in the long run.


brewer12345

  • Handlebar Stache
  • *****
  • Posts: 1386
Re: You shouldn't buy a home more than xxx ?
« Reply #10 on: August 24, 2013, 01:06:46 PM »
We mostly stuck to no more than 2 to 2.5X annual income for the price of the house.  My last purchase when we relocated was about 2.25X, but by that point the mortgage was a modest fraction of our net worth so income measures sort of start to look funny.

Deano

  • Stubble
  • **
  • Posts: 213
Re: You shouldn't buy a home more than xxx ?
« Reply #11 on: August 24, 2013, 01:08:18 PM »
I'd say that buying a house in Australia the general principle is more like 5 times your annual income. Houses are way too expensive in Australia.

The reckoning will come in that regard, just like in my country, Canada.

avonlea

  • Guest
Re: You shouldn't buy a home more than xxx ?
« Reply #12 on: August 24, 2013, 01:19:04 PM »
So basically in my opinion, you shouldn't go off of any "experts say this" type of advice. If it was me, I'd do the same thing all over again. The important thing is to not buy more house than you actually need just because of some idea of that's the type/size of house you should be buying based off of income levels or lifestyle inflation crap.

Find a decent neighborhood that is BELOW the range of what all the advice tells you you can technically afford and get a size of house that is reasonable for your family size. And also seriously consider how to maximize the usage of every room - having a formal living and dining room when you already have a family room and breakfast nook seems like wasted space to me, and definitely don't fall for the "gotta have a guest bedroom" unless it's a multipurpose type thing - office/guest room or the like. Buying a bunch of sq ft that you only use parts of occasionally is wasted space and wasted money (besides the initial mortgage outlay, also costs you to heat/cool and maintain).

I completely agree.

steveo

  • Handlebar Stache
  • *****
  • Posts: 1944
Re: You shouldn't buy a home more than xxx ?
« Reply #13 on: August 24, 2013, 05:35:42 PM »
I'd say that buying a house in Australia the general principle is more like 5 times your annual income. Houses are way too expensive in Australia.

The reckoning will come in that regard, just like in my country, Canada.

I've been saying this for 10 years. It hasn't happened yet.

marty998

  • Walrus Stache
  • *******
  • Posts: 6386
  • Location: Sydney, Oz
Re: You shouldn't buy a home more than xxx ?
« Reply #14 on: August 24, 2013, 06:11:54 PM »
I'd say that buying a house in Australia the general principle is more like 5 times your annual income. Houses are way too expensive in Australia.

The reckoning will come in that regard, just like in my country, Canada.

I've been saying this for 10 years. It hasn't happened yet.

I cannot see house prices collapsing in the near future, there's just too much demand in the cities, and if you actually read the financial statements of the big banks you will see that mortgage arrears are declining. Very, very few people are running into trouble paying the sky high prices.

FWIW I paid 6.5x income for my unit. I expect to be paying 8x-9x for a house soon enough.

pdxcyn

  • 5 O'Clock Shadow
  • *
  • Posts: 49
Re: You shouldn't buy a home more than xxx ?
« Reply #15 on: August 24, 2013, 06:48:06 PM »
My house was 5x my gross income, but I put a 40% downpayment, so actually only mortgaged 3x my income. This brought the payments, even on a 15 yr loan at 5.625% at the time, to a very affordable level, so in my opinion 3x is not too high.

steveo

  • Handlebar Stache
  • *****
  • Posts: 1944
Re: You shouldn't buy a home more than xxx ?
« Reply #16 on: August 24, 2013, 07:04:09 PM »

I cannot see house prices collapsing in the near future, there's just too much demand in the cities, and if you actually read the financial statements of the big banks you will see that mortgage arrears are declining. Very, very few people are running into trouble paying the sky high prices.

FWIW I paid 6.5x income for my unit. I expect to be paying 8x-9x for a house soon enough.

I was going to state my 5 times income was too low. The thing is from a FI viewpoint buying a house this far over your income can't be a good thing especially with interest rates at around 6%.

I don't view my house as an asset towards FI. I view it solely as something that will reduce my living expenses. Assuming I own my house and I do not upgrade it will mean that I am rent free for life. To me that is huge but it isn't something to be utilised in my FI calculations other than as reduced expenses. Paying off my mortgage is also my first real check point on my path to FI. All of this to me means if house prices drop its not a big issue. Ideally I'd avoid it but I fail to see how anyone can predict a crash or better the timing of and severity of any price decline. My thoughts are that we won't see significant growth for the next 20-30 years or more.

smedleyb

  • Bristles
  • ***
  • Posts: 434
Re: You shouldn't buy a home more than xxx ?
« Reply #17 on: August 24, 2013, 09:51:35 PM »
Quote
E) YOU HAVE A LOT OF CASH. If you buy a house, have 4x the amount of the mortgage sitting in cash in your bank account.

http://www.jamesaltucher.com/

sleepyguy

  • Pencil Stache
  • ****
  • Posts: 671
  • Location: Oakville, Ontario
Re: You shouldn't buy a home more than xxx ?
« Reply #18 on: August 25, 2013, 07:21:49 AM »
Living in GTA (Greater Toronto Area), you'll be hard pressed to find ANYTHING decent for under $375k.  Condos are like $300k and beyond as well in the downtown core.

We've gone as high as 3.5x (our first home, low salary) but we've gradually come down to 1.5x (our current home).

We were very fortunate and found a small fixer-upper bungalow in the suburbs which of the GTA (Oakville) for about $300k a few years back.  We fixed it up over time with me doing most of the work (even before I read MMM, cool eh? :)).

Deano

  • Stubble
  • **
  • Posts: 213
Re: You shouldn't buy a home more than xxx ?
« Reply #19 on: August 25, 2013, 04:11:43 PM »
I'd say that buying a house in Australia the general principle is more like 5 times your annual income. Houses are way too expensive in Australia.

The reckoning will come in that regard, just like in my country, Canada.

I've been saying this for 10 years. It hasn't happened yet.

I cannot see house prices collapsing in the near future, there's just too much demand in the cities, and if you actually read the financial statements of the big banks you will see that mortgage arrears are declining. Very, very few people are running into trouble paying the sky high prices.

FWIW I paid 6.5x income for my unit. I expect to be paying 8x-9x for a house soon enough.

Interest rates are up 1% in Canada...there was a rush of buying before that happened...now sales tailing off. Condo sales are collapsing in the GTA, the canary in the coal mine. Houses over 1 million are sitting stagnant on the market as you can't get mortgage insurance anymore for houses at that price...but houses at 900 to a million are flying off the shelves, showing that people buying at that price are only putting minimum down (5% in Canada, anything under 20% down requires mortgage insurance). July sales hit a 10 year low here. There is a stock of over 2 years of condos in the GTA at the current and cottage sales have plummeted in Ontario. Some places will do well, others will implode. Real estate is local.

Oh, indeed, mortgage arrears are declining...people were getting 30 year or more mortgages at 3%. Those days are done. Increase in interest rates equals decrease in prices, every time.

http://www.businessinsider.com/the-three-reasons-canada-is-in-big-trouble-2013-6

The rest of the world sees it, I'm not really sure why so many Canadians don't see it. As for Australia, my impression was that house prices were already starting to dip. Mind you, you may not feel it much if they only go from completely insane to just insane prices.

As for the OP (sorry to thread hijack), I think 2x income is plenty, unless you're in a major city, where I don't think I could bring myself to go over 4x. If you're American, this is probably a decent time to buy. Just my take.




pom

  • Bristles
  • ***
  • Posts: 288
  • Location: Paris, France
Re: You shouldn't buy a home more than xxx ?
« Reply #20 on: August 26, 2013, 06:43:29 AM »
I paid 2.4 times my annual income.

My opinion though is that you should always buy the cheapest house that meets your real needs (as oppose to perceived needs or wants).




jrhampt

  • Handlebar Stache
  • *****
  • Posts: 1073
  • Age: 41
  • Location: Connecticut
Re: You shouldn't buy a home more than xxx ?
« Reply #21 on: August 26, 2013, 07:25:51 AM »
This becomes easy if you have either a high income or low housing prices where you live.  For everyone else, I think it's trickier.  When we bought, the house was about 1.5 times annual income; now it's about 1 times annual income since our household income has increased in the past 5 years (mine has doubled).

nawhite

  • Handlebar Stache
  • *****
  • Posts: 1060
  • Location: An RV somewhere in the West
    • The Reckless Choice
Re: You shouldn't buy a home more than xxx ?
« Reply #22 on: August 26, 2013, 09:42:47 AM »
For me, it had nothing to do with multiple of income, it was a debt to income ratio on monthly take home. My student loans were too high not to think of it that way. So we ended up buying a house at 1.6x but because of an additional 100k of student loans (pre-MMM) my debt to income is right around 25%.

Undecided

  • Handlebar Stache
  • *****
  • Posts: 1082
Re: You shouldn't buy a home more than xxx ?
« Reply #23 on: August 26, 2013, 11:11:35 AM »
I paid 2.4 times my annual income.

My opinion though is that you should always buy the cheapest house that meets your real needs (as oppose to perceived needs or wants).

Because you can't have something you want?

blackfedora

  • 5 O'Clock Shadow
  • *
  • Posts: 34
Re: You shouldn't buy a home more than xxx ?
« Reply #24 on: August 26, 2013, 03:33:00 PM »
Don't buy more than you can afford to pay the monthly payments on (20-25% of monthly income is conservative 35% or higher is likely a mistake). - This prevents you from hamstringing your ability to save your income in the future.

Don't buy a house for more than 180x rental price (i.e. 15 years of rent) of the house. You can get a rough idea of the rental price by looking at similar houses for rent in the area. - This helps keep you from spending more than the house is likely to be worth down the road (obviously not a guarantee).

Don't deplete your savings entirely in order to buy a house. I.e. you should have 6 months worth of living expenses AFTER the sale is finished. - The last thing you want after losing your job is to also lose your credit because your mortgage payments are late.

EconDiva

  • Handlebar Stache
  • *****
  • Posts: 1130
Re: You shouldn't buy a home more than xxx ?
« Reply #25 on: September 01, 2013, 10:37:30 AM »
For most wage earners, a payment that is 25% or less of your monthly income toward a 15 year mortgage is prudent.  Plenty leftover in the budget to save, debt term is short enough to see the light at the end of the tunnel.

Ramsey and others use this guideline.  Many people see this as overly conservative but the more you pay the harder it is to save, and harder to get through downturns, layoffs, medical issue etc that can affect income...

25% of gross or net income?

rubybeth

  • Handlebar Stache
  • *****
  • Posts: 1402
  • Location: Midwest
Re: You shouldn't buy a home more than xxx ?
« Reply #26 on: September 01, 2013, 11:18:22 AM »
For most wage earners, a payment that is 25% or less of your monthly income toward a 15 year mortgage is prudent.  Plenty leftover in the budget to save, debt term is short enough to see the light at the end of the tunnel.

Ramsey and others use this guideline.  Many people see this as overly conservative but the more you pay the harder it is to save, and harder to get through downturns, layoffs, medical issue etc that can affect income...

25% of gross or net income?

Net. So if you bring home $4,000/month after taxes, your payment (including taxes and insurance) shouldn't be more than $1,000/month.
« Last Edit: September 01, 2013, 11:21:53 AM by rubybeth »

pbkmaine

  • Walrus Stache
  • *******
  • Posts: 8332
  • Age: 63
  • Location: The Villages, Florida
Re: You shouldn't buy a home more than xxx ?
« Reply #27 on: September 01, 2013, 11:44:52 AM »
Here's what i think: If you are going to be someplace at least 10 years, buy. Or someplace with a great buy/rent ratio. If you do buy, buy something you think can live in the rest of your life in a neighborhood you love. Within those parameters, buy the smallest, least expensive house you can. Otherwise, rent. I have seen more people make more foolish decisions on house purchases than on any other financial matter. (Unless you count choosing a spouse.)

EconDiva

  • Handlebar Stache
  • *****
  • Posts: 1130
Re: You shouldn't buy a home more than xxx ?
« Reply #28 on: January 09, 2014, 11:33:12 AM »
Just bumping this thread for more people's insight/opinions....

I have a friend that makes $70k that said she got approved for a home for either $230k or $250k...she's looking at townhomes in one of the more expensive sides of town, that would more than likely mean she'd be buying at the highest end of the approved amount.

Does this seem like a bad move...or am I just being jealous perhaps?  Surely the homes she's looking at will appreciate over the next 10-20 years or so...so it seems this may be a very good investment...?  Or is buying so much never a good idea?

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8663
  • Registered member
Re: You shouldn't buy a home more than xxx ?
« Reply #29 on: January 09, 2014, 11:56:46 AM »
Just bumping this thread for more people's insight/opinions....

I have a friend that makes $70k that said she got approved for a home for either $230k or $250k...she's looking at townhomes in one of the more expensive sides of town, that would more than likely mean she'd be buying at the highest end of the approved amount.

Does this seem like a bad move...or am I just being jealous perhaps?  Surely the homes she's looking at will appreciate over the next 10-20 years or so...so it seems this may be a very good investment...?  Or is buying so much never a good idea?

Well what are her goals?  Does she plan to work for her entire life?  Is it likely her income will increase substantially over the years?  At a fixed interest rate, even with the home and salary increasing at any kind of positive inflation, it could make sense... but probably not for ER.

brand new stash

  • Stubble
  • **
  • Posts: 148
Re: You shouldn't buy a home more than xxx ?
« Reply #30 on: January 09, 2014, 12:02:38 PM »
Just bumping this thread for more people's insight/opinions....

I have a friend that makes $70k that said she got approved for a home for either $230k or $250k...she's looking at townhomes in one of the more expensive sides of town, that would more than likely mean she'd be buying at the highest end of the approved amount.

Does this seem like a bad move...or am I just being jealous perhaps?  Surely the homes she's looking at will appreciate over the next 10-20 years or so...so it seems this may be a very good investment...?  Or is buying so much never a good idea?

I think the thought "Surely the homes she's looking at will appreciate over the next 10-20 years or so..."  got a LOT of people in trouble during the housing bubble.

Housing generally goes up in price, but not always. 

I also think that no matter what the ratio of income to house, that using the maximum that the bank will loan you as a guide on how much you can spend isn't a good approach.  I've found that the bank has always been willing to loan me much much much more than I'm willing to take on as debt.  We have probably the most expensive and most anti-mustachian house of anyone on this forum, but the bank offered us a mortgage for more than twice what we spent on the house. 

Income also isn't the only guide.

Which one can afford to spend more:
Some one with an  annual income of $100K, and $20K in credit card debt, and $20K in student loans and $20K in car loan and no retirement savings.
Some one with an annual income of $100K and no debt and $500K in retirement savings.

Its the same income, but different result.
 

Elaine

  • Bristles
  • ***
  • Posts: 467
  • Age: 32
  • Location: NYC
    • Small Things Good
Re: You shouldn't buy a home more than xxx ?
« Reply #31 on: January 09, 2014, 12:10:22 PM »
I make 60k, my better half is in school right now but when he finished (Actuarial Science) he'll probably end up making a good deal more than me long term- we're guessing a start salary conservatively around 60k for him. So combined 120k- we'd like a house for no more than 200k regardless.

NumberCruncher

  • Pencil Stache
  • ****
  • Posts: 612
Re: You shouldn't buy a home more than xxx ?
« Reply #32 on: January 09, 2014, 12:42:44 PM »
We are in the process of buying a $105k house, we made $168k last year.  We are downsizing from a $150k house.

badass!


We currently live in a higher COL area (cheapest house maybe 250k nearby, average house maybe 350k), but we rent.

We want to move in 2-5 years to a lower COL area, hopefully where we can buy a house for less than or around our current combined salary.

brandino29

  • Bristles
  • ***
  • Posts: 318
Re: You shouldn't buy a home more than xxx ?
« Reply #33 on: January 09, 2014, 12:49:09 PM »
I think the safest general rule of thumb when considering other people's financial moves is to assume they are 1) clueless,  b) up to their eyeballs in debt, and iii) struggling to get by month to month, even if they do drive a Mercedes and live in a 4000 sq ft home. 

Approach it that way and it's easier to see how you don't want to be in their shoes. 

totoro

  • Handlebar Stache
  • *****
  • Posts: 2099
Re: You shouldn't buy a home more than xxx ?
« Reply #34 on: January 09, 2014, 12:58:35 PM »
I don't use a multiple of family income.  I use cost per month based on a ten year fixed mortgage with 25 year amortization.

I only buy places with suites or potential for secondary units.  My test is that the place must be cash flow positive if rented and must be cheaper than renting a comparable place if I occupy it.  Right now two of our units pay the mortgage on our place.   Our mortgage is approx. 1.5x income, but I would have gone higher than that if the cost per month made sense.

Gerard

  • Handlebar Stache
  • *****
  • Posts: 1389
  • Location: eastern canada
Re: You shouldn't buy a home more than xxx ?
« Reply #35 on: January 09, 2014, 01:59:23 PM »
My house cost me one year's salary, seven years ago. In hindsight I wish I'd spent more for a smaller place, but that's because I'm not handy. I don't know if my experience or advice are generalizable in any way... except I'd be careful if I heard myself saying "my region is special or different and so the regular rules don't apply."

Sydneystache

  • Bristles
  • ***
  • Posts: 274
  • Location: Sydney (Westie!)
  • Aiming for RE!
Re: You shouldn't buy a home more than xxx ?
« Reply #36 on: January 09, 2014, 02:27:46 PM »
Just bumping this thread for more people's insight/opinions....

I have a friend that makes $70k that said she got approved for a home for either $230k or $250k...she's looking at townhomes in one of the more expensive sides of town, that would more than likely mean she'd be buying at the highest end of the approved amount.

Does this seem like a bad move...or am I just being jealous perhaps?  Surely the homes she's looking at will appreciate over the next 10-20 years or so...so it seems this may be a very good investment...?  Or is buying so much never a good idea?

Her purchase, her decision. I wish I could buy a house on that income! How big is her deposit though? Can she meet her repayments? The average house price in Sydney is 600s-700s, and the touristy parts is 1M! I've been waiting for the bubble to go down since 2000. It is insane.

Just reading people's posts here, I am amazed that I can buy in parts of America where it is only 2-3x of my income! What does make Sydney's prices then? Londonish? Out of this world? I agree with @steveo, having a PPR isn't really part of my FI calculations. Can't. Not in Sydney especially if I want to continue living here...which I do :-)

happy

  • Walrus Stache
  • *******
  • Posts: 5130
  • Location: NSW Australia
Re: You shouldn't buy a home more than xxx ?
« Reply #37 on: January 10, 2014, 04:53:34 AM »
 I saw a suggestion that whilst you are in accumulation phase, your house should be around 20% of your net worth. Of course in Australia this is not possible until your stash is huge! However, the blogger went on to say, once you are FI, then the proportion can get bigger. What I think he meant was,  not to spend very much at all on your housing whilst in accumulation phase. Buy the least house you can. Concentrate on increasing your stash first, before getting more house.

captainawesome

  • Stubble
  • **
  • Posts: 151
Re: You shouldn't buy a home more than xxx ?
« Reply #38 on: January 10, 2014, 07:19:38 AM »
I was a bit clueless when I was buying a house, but I knew I didn't really want to go over 300k in my area based on my ~$6500 per month after tax income.  I ended up buying a foreclosure for around 225k and before I did any work it appraised for 299k.  I know that whenever we leave in 2 years we will either rent or sell, so it is more of an investment property than anything else.  But I really don't enjoy seeing the break down of what my $1368 per month is.  Tough to say what my price range would be for a "forever" home.  But I still don't think I'd ever want to go over 300k, even if my income increases.

mpbaker22

  • Handlebar Stache
  • *****
  • Posts: 1095
Re: You shouldn't buy a home more than xxx ?
« Reply #39 on: January 10, 2014, 08:22:15 AM »
I make about 50K/year.  This calculator says I can get a loan for up to about 250K.  That's 5x annual expenses!  So, that's what you could potentially qualify for.

I would recommend setting an absolute limit at 2.5x expenses.  Any higher and I would consider myself to be in solid danger of foreclosure at some point over 30 years.  Optimally you get a loan at 1-2x income AND you have equivalent assets invested for higher rate of return.  But when interest rates go back to 7%, higher rates of return will probably be impossible.

pom

  • Bristles
  • ***
  • Posts: 288
  • Location: Paris, France
Re: You shouldn't buy a home more than xxx ?
« Reply #40 on: January 10, 2014, 05:21:04 PM »
At the time mine was slightly above 2x base pay, slightly below 2x if you count bonuses.

lauraredcloud

  • 5 O'Clock Shadow
  • *
  • Posts: 29
Re: You shouldn't buy a home more than xxx ?
« Reply #41 on: January 10, 2014, 10:12:35 PM »
I live in a major city. There was no way I was going to be able to limit myself to 2.5x my salary; the real estate just wasn't available. What that rule of thumb doesn't take into account is the cost-benefit analysis of living in an urban area and/or having extra rentable room. By buying a 2-bedroom condo in an expensive, in-demand area, I'm able to live car-free and to rent out a room. So while I spent 4.3333 x salary, my housing and transit combined ends up being something like 20% of my takehome pay per month, well within that other rule of thumb which I think states that you shouldn't spend more than 35% on housing ad 15% on transportation. I'm all over the map.

Self-employed-swami

  • Handlebar Stache
  • *****
  • Posts: 1094
  • Location: Canada
Re: You shouldn't buy a home more than xxx ?
« Reply #42 on: January 11, 2014, 12:06:43 AM »
My measure of affordability has always been 'can I afford to keep the mortgage paid, the lights/heat on and groceries in my cupboards if I have to work a minimum wage job?'

My mortgage, at a minimum payment of $68/week, meets that criteria, despite the fact that the house was 8.3x my annual income when I bought it 6 years ago.

dragoncar

  • Walrus Stache
  • *******
  • Posts: 8663
  • Registered member
Re: You shouldn't buy a home more than xxx ?
« Reply #43 on: January 11, 2014, 12:58:35 PM »
My measure of affordability has always been 'can I afford to keep the mortgage paid, the lights/heat on and groceries in my cupboards if I have to work a minimum wage job?'

My mortgage, at a minimum payment of $68/week, meets that criteria, despite the fact that the house was 8.3x my annual income when I bought it 6 years ago.

Tyler

  • Handlebar Stache
  • *****
  • Posts: 1142
Re: You shouldn't buy a home more than xxx ?
« Reply #44 on: January 11, 2014, 01:39:41 PM »
I don't know if my experience or advice are generalizable in any way... except I'd be careful if I heard myself saying "my region is special or different and so the regular rules don't apply."

+1 

Just because the average home value in your area is extremely high and everyone else is doing it doesn't make purchasing one a wise decision. 

FWIW, after moving away from a very high COL area (where we rented) a year ago we bought a home for 1X our annual income.  The financial flexibility feels great. 

Gen Y Finance Journey

  • Stubble
  • **
  • Posts: 209
  • Location: CA
Re: You shouldn't buy a home more than xxx ?
« Reply #45 on: January 11, 2014, 02:12:09 PM »
Just because the average home value in your area is extremely high and everyone else is doing it doesn't make purchasing one a wise decision. 

I couldn't agree more. One of my friends is falling into this trap right now. She feels that it's the right time in her life to buy a home, and since we live in a high COL area, she figures she'll just have to deal with an absurd mortgage payment. Meanwhile my fiance and I are almost certainly better off than she and her husband and surely could get approved for a mortgage here, but we're not comfortable with a $3000/month payment just because it's the norm for our area, so we're staying put in our falling-apart-but-cheap rental.

I don't want a house that I can afford on the condition that my fiance and I both continue to work full time at jobs we don't particularly like until we're 65. I want a house that will allow us the flexibility to work part time, stay at home with our kids, or switch to lower paying jobs in fields we love (we're both involved in theatre and would love to do it professionally). Barring any huge windfalls, that will probably mean moving to a lower COL area. We love where we live now, but not enough to become slaves to our jobs for the next 30 years.

marty998

  • Walrus Stache
  • *******
  • Posts: 6386
  • Location: Sydney, Oz
Re: You shouldn't buy a home more than xxx ?
« Reply #46 on: January 11, 2014, 03:13:45 PM »
Just bumping this thread for more people's insight/opinions....

I have a friend that makes $70k that said she got approved for a home for either $230k or $250k...she's looking at townhomes in one of the more expensive sides of town, that would more than likely mean she'd be buying at the highest end of the approved amount.

Does this seem like a bad move...or am I just being jealous perhaps?  Surely the homes she's looking at will appreciate over the next 10-20 years or so...so it seems this may be a very good investment...?  Or is buying so much never a good idea?

Her purchase, her decision. I wish I could buy a house on that income! How big is her deposit though? Can she meet her repayments? The average house price in Sydney is 600s-700s, and the touristy parts is 1M! I've been waiting for the bubble to go down since 2000. It is insane.

Just reading people's posts here, I am amazed that I can buy in parts of America where it is only 2-3x of my income! What does make Sydney's prices then? Londonish? Out of this world? I agree with @steveo, having a PPR isn't really part of my FI calculations. Can't. Not in Sydney especially if I want to continue living here...which I do :-)

oh dear...please don't wait any longer. It would have cost you $60-$90 thousand this year depending what end of town you are in. Just take the plunge and smash the ghastly mortgage you will start with. My interest cost started at $50 a day. After 3 years my interest cost is now $14.60 a day ($100 a week). If I had to rent it would be $425 a week here.

The cost of a mortgage is not the repayments. It's interest. Think of principal payments as just enforced savings.

LowER

  • Stubble
  • **
  • Posts: 161
Re: You shouldn't buy a home more than xxx ?
« Reply #47 on: January 11, 2014, 03:52:04 PM »
1X for me.  Considering "upgrade" to 0.5X in the next 2 years.

Anatidae V

  • Walrus Stache
  • *******
  • Posts: 8605
  • Age: 30
  • Location: Fourecks
  • Nullus Anxietas
Re: You shouldn't buy a home more than xxx ?
« Reply #48 on: January 11, 2014, 04:15:50 PM »
Just bumping this thread for more people's insight/opinions....

I have a friend that makes $70k that said she got approved for a home for either $230k or $250k...she's looking at townhomes in one of the more expensive sides of town, that would more than likely mean she'd be buying at the highest end of the approved amount.

Does this seem like a bad move...or am I just being jealous perhaps?  Surely the homes she's looking at will appreciate over the next 10-20 years or so...so it seems this may be a very good investment...?  Or is buying so much never a good idea?

Her purchase, her decision. I wish I could buy a house on that income! How big is her deposit though? Can she meet her repayments? The average house price in Sydney is 600s-700s, and the touristy parts is 1M! I've been waiting for the bubble to go down since 2000. It is insane.

Just reading people's posts here, I am amazed that I can buy in parts of America where it is only 2-3x of my income! What does make Sydney's prices then? Londonish? Out of this world? I agree with @steveo, having a PPR isn't really part of my FI calculations. Can't. Not in Sydney especially if I want to continue living here...which I do :-)

oh dear...please don't wait any longer. It would have cost you $60-$90 thousand this year depending what end of town you are in. Just take the plunge and smash the ghastly mortgage you will start with. My interest cost started at $50 a day. After 3 years my interest cost is now $14.60 a day ($100 a week). If I had to rent it would be $425 a week here.

The cost of a mortgage is not the repayments. It's interest. Think of principal payments as just enforced savings.

This is what I'm worried about. Can't afford to buy now, can't afford not to buy now...

NinetyFour

  • Walrus Stache
  • *******
  • Posts: 6438
  • Location: Southwestern US
Re: You shouldn't buy a home more than xxx ?
« Reply #49 on: January 11, 2014, 04:37:27 PM »
I was totally clueless when I bought my house.

No money down, mortgaged $320K.  Was making about $60K gross, maybe less.  Yikes.

(By the way, the house is not a McMansion--it is a 720 square foot 116 year old cottage, which just happens to be in a very cool mountain town in Colorado.)

Treaded water for about 6 years, then was able to refi.  Now I rent out the "main" house and live in the renovated ADU.  Gross income now is about $80K, and mortgage is down to $230K.  Feels much better.  In 7-8 years, I hope to have mortgage crushed.